<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-32207
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HCC INDUSTRIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3679 95-2691666
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
4232 TEMPLE CITY BOULEVARD
P.O. BOX 739
ROSEMEAD, CALIFORNIA 91770-1592
(213) 283-7500
(ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ANDREW GOLDFARB
HCC INDUSTRIES INC.
4232 TEMPLE CITY BOULEVARD
P.O. BOX 739
ROSEMEAD, CALIFORNIA 91770-1592
(213) 283-7500
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
Copies to:
LOU R. KLING, ESQ.
HOWARD L. ELLIN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
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<TABLE>
<CAPTION>
PRIMARY STANDARD
INDUSTRIAL I.R.S. EMPLOYER
NAME OF ADDITIONAL JURISDICTION OF CLASSIFICATION IDENTIFICATION
REGISTRANTS* INCORPORATION NUMBER NUMBER
------------------ --------------- ---------------- ---------------
<S> <C> <C> <C>
Hermetic Seal Corporation Delaware 3679 95-3443353
Glasseal Products, Inc. New Jersey 3679 22-1909729
Sealtron, Inc. Delaware 3679 31-1191739
Sealtron Acquisition
Corp. Delaware 3679 31-1193056
HCC Industries Interna-
tional California 3679 95-3974136
Norfolk Avon Realty Trust Massachusetts 3679 04-6044071
</TABLE>
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* Address and telephone number of principal executive offices are same as
those of HCC Industries Inc.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 3/4% SENIOR SUBORDINATED NOTES DUE 2007
IN EXCHANGE FOR 10 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2007
HCC INDUSTRIES INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON DECEMBER 3,
1997, UNLESS EXTENDED
--------------
HCC Industries Inc., a Delaware corporation ("HCC" or "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount of
up to $90.0 million of its Senior Subordinated Exchange Notes due 2007 (the
"New Notes") of the Company, which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), for a like principal amount of
its issued and outstanding Senior Subordinated Notes due 2007 (the "Old Notes"
and, with the New Notes, the "Notes"), of the Company from the holders
thereof. The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration
rights relating to the Old Notes and except that additional interest will
accrue on the Old Notes from and including November 3, 1997 until but
excluding the date of consummation of the Exchange Offer payable in cash
semiannually in arrears on May 15 and November 15, commencing November 15,
1997 at a rate of .50% per annum (increasing at .50% per annum at the end of
each 90-day period following November 3, 1997, but in no event will the
additional interest exceed 2%). The Old Notes were issued pursuant to an
offering (the "Offering"), which was exempt from registration under the
Securities Act, on May 6, 1997.
The Notes will not be redeemable prior to May 15, 2002 except that, until May
15, 2000, the Company may redeem, at its option, up to an aggregate of $20.0
million of the principal amount of the Notes at the redemption price set forth
herein plus accrued interest to the date of redemption with the net proceeds
of one or more Public Equity Offerings (as defined herein) if at least $70.0
million of principal amount of the Notes remains outstanding after each such
redemption. On or after May 15, 2002, the Notes are redeemable at the option
of the Company, in whole or in part, at the redemption prices set forth herein
plus accrued interest to the date of redemption. Upon a Change of Control (as
defined herein), each holder of Notes may require the Company to repurchase
such Notes at 101% of the principal amount thereof plus accrued interest to
the date of repurchase. See "Description of the Notes--Change of Control." The
Notes will settle through the book-entry facilities of the Depository Trust
Company.
The Old Notes are, and the New Notes will be, senior subordinated unsecured
obligations of the Company. The Old Notes are, and the New Notes will be,
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company. As of August 23, 1997, (i)
the amount of Senior Indebtedness of the Company was approximately $2.2
million, (ii) the Company had the ability to borrow up to an additional $20.0
million under the Revolving Credit Facility (as defined herein) and (iii)
there was no outstanding indebtedness to which the Notes are senior in right
of payment. The Old Notes are, and the New Notes will be, fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by all of the Company's operating subsidiaries including, Hermetic Seal
Corporation ("Hermetic"), Glasseal Products, Inc. ("Glasseal"), Sealtron Inc.
("Sealtron"), Sealtron Acquisition Corp., HCC Industries International and
Norfolk Avon Realty Trust (collectively, the "Subsidiary Guarantors"). See
"Description of Notes--Subsidiary Guarantees" and "--Certain Covenants." The
Subsidiary Guarantees (as defined herein) will be subordinated in right of
payment to all existing and future Senior Indebtedness of the Subsidiary
Guarantors, including guarantees under the Revolving Credit Facility. The
Notes will rank pari passu in right of payment with all senior subordinated
indebtedness of the Company and senior to any subordinated indebtedness of the
Company issued after the Offering.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from May 6, 1997. Holders whose Old Notes are accepted for
exchange will, in the limited circumstances described above, have the right to
receive, in cash, additional accrued interest thereon to, but not including,
the date of consummation of the Exchange Offer, such interest to be payable on
May 15 and November 15, commencing November 15, 1997. Holders of Old Notes
accepted for exchange will be deemed to have waived the right to receive any
other payments or accrued interest on the Old Notes.
(continued on following page)
--------------
SEE "RISK FACTORS" COMMENCING ON PAGE 17 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------
The date of this Prospectus is November 3, 1997.
<PAGE>
(continued from previous page)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Subsidiary Guarantors contained in the
Registration Rights Agreement dated May 6, 1997 among the Company and the
other signatories thereto (the "Registration Rights Agreement"). Based on
interpretations by the staff of the Securities and Exchange Commission (the
"SEC") as set forth in no action letters issued to third parties, 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 (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the SEC to consider, and the SEC has not
considered, the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any holder is an affiliate of the Company, is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such holder (i) could not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date (as defined herein),
it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Old Notes, the Company will promptly return
the Old Notes to the holders thereof. See "The Exchange Offer."
----------------
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. Credit Suisse First
Boston Corporation and Furman Selz LLC (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.
The Company does not intend to apply for listing or quotation of the New Notes
on any securities exchange or stock market.
2
<PAGE>
AVAILABLE INFORMATION
The Company and the Subsidiary Guarantors have filed with the SEC a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act, with respect to the New Notes being offered by this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits thereto, to which reference is
hereby made. Any statements made in this Prospectus concerning the provisions
of certain documents include all material elements of such documents, but are
not necessarily complete and, in each instance, reference is made to the copy
of such document filed as an exhibit to the Registration Statement. Statements
made in this Prospectus regarding the overall market size of the glass-to-
metal sealing industry and the Company's relative size and rank are based upon
internal estimates and analyses derived from the Company's general knowledge
of the industry and research of, and discussions with, the Company's customers
and certain other companies in the industry.
The guarantee obligations of the Subsidiary Guarantors (which are all direct
or indirect wholly owned subsidiaries of the Company) are full, unconditional
and joint and several. The aggregate assets, liabilities, earnings, and equity
of the Subsidiary Guarantors are substantially equivalent to the total assets,
liabilities, earnings and equity of HCC Industries Inc. and its subsidiaries
on a consolidated basis. Separate financial statements of the Subsidiary
Guarantors are not included in this Prospectus because management of the
Company has determined that separate financial statements of the Subsidiary
Guarantors would not be material to investors.
The Registration Statement and the exhibits thereto may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the SEC
located at 7 World Trade Center, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Company and the Subsidiary Guarantors are not currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As a result of the Exchange Offer, the Company and the
Subsidiary Guarantors will become subject to such requirements, and in
accordance therewith will file periodic reports and other information with the
SEC. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the SEC and the address of such site is
http://www.sec.gov. In the event the Company is not required to be subject to
the reporting requirements of the Exchange Act in the future, the Company will
be required under the Indenture, dated as of May 6, 1997, as supplemented by a
supplemental indenture, dated as of October 24, 1997 (the "Indenture"), among
the Company, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company,
as trustee (the "Trustee"), pursuant to which the Old Notes have been, and the
New Notes will be, issued, to continue to file with the SEC and to furnish to
holders of the Notes the information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act, including reports on Form 10-K, 10-
Q and 8-K, for so long as any Notes are outstanding.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus includes "forward-looking statements." All statements other
than statements of historical facts included in this Prospectus, including
without limitation the statements under "Business-Business Strategy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements. Although management believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ
materially from the Company's or management's expectations ("Cautionary
Statements") are disclosed in this Prospectus, including without limitation in
conjunction with the forward-looking statements included in this Prospectus
and under "Risk Factors." All written and oral forward-looking statements made
following consummation of the Exchange Offer that are attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN
CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY ARE USED HEREIN AS
DEFINED TERMS ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE
REQUIRES, (I) ALL REFERENCES TO "HCC" HEREIN REFER TO HCC INDUSTRIES INC., ALL
REFERENCES TO THE "COMPANY" HEREIN REFER TO HCC INDUSTRIES INC. AND ITS
CONSOLIDATED SUBSIDIARIES AND (II) THE INFORMATION IN THIS PROSPECTUS GIVES
EFFECT TO THE RECAPITALIZATION AND THE OFFERING.
THE COMPANY
The Company is the largest custom manufacturer of high precision hermetically
sealed electronic connection devices in the United States. High precision
hermetic seals are used primarily to permit the flow of electricity across a
barrier that separates different atmospheric media (such as gas or liquid to
air or vacuum). A hermetic seal is generally accomplished through the creation
of a glass-to-metal seal ("GTMS"). The Company's glass-to-metal seal products
are custom designed for each application to meet demanding pressure,
temperature and vibration specifications. The Company focuses on the high-end,
custom segment of the GTMS market where it believes that its higher value added
manufacturing and engineering capabilities enable it to differentiate itself
from its competitors and enhance profitability.
Hermetically sealed components have diverse applications and are found in
electronic equipment used in automobiles, airplanes, process control devices,
military equipment, electronic sensors, petrochemical related equipment and
telecommunications equipment. The Company estimates that the total market for
hermetic seals is $600 million, of which approximately half of the market
services high-end custom applications in which the Company competes. The
Company believes based upon internal analysis that the market for custom
manufactured hermetically sealed products is extremely fragmented, with no
other competitor offering the same breadth of products as the Company. The
Company believes based upon internal estimates that it is a leading supplier of
glass-to-metal seals to each of the industries that it supplies. The Company
has a diverse customer base, with sales to approximately 1,200 customers in
fiscal 1997, and believes that it has significant competitive advantages
because of its custom designed engineering, rapid turnaround capabilities and
its strict adherence to quality and reliability. Sales to Special Devices, Inc.
("SDI"), the Company's largest customer, accounted for approximately 27% of the
Company's consolidated sales for the fiscal year ended March 29, 1997. Two of
the Company's other key customers include ICI North America, Inc., a subsidiary
of Imperial Chemical Industries P.L.C. ("ICI"), and TRW Inc. ("TRW").
Approximately 70% of the Company's consolidated sales for fiscal 1997 were to
customers with which the Company had contractual agreements, sole source
relationships, letters of intent or long-term purchase orders. The Company's
sales have grown at a compound annual growth rate ("CAGR") of 15% over the last
five years.
Sales of GTMS products to the aerospace, petrochemical and general industrial
markets constituted approximately 59% of the Company's consolidated sales for
the 1997 fiscal year. The Company's GTMS products are used in a variety of
applications, such as temperature sensors, down-hole logging equipment in the
oil and gas industry, and in most commercial aircraft currently in production.
The Company believes it is well positioned to benefit from any growth that
might occur in these respective markets.
4
<PAGE>
Sales of products to the automotive industry constituted approximately 41% of
the Company's consolidated sales for the 1997 fiscal year. A substantial
portion of the Company's growth over the last several years has come from sales
to the automotive industry, particularly hermetically sealed components for use
in airbag initiators, automotive crash sensors, climate control devices and
anti-lock braking systems. At present, every airbag produced requires at least
one airbag initiator (the device that deploys the airbag). The Company is the
leading supplier of hermetically sealed products used in airbag initiators, and
because of its strong relationships with most of the major initiator suppliers,
the Company believes it is well positioned to benefit from projected growth in
the airbag industry. Growth in airbag installations is expected to continue
through the turn of the century due to the fill-out penetration of driver side
and passenger side front seat airbags and increased penetration of side impact
and other types of airbags. The Economist Intelligence Unit ("EIU") has
forecast that worldwide airbag demand is expected to increase to 104 million
units by 2005, a CAGR of 10% from 1995 to 2005. Additionally, other
applications which use GTMS products in the automotive industry continue to
grow including, for example, seat belt pretensioners, suspension stabilization
devices and additional climate control devices.
The Company believes that it has established its market position as a result
of its (i) vertical integration, (ii) focus on customer service, particularly
on the shortening of its manufacturing cycle and improving the timeliness of
its deliveries, and (iii) proprietary manufacturing processes used in producing
high precision GTMS which has been built up over its 51 years in the industry.
Many of the Company's smaller competitors are only involved in one aspect of
manufacturing a hermetically sealed electronic connector, typically the heat
induced fusing of the glass to the metal. In contrast, the Company produces its
own glass and ceramic compounds, designs and machines the metal connector
housing and plates the connector pins as required. The Company believes that it
has the capability to perform all of the manufacturing functions itself without
having to rely on third party contractors, providing the Company a competitive
advantage in terms of supplying a high level of customer satisfaction.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
Long-Term Customer Relationships. Many of the Company's customers, including
SDI and TRW, have been customers for over ten years. The Company believes that
both automotive and aerospace original equipment manufacturers ("OEMs")
continue to seek long-term partnerships with fewer core suppliers. The
Company's relationships are strengthened by the fact that many of its
arrangements with its customers provide for the Company to act as the sole
source of supply for the customer. The Company estimates that approximately 70%
of the Company's consolidated sales for fiscal year 1997 were from contractual
agreements, sole source relationships, letters of intent or long-term purchase
orders.
Market Leadership. A number of the Company's products hold leading market
positions in their respective niche markets. The Company believes based upon
internal estimates that it currently produces hermetically sealed products for
approximately 50% of the airbag initiators produced in the U.S. The Company
believes, based upon long-term relationships with ICI and SDI, that it is well
positioned to continue to increase its market share, as well as expand its
sales internationally.
Commitment to Quality and Service. The Company believes that its commitment
to provide consistent, high quality products and services, flexible
manufacturing and custom designed products at competitive prices forms the
basis for its strong and diversified customer relationships. The Company
5
<PAGE>
manufactures most of its parts to specific customer requirements. The Company
utilizes Statistical Process Control, Design Failure Mode Effects Analysis,
Process Failure Mode Analysis, and a strict adherence to complete manufacturing
documentation in order to manufacture high quality products for internal use as
well as external customer sales. The Company believes that its knowledge and
use of these procedures give the Company a competitive advantage. Sealtron
became registered to ISO 9001 in September 1996. Hermetic and Glasseal expect
to be registered to ISO 9001 within twelve months and to be registered to QS
9000 (the automotive standard) within 24 months.
Proprietary Technology. The Company operates in the automotive, aerospace and
general industrial technologies markets in which products typically require
sophisticated engineering and production techniques. The Company designs and
manufactures new products to fulfill customer needs, and has developed
proprietary manufacturing technology since its founding in 1945. The Company
believes that this proprietary technology helps enable it to attract and retain
customers who require customized, high tolerance products. The Company
estimates that it has produced over 75,000 different variations of GTMS.
Low Cost Operations. The Company believes that its extensive "in-house"
capabilities and vertical integration are competitive advantages that have
allowed it to become a low cost producer. By controlling the tolerance of the
component parts, the Company has been able to reduce scrap and to increase the
yields of its products. Furthermore, the Company is continually developing and
assessing its programs designed to increase efficiency and enhance economies of
scale in order to further reduce costs.
Diverse Products and Customers. The Company has a diverse customer base, with
sales of numerous product variations to approximately 1,200 customers in fiscal
1997. Sales to SDI, the Company's largest customer, accounted for approximately
27% of the Company's consolidated sales for the fiscal year ended March 29,
1997. Over the past several years, the Company has recognized consistent growth
in sales of GTMS products to the automotive, aerospace and general industrial
markets.
BUSINESS STRATEGY
The Company's strategy is to expand its business through:
Focusing on Core Strengths. The Company continues to focus on what it
believes are its core strengths and to invest in those businesses that are
consistent with those strengths and which exhibit high growth potential. Core
strengths include the timely custom design and manufacturing of high tolerance,
high reliability components and the effective program management of long-term
contracts and supply agreements.
Leveraging Customer Relationships. The Company works closely with its
customers to jointly develop and design new products and to improve the
performance and lower the cost of existing products. The Company has sole
source supply contracts, shares product development, and enters into other
teaming arrangements with its key customers to further strengthen and broaden
its relationships. The Company believes that this strategy, together with the
successful performance under existing contracts has led to additional long-term
business from key existing customers and new customers.
Pursuing Selective Acquisitions. The Company intends to pursue selective
acquisitions and to add products and capabilities that are complementary to its
existing operations. Priority is expected to be given to acquiring businesses
whose products can be manufactured in the Company's existing facilities ("fold-
in" acquisitions). The Company's operations are characterized by a relatively
high level of operating leverage; therefore, such fold-in acquisitions should
allow the Company to allocate costs across broader synergistic product lines
and represent additional volume through the Company's existing facilities which
should provide opportunities to improve profitability.
6
<PAGE>
Expanding Internationally. The Company is considering the expansion of its
operations in Europe. The primary motivation in a geographic expansion would
most likely be to service the growth of its current customers' operations as
they expand their production operations abroad.
The Company was incorporated in Delaware in 1985, and its principal executive
offices are located at 4232 Temple City Boulevard, P.O. Box 739, Rosemead,
California 91770-1592 and its telephone number is (213) 283-7500. The Company
operates through three operating subsidiaries: Hermetic, Glasseal and Sealtron
each of which manufactures and sells glass-to-metal sealed products. HCC
Industries International is a European based marketing subsidiary, which sells
glass-to-metal sealed products. Sealtron Acquisition Corp. is a holding company
for Sealtron, Inc., and Norfolk Avon Realty Trust owns real estate in
Massachusetts.
7
<PAGE>
THE RECAPITALIZATION
Effective as of February 14, 1997, pursuant to a Stock Purchase and Sale
Agreement (the "Recapitalization Agreement") dated as of December 23, 1996,
HCC, Andrew Goldfarb and certain affiliates of Mr. Goldfarb and his family
(collectively, the "Selling Stockholder"), certain members of management
(together with the Selling Stockholder, the "Selling Group"), Windward Capital
Associates, L.P. ("Windward") and certain entities Windward controls
(collectively, with Windward, the "Windward Group") and Metropolitan Life
Insurance Company ("MetLife") completed a recapitalization of the Company (the
"Recapitalization"). The Windward Group is a group of related entities which
make merchant banking investments pursuant to certain program agreements. In
connection with the Recapitalization, among other things: (i) the Company
entered into Credit Facilities, consisting of: (a) a $10 million five year
Revolving Credit Facility (the "Old Revolving Credit Facility"), (b) a $30
million, five-year Tranche A Term Loan ("Term Loan A") and (c) a $30 million,
six and one-half year Tranche B Term Loan ("Term Loan B" and together with the
Old Revolving Credit Facility and Term Loan A, the "Old Credit Facilities");
(ii) HCC issued $19.3 million, net of discount, of 12% subordinated notes to
the Windward Group and MetLife (the "Mezzanine Notes") along with accompanying
shares of Common Stock and contingent anti-dilution warrants (together valued
at $3.2 million and representing approximately 6% of the common equity of the
Company on a fully diluted basis) for an aggregate consideration of $22.5
million (as more fully described herein, the Mezzanine Notes together with the
accompanying equity, the "Mezzanine Units"); (iii) HCC repurchased a portion of
the shares of Common Stock beneficially owned by the Selling Group for $87.5
million in cash, including certain transaction expenses, and $5 million in
contingent subordinated notes (the "Contingent Notes") and the Selling Group
retained 47,234 shares of Common Stock; (iv) the Windward Group purchased
87,721 shares of Common Stock from HCC for $32.5 million in cash; and (v) HCC
repaid $21.4 million of its outstanding indebtedness. Immediately prior to the
Recapitalization, the Selling Group owned 100% of the outstanding Common Stock.
As a result of the Recapitalization, after giving effect to the redemption of
the Mezzanine Units with the proceeds of the Offering, the Windward Group owns
65% of the outstanding Common Stock and the Selling Group (and certain other
members of management) owns 35% of the outstanding Common Stock.
THE REFINANCING
On May 6, 1997, the Company issued $90.0 million in principal amount of Old
Notes and used the proceeds of such issuance to, among other things, (i) repay
100% of the outstanding principal amount, together with all accrued but unpaid
interest thereon, of each of Term Loan A and Term Loan B and (ii) repurchase
all outstanding Mezzanine Units for $22.5 million, the initial purchase price
thereof, together with accrued but unpaid interest on the Mezzanine Notes. In
addition on May 6, 1997, the Company amended the Old Revolving Credit Facility
to, among other things, increase the amount available thereunder from $10.0
million to $20.0 million (the Old Revolving Credit Facility, as so amended and
in effect on the date hereof, the "Revolving Credit Facility").
THE EXCHANGE OFFER
Securities Offered......
Up to $90.0 million principal amount of 10 3/4% Se-
nior Subordinated Exchange Notes due 2007, which have
been registered under the Securities Act. The terms
of the New Notes and the Old Notes are identical in
all material respects, except for certain transfer
restrictions and registration rights relating to the
Old Notes and except that additional interest will
accrue on the Old Notes from and including November
3, 1997 until but excluding the date of consummation
of the Exchange Offer payable in cash semiannually in
arrears on May 15 and November 15, commencing Novem-
ber 15, 1997 at a rate of .50% per annum
8
<PAGE>
(increasing at .50% per annum at the end of each 90-
day period following November 3, 1997, but in no
event will the additional interest exceed 2%).
The Exchange Offer...... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance of
the New Notes is intended to satisfy obligations of
the issuer contained in the Registration Rights
Agreement. For procedures for tendering, see "The Ex-
change Offer."
Tenders, Expiration
Date; Withdrawal.......
The Exchange Offer will expire at 5:00 p.m., New York
City time, on December 3, 1997, or such later date
and time to which it is extended. The tender of Old
Notes pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any Old
Note not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the expira-
tion or termination of the Exchange Offer.
Certain Conditions to
Exchange Offer......... The Company shall not be required to accept for
exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Of-
fer if at any time before the acceptance of Old Notes
for exchange or the exchange of the New Notes for
such Old Notes certain events have occurred, which in
the reasonable judgment of the Company, make it
inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such ex-
change. Such events include (i) any threatened, in-
stituted or pending action seeking to restrain or
prohibit the Exchange Offer, (ii) a general suspen-
sion of trading in securities on any national securi-
ties exchange or in the over-the-counter market,
(iii) a general banking moratorium, (iv) the com-
mencement of a war or armed hostilities involving the
United States and (v) a material adverse change or
development involving a prospective material adverse
change in the Company's business, properties, assets,
liabilities, financial condition, operations, results
of operations or prospects that may affect the value
of the Old Notes or the New Notes. In addition, the
Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange
for any such Old Notes, at any such time any stop or-
der shall be threatened or in effect with respect to
the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Inden-
ture under the Trust Indenture Act of 1939. See "The
Exchange Offer--Certain Conditions to the Exchange
Offer."
Federal Income Tax
Considerations......... The exchange pursuant to the Exchange Offer should
not result in gain or loss to the holders or the Com-
pany for federal income tax purposes. See "Certain
U.S. Federal Income Tax Considerations."
Use of Proceeds......... There will be no proceeds to the Company from the ex-
change pursuant to the Exchange Offer.
Exchange Agent.......... IBJ Schroder Bank & Trust Company is serving as ex-
change agent (the "Exchange Agent") in connection
with the Exchange Offer.
9
<PAGE>
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Old Notes under the Securities Act.
See "Description of the Notes--Registration Rights." Based on interpretations
by the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder which is an "affiliate"
of the Issuer within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the SEC to consider, and the SEC has not
considered, the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to
the distribution of the New Notes to be acquired pursuant to the Exchange Offer
such holder (i) could not rely on the applicable interpretations of the staff
of the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities and
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. In addition, to comply with the
state securities laws, the New Notes may not be offered or sold in any state
unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
The offer and sale of the New Notes to "qualified institutional buyers" (as
such term is defined under Rule 144A of the Securities Act) is generally exempt
from registration or qualification under the state securities laws. The Company
has agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Notes for offer
or sale under the Securities laws of such jurisdictions as any holder
reasonably requests in writing. Unless a holder so requests, the Company
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required and
not available. See "The Exchange Offer--Consequences of Exchanging Old Notes"
and "Description of the Notes--Registration Rights."
10
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that additional interest will accrue on
the Old Notes from and including November 3, 1997 until but excluding the date
of consummation of the Exchange Offer at a rate of .50% per annum (increasing
at .50% per annum at the end of each 90-day period following November 3, 1997,
but in no event will the additional interest exceed 2%). The New Notes will
bear interest from the most recent date to which interest has been paid on the
Old Notes or, if no interest has been paid on the Old Notes, from May 6, 1997.
Accordingly, if the relevant record date for interest payment occurs after the
consummation of the Exchange Offer, registered holders of New Notes on such
record date will receive interest accruing from the most recent date to which
interest has been paid or, if no interest has been paid, from May 6, 1997. If,
however, the relevant record date for interest payment occurs prior to the
consummation of the Exchange Offer registered holders of Old Notes on such
record date will receive interest accruing from the most recent date to which
interest has been paid or, if no interest has been paid, from May 6, 1997. Old
Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer. Holders of Old Notes whose Old
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Notes otherwise payable on any interest payment date the
record date for which occurs on or after consummation of the Exchange Offer.
Securities Offered...... Up to $90.0 million aggregate principal amount of the
Company's 10 3/4% Senior Subordinated Exchange Notes
due 2007.
Maturity Date........... May 15, 2007.
Interest Payment Dates.. May 15 and November 15 of each year, commencing No-
vember 15, 1997.
Optional Redemption..... The Notes will not be redeemable prior to May 15,
2002 except that, until May 15, 2000, the Company may
redeem, at its option, up to an aggregate of $20.0
million of the principal amount of the Notes at the
redemption price set forth herein plus accrued inter-
est to the date of redemption with the net proceeds
of one or more Public Equity Offerings (as defined
herein) if at least $70.0 million of principal amount
of the Notes remain outstanding after each such re-
demption. On or after May 15, 2002, the Notes are re-
deemable at the option of the Company, in whole or in
part, at the redemption prices set forth herein plus
accrued interest to the date of redemption.
Change of Control....... Upon the occurrence of a Change of Control, each
Holder will have the right to require the Company to
repurchase all or any part of such Holder's Notes at
101% of the principal amount of such Notes plus ac-
crued and unpaid interest to the repurchase date. If
a Change of Control offer is made, there can be no
assurance that the Company will have available funds
sufficient to pay the purchase price for all of the
Notes that might be delivered by Holders seeking to
accept the Change of Control offer.
11
<PAGE>
Ranking................. The Old Notes are, and the New Notes will be, senior
subordinated unsecured obligations of the Company,
and will be subordinate in right of payment to all
existing and future Senior Indebtedness of the
Company and pari passu to all existing and future
Senior Subordinated Indebtedness of the Company. As
of August 23, 1997, the aggregate amount of
outstanding Senior Indebtedness of the Company was
$2.2 million. As of August 23, 1997, there was no
outstanding indebtedness of the Company to which the
Notes were senior in right of payment. The Indenture
will limit the incurrence of future indebtedness.
Guarantees.............. The payment of the principal of, premium and interest
on the Notes is fully and unconditionally guaranteed
on a senior subordinated basis jointly and severally
by the Subsidiary Guarantors (as defined). The guar-
antees by the Subsidiary Guarantors will be subordi-
nated to all existing and future Senior Indebtedness
of each such Subsidiary Guarantor, including the
guarantees of such Subsidiary Guarantor under the Re-
volving Credit Facility. See "Description of the
Notes--Subsidiary Guarantees."
Certain Covenants....... The Indenture limits the incurrence of additional in-
debtedness by the Company and the Subsidiary Guaran-
tors, the payment of dividends and distributions, the
proceeds from certain asset sales and certain trans-
actions with affiliates and contains certain other
restrictive covenants affecting the Company and the
Subsidiary Guarantors. As of August 23, 1997, the
maximum aggregate amount of additional indebtedness
which may have been incurred pursuant to the terms of
the Indenture by the Company and the Subsidiary Guar-
antors was approximately $34.2 million. See "Descrip-
tion of the Notes--Certain Covenants."
Events of Default....... An Event of Default is defined in the Indenture as
(i) default in the payment of interest on the Notes
when due, continued for 30 days, (ii) default in the
payment of principal of any Note when due, (iii) the
failure by the Company to comply with its obligations
in the "Merger and Consolidation" section of the In-
denture, (iv) the failure by the Company to comply
for 30 days after notice with any of its obligations
in the "Change of Control" section of the Indenture
(other than a failure to purchase the Notes) or under
certain other sections of the Indenture, (v) the
failure by the Company to comply for 60 days after
notice with its other agreements contained in the In-
denture, (vi) Indebtedness of the Company or any Sig-
nificant Subsidiary is not paid within any applicable
grace period after final maturity or upon accelera-
tion and the total amount of such Indebtedness unpaid
or accelerated exceeds $5 million, (vii) certain
events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary, (viii) any
judgment or decree for the payment of money in excess
of $5 million is rendered against the Company or any
Significant Subsidiary and is not discharged, or (ix)
any Subsidiary Guarantee by a Significant Subsidiary
ceases to be in full force and effect (other than
pursuant to the terms
12
<PAGE>
of the Subsidiary Guarantee) or any Subsidiary Guar-
antor that is a Significant Subsidiary denies or
disaffirms its obligations under its Subsidiary
Guarantee.
Use of Proceeds......... The Company will not receive any proceeds from the
Exchange Offer. The net proceeds of the Offering,
which were approximately $86.3 million, were used
primarily to (i) repay in full Term Loan A and Term
Loan B totaling $60.0 million, (ii) redeem all of the
Mezzanine Units for an aggregate redemption price of
$22.5 million and (iii) provide for working capital
and general corporate purposes. See "The
Recapitalization," "Use of Proceeds" and "Description
of Certain Indebtedness."
Exchange Offer;
Registration Rights.... Holders of New Notes are not entitled to any regis-
tration rights with respect to the New Notes. Pursu-
ant to the Registration Rights Agreement, the Company
has agreed to file an Exchange Offer Registration
Statement or, under certain circumstances, a Shelf
Registration Statement. The Registration Statement of
which this Prospectus is a part constitutes the Ex-
change Offer Registration Statement. Under certain
circumstances, certain Holders of Notes (including
Holders who may not participate in the Exchange Offer
or who may not freely resell New Notes received in
the Exchange Offer) may require the Company to file,
and cause to become effective, a shelf registration
statement under the Securities Act, which would cover
resales of the Notes by such Holders. See "Descrip-
tion of the Notes--Registered Exchange Offer; Regis-
tration Rights."
RISK FACTORS
Before making a decision to tender their Old Notes in the Exchange Offer,
holders of Old Notes should consider carefully the information set forth in
this Prospectus, and in particular, the information set forth in the section
entitled "Risk Factors" under the headings entitled "Consequences of Failure to
Exchange and Requirements for Transfer of New Notes", "Potential Inability of
the Company to Pay Interest and Principal of Notes; Substantial Leverage",
"Dependence on Key Customers and Contractual Relationships", "Uncertainty of
Demand and Pricing of Automotive Products", "Uncertainty of Potential Changes
in Government Regulation", "Uncertainty of Demand and Pricing for Commercial
and Military Aviation and Electronics", "Potential Exposure to Environmental
Liabilities", "Technological Risk", "Reduced or Discontinued Sales Due to
Vertical Integration of Initiator Suppliers by Manufacturing Glass-to-Metal
Seals", "Subordination of the Notes and Subsidiary Guarantees", "Lack of Public
Market for the Notes; Restrictions on Resales", "Controlling Stockholders",
"Potential Inability to Repurchase the Notes in the Event of a Change in
Control", "Dependence on Key Personnel", "Fraudulent Transfer Considerations",
and "Products Liability Exposure", beginning on page 17 of this Prospectus.
13
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following summary consolidated historical financial information for each
of the three years ended April 1, 1995, March 30, 1996 and March 29, 1997 has
been derived from the audited consolidated financial statements of the Company
contained elsewhere in this Prospectus. The summary interim consolidated
financial information as of and for the three month periods ended June 28, 1997
and June 29, 1996 has been derived from the unaudited consolidated financial
statements of the Company. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring accruals, necessary for the fair presentation of the financial
information for such periods. Results for the interim periods are not
necessarily indicative of the results for the full fiscal year. The unaudited
pro forma consolidated financial information for the fiscal year ended March
29, 1997 reflects the effect of adjustments to the historical consolidated
financial statements of the Company necessary to give effect to (i) the
Recapitalization, (ii) the Offering and the use of proceeds therefrom and (iii)
the other transactions as described in the notes below, and is based upon
available information and certain assumptions that the Company believes are
reasonable under the circumstances. The unaudited pro forma consolidated
financial information for the three month period ended June 28, 1997 reflects
the effect of adjustments to the historical consolidated financial statements
of the Company necessary to give effect to the Offering and the use of proceeds
therefrom, and is based upon available information and certain assumptions that
the Company believes are reasonable under the circumstances. The unaudited pro
forma consolidated financial information is presented for comparative and
informational purposes only and is not necessarily indicative of future results
or of the results that would have been obtained had the transactions assumed
therein been completed on the dates indicated. The information presented below
should be read in conjunction with "Unaudited Pro Forma Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of the Company
and related notes, all included elsewhere in this Prospectus.
14
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FISCAL YEAR ENDED FISCAL THREE MONTHS THREE MONTHS THREE MONTHS
---------------------------------- YEAR ENDED ENDED ENDED ENDED
APRIL 1, MARCH 30, MARCH 29, MARCH 29, JUNE 29, JUNE 28, JUNE 28,
1995 1996 1997 1997 1996 1997 1997
-------- --------- --------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 40.3 $ 52.2 $ 56.7 $ 56.7 $ 14.7 $ 15.5 $ 15.5
Cost of goods sold...... 25.4 32.6 35.7 35.7 9.2 9.3 9.3
------- ------- ------- ------- ------- ------- -------
Gross profit............ 14.9 19.6 21.0 21.0 5.5 6.2 6.2
Selling, general and ad-
ministrative
expenses............... 6.3 9.1 9.3 4.7 2.2 2.1 2.1
Non-recurring expense... -- -- 10.0(/1/) 10.0(/1/) -- -- --
------- ------- ------- ------- ------- ------- -------
Earnings from opera-
tions.................. 8.6 10.5 1.7 6.3 3.3 4.1 4.1
Interest expense........ (1.7) (1.9) (2.9) (10.7) (0.4) (2.6) (2.6)
Interest and other in-
come................... 0.1 0.3 0.4 0.4 0.1 0.1 0.1
Other expense........... (1.4)(/2/) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
taxes and extraordinary
item................... 5.6 8.9 (0.8) (4.0) 3.0 1.6 1.6
Taxes (benefit) on earn-
ings (loss)............ 1.7 3.2 (0.3) (1.4) 1.2 0.7 0.6
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
extraordinary item..... 3.9 5.7 (0.5) (2.6) 1.8 0.9 1.0
Extraordinary loss on
retirement
of debt, net of tax
benefit................ -- -- (1.2) --(/8/) -- (1.0) --(/8/)
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ 3.9 $ 5.7 $ (1.7) $ (2.6) $ 1.8 $ (0.1) $ 1.0
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share before
extraordinary loss..... $ 7.76 $ 11.44 $ (1.46) $(19.23) $ 3.68 $ 6.84 $ 7.05
Extraordinary loss per
share.................. -- -- (3.29) -- -- (7.27) --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) per
share.................. $ 7.76 $ 11.44 $ (4.75) $(19.23) $ 3.68 $ (.43) $ 7.05
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............ 496,166 494,968 360,585 134,955 499,866 137,826 134,995
======= ======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
Gross margin............ 37.0% 37.5% 37.0% 37.0% 37.4% 40.0% 40.0%
EBITDA, as adjust-
ed(/4/)................ 9.7 11.6 3.1 7.7 3.6 4.5 4.5
EBITDA margin, as ad-
justed................. 24.2% 22.3% 5.3% 13.6% 24.5% 29.0% 29.0%
Depreciation and
amortization........... 1.1 1.1 1.4 1.4 0.3 0.4 0.4
Non-recurring
charges(/3/)........... 2.1 4.9 14.6 10.0 1.2 -- --
Capital expenditures.... 1.2 2.0 3.4 3.4 0.8 0.7 0.7
Cash flows provided by
(used in):
Operating activities.... 5,696 5,062 1,810 -- 2,583 1,758 --
Investing activities.... 136 (615) (1,768) -- (297) (2,894) --
Financing activities.... (2,520) (1,424) 152 -- (153) 3,075 --
Pro forma ratio of
EBITDA, as adjusted, to
interest expense(/5/).. -- -- -- --(/1//0/) -- -- 1.7x
Pro forma ratio of
EBITDA, as adjusted,
less capital
expenditures to
interest expense....... -- -- -- --(/1//0/) -- -- 1.5x
Pro forma ratio of earn-
ings to fixed
charges(/6/)........... -- -- -- --(/9/) -- -- 1.6x
Pro forma ratio of total
debt to EBITDA, as ad-
justed................. -- -- -- 12.1x -- -- 5.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 29, 1997
-------------------------- AS OF
AS ADJUSTED FOR JUNE 28,
HISTORICAL THE OFFERING 1997
---------- --------------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 6.8 $ 10.6 $ 8.8
Working capital............................ 7.6 14.3 12.7
Property, plant and equipment, net......... 12.3 12.3 13.0
Total assets............................... 116.1 122.5 54.9
Total debt(/7/)............................ 82.4 93.1 92.9
Stockholders' deficit...................... (53.3) (57.7) (57.1)
</TABLE>
15
<PAGE>
- -------
(/1/) Represents $10.0 million non-recurring expense for environmental
remediation. In connection with the Recapitalization, a $6.0 million
escrow (the "Deferred Amount") was established primarily to fund the
estimated after-tax cost (estimated tax benefit of $4.0 million)
associated with these environmental matters. See "The Recapitalization."
(/2/) Represents $1.4 million loss on sale of real property.
(/3/) Non-recurring charges represent certain compensation and environmental
costs which will not recur subsequent to the Recapitalization. The non-
recurring compensation amounts were derived by subtracting the
compensation under contracts entered into in conjunction with the
Recapitalization from the historical compensation expense. The non-
recurring compensation amounts for the fiscal years ended April 1, 1995,
March 30, 1996 and March 29, 1997 and for the three months ended June
29, 1996 were, respectively, $1.8 million, $4.6 million, $4.6 million
and $1.1 million. Those charges that are directly affected by the
Recapitalization and the Offering are eliminated in the pro forma
adjustments.
(/4/) EBITDA, as adjusted, represents net earnings before taking into
consideration extraordinary loss, taxes on earnings, interest income,
other non-cash expense, interest expense, depreciation and amortization.
This data is relevant to an understanding of the economics of the
Company's business as it indicates cash flow available from operations
(and/or trends in cash flow available from operations) to service debt
and satisfy certain fixed obligations. EBITDA, as adjusted, should not
be construed by the reader as an alternative to operating income as an
indicator of the Company's operating performance, or to cash flows from
operating activities (as determined in accordance with GAAP) or as a
measure of liquidity. In addition, EBITDA, as adjusted, measures
presented may not be comparable to other similarly titled measures of
other companies.
(/5/) Pro forma interest expense for the fiscal year ended March 29, 1997 is
pro forma interest expense including amortization of deferred financing
costs, and gives effect to the Recapitalization and the Offering as if
they occurred on March 31, 1996.
(/6/) For purposes of this ratio, earnings consists of earnings before income
taxes. Fixed charges consists of interest expense and the portion of
rents representative of an interest factor. The pro forma ratio of
earnings to fixed charges is computed by adding earnings before income
taxes and fixed charges and dividing by fixed charges.
(/7/) Total debt represents total indebtedness of the Company including current
maturities.
(/8/) Excludes extraordinary loss on the debt retired from the proceeds from
the Recapitalization.
(/9/) The Company's pro forma earnings were insufficient to cover interest
expense and fixed charges for the fiscal year ended March 29, 1997. The
dollar amount of the deficiency was $4,000,000.
(/10/) The Company's pro forma EBITDA, as adjusted, and EBITDA, as adjusted,
less capital expenditures were insufficient to cover interest expense for
the fiscal year ended March 29, 1997.
16
<PAGE>
RISK FACTORS
Holders of Old Notes should carefully consider the following specific risk
factors, as well as the other information set forth in this Prospectus, before
tendering their Old Notes in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Old Notes under the Securities Act.
See "The Exchange Offer--Consequences of Exchanging Old Notes."
POTENTIAL INABILITY OF THE COMPANY TO PAY INTEREST AND PRINCIPAL OF NOTES;
SUBSTANTIAL LEVERAGE
The Company has indebtedness which is substantial in relation to
stockholders' equity, as well as interest and debt service requirements that
are significant compared to its income and cash flow from operations. At
August 23, 1997, the Company's total indebtedness was $92.2 million and the
Company's annual interest payments due on such indebtedness will be $9.9
million. No principal payments are due on the Notes until maturity in May
2007. For the three months ended June 28, 1997, on a pro forma basis (after
giving effect to the assumptions described in "Unaudited Pro Forma
Consolidated Financial Information"), the Company's ratio of earnings to fixed
charges would have been 1.6 to 1.0.
This degree of leverage will have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
working capital, capital expenditures, debt service requirements or other
purposes may be impaired; (ii) a substantial portion of the Company's cash
flow from operations will be required to pay the Company's interest expense
and principal repayment obligations and will not be available for the general
corporate needs of the Company; (iii) the Company's leverage may limit its
flexibility to adjust to changing market conditions and reduce its ability to
compete against its less highly leveraged competitors; (iv) the Company may be
more vulnerable in the event of a downturn in its business, in the automotive
and aerospace industries or in the economy generally; and (v) to the extent
that the Company incurs any borrowings under the Revolving Credit Facility,
which borrowings will be at variable rates, the Company will be vulnerable to
increases in interest rates. The maximum amount available under the Revolving
Credit Facility is $20.0 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
The Company's ability to pay interest on the Notes and satisfy its other
obligations will depend on its future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, many of which are beyond its control. There can be no assurance that
the Company will generate earnings in any future period sufficient to cover
its fixed charges. In the absence of adequate operating results and cash
flows, the Company might be required to adopt alternative strategies that may
include reducing or delaying capital expenditures, disposing of material
assets or operations, refinancing its indebtedness, including the Notes, or
seeking additional equity capital to meet its debt service obligations. The
Revolving Credit Facility and Indenture will contain covenants which restrict
the Company's ability to take certain of the foregoing actions, including
selling assets and using the proceeds therefrom. There can be no assurance as
to the timing of such actions, the ability of the Company to consummate such
actions under its existing financing agreements or the proceeds that the
Company could realize therefrom and there can be no assurance that any such
refinancing would be feasible at the time or that such proceeds would be
adequate to meet the obligations then due. In addition, there can be no
assurance that the Subsidiary Guarantors will generate sufficient cash flow to
meet their respective obligations under the Subsidiary Guarantees. See
"Description of Certain Indebtedness" and "Description of the Notes."
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DEPENDENCE ON KEY CUSTOMERS AND CONTRACTUAL RELATIONSHIPS
The demand for the Company's products is largely dependent on the automotive
and aerospace industries. Sales to SDI, the Company's largest customer,
accounted for approximately 27% of the Company's consolidated sales for the
fiscal year ended March 29, 1997. Sales to the Company's ten largest customers
accounted for approximately 47% of consolidated sales during the 1997 fiscal
year. Approximately 70% of the Company's consolidated sales for fiscal year
1997 were to customers with which the Company had contractual agreements, sole
source relationships, letters of intent or long-term purchase orders. A
substantial portion of these business relationships are informal and certain
of the Company's contractual arrangements may be terminated at will. There can
be no assurance that sales to SDI or the Company's other major customers will
continue at the same level of volume or pricing or that one or more major
customers will not terminate or seek to materially alter the terms of their
relationship with the Company. There can be no assurance that SDI or other
large customers will not shift their sourcing to other suppliers, develop in-
house manufacturing capabilities, transfer production outside of North America
or take other actions which could adversely affect the Company. In the past,
SDI has attempted to find such second source suppliers and to secure a license
from the Company to produce GTMS products internally. SDI has recently
announced its intention to internally produce 100,000 glass-to-metal seal
units per week in partial substitution of the glass-to-metal seal units
supplied to SDI by the Company. In addition, SDI is seeking to renegotiate the
terms of its contract with the Company, including with respect to price and
the minimum percentage of glass-to-metal seal units SDI must buy from the
Company. The loss of SDI as a customer or a substantial decrease in SDI's
purchases from the Company, a material decrease in the demand for automobiles,
automobile airbags or aircraft for which the Company supplies GTMS products or
a material deterioration in the ability of the Company to obtain orders to
supply GTMS products for automobiles or aircraft would have a material adverse
effect on the financial condition and results of operations of the Company. A
portion of the Company's sales in these markets are to customers who are
government contractors. As such, compliance with various government
regulations and provisions in such customers' contracts may be required.
Certain violations of these regulations could result in termination of the
Company's contracts with such customers, imposition of fines, and/or
suspension or debarment from supplying component parts for government
contracts.
UNCERTAINTY OF DEMAND AND PRICING OF AUTOMOTIVE PRODUCTS
Many of the Company's customers, including SDI, the Company's largest
customer, are suppliers of products to the automotive industry. The automotive
and automotive supply industries are highly cyclical and, in large part,
dependent upon the overall strength of consumer demand for passenger cars and
light trucks. The U.S. automotive industry has historically experienced
significant fluctuations in demand, based on such factors as general economic
conditions, interest rates and consumer confidence. In addition, strikes,
lock-outs, work stoppages or other production interruptions in the automotive
industry can affect demand for the Company's products. There can be no
assurance that the automotive industry, for which the Company's customers
supply airbags and seat belt pretensioners that incorporate products
manufactured by the Company, will not experience downturns in the future. A
decrease in overall consumer demand for passenger cars and light trucks would
have a material adverse effect on the Company's financial condition and
results of operations. In addition, the Company believes that entry into the
airbag sub-assembly market by a growing number of component and system
suppliers, combined with a greater percentage of lower priced airbags, such as
side-impact airbags, has reduced pricing in the airbag industry. There can be
no assurance that this trend will not continue.
UNCERTAINTY OF POTENTIAL CHANGES IN GOVERNMENT REGULATION
Products for which the Company produces component parts, including airbags
and seat belt pretensioners, are subject to legislative regulation that is
regularly reexamined and amended. There can be no assurance that federal
regulations regarding automobile safety standards will not be amended in the
future so as to adversely impact (a) the use of airbags and seat belt
pretensioners or (b) the manufacturing of such products in a manner that would
adversely impact the Company or that such amendments would not have a material
adverse effect on the financial condition and results of operations of the
Company.
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UNCERTAINTY OF DEMAND AND PRICING FOR COMMERCIAL AND MILITARY AVIATION AND
ELECTRONICS
Many of the Company's products are used in a number of different
applications in commercial and military aircraft and electronics. The
aerospace and defense industry has been undergoing rapid consolidation over
the last few years. Consolidations and combinations in the industry may
eliminate customers from the market (including customers of the Company who
are acquired by non-customers) or produce downward pricing pressures on
component parts sales to the aerospace and defense industry. Downward pricing
pressures on sales of component parts, the elimination of customers from the
industry generally or the loss of the Company's customers may have a material
adverse effect on the financial condition and results of operations of the
Company.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company is subject to various federal, state and local environmental
laws, ordinances and regulations, including those governing discharges into
the air and water, the storage, handling and disposal of solid and hazardous
wastes, the remediation of soil and groundwater contamination by hazardous
substances, wastes or petroleum products, and the health and safety of
employees ("Environmental Laws"). The soil and groundwater at some of the
Company's facilities have evidence of contamination which may be as a result
of either the Company's operations or other industrial activities in the area.
In particular, a portion of the San Gabriel Valley in which the Company's
principal operating facility in Rosemead, California is located was designated
by the U.S. Environmental Protection Agency (the "EPA") as a Superfund site in
1984 pursuant to the Comprehensive Response, Compensation and Liability Act
("CERCLA" or "Superfund"). To facilitate cleanup and improve administration of
the vast site, the EPA subdivided the valley into seven geographically
distinct "operable units." The Company has been named as a potentially
responsible party ("PRP") under CERCLA for the El Monte Operable Unit.
Generally, liability under CERCLA is joint and several and remediation can
extend to properties owned by third parties. In addition, the Company's
facility in Avon, Massachusetts is subject to Massachusetts "Chapter 21E," the
state's hazardous site cleanup program. In connection with the ownership and
operation of such properties, the Company may be liable under Environmental
Laws, including CERCLA, for the cost of remediation or removal of such
contamination, as well as certain other related costs, including governmental
penalties and claims by third parties for personal injury and property damage.
In connection with the Recapitalization, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of certain
environmental liabilities and certain funds were placed in escrow to secure
indemnification obligations, including environmental indemnification, of the
Selling Group. There can be no assurance that the expenditures ultimately
required for resolution of these matters will not exceed either the amount
escrowed or the total indemnification obligation. In addition, the Company has
agreed to indemnify the Selling Group to the extent such environmental claims
exceed $30.0 million. Moreover, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement by regulatory authorities, may give rise to additional
expenditures, compliance requirements or liabilities that could be material to
the business and the results of the operations of the Company. See "The
Recapitalization" and "Business--Environmental Matters."
TECHNOLOGICAL RISK
The use of the products manufactured by the Company, including those used in
airbags, are subject to the risk of technological change. The airbag industry
represents a competitive and constantly changing environment with many large
global companies competing for market share with evolving products and new
technologies. Sales to the automotive industry represent approximately 41% of
the Company's sales; a substantial portion of which are sales related to
airbags. Virtually all airbag initiators used in the U.S. and some in Europe
incorporate a glass-to-metal, hermetic seal which protects the initiator from
temperature extremes, electromagnetic interference, moisture and other forms
of environmental stress. Less expensive
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plastic initiators are available, but to date have had limited impact in the
U.S. because plastic initiators have not met performance specifications
currently demanded by U.S. auto makers. Plastic initiators may, however,
capture a larger portion of the U.S. market for seat belt pretensioners. In
Europe, plastic initiators have gained greater acceptance for use with airbag
initiators and pretensioners due to their relative cost. In the United States,
a competitor of the Company's customers is introducing an initiator with less
expensive plastic components, which does not use a GTMS, but which may have
similar performance characteristics. Moreover, they and other competitors
continue to seek to develop new plastics and new technology which will be able
to match the performance standards of the Company's glass-to-metal seals.
There can be no assurance that such a product would not be developed or that
given the significant pricing pressure currently existing in the automotive
industry, certain auto makers and auto parts suppliers might elect to use less
expensive plastic seals.
REDUCED OR DISCONTINUED SALES DUE TO VERTICAL INTEGRATION OF INITIATOR
SUPPLIERS BY MANUFACTURING GLASS-TO-METAL SEALS
The majority of the Company's business is a customized, niche business,
requiring engineering and manufacturing complexity. However, the glass-to-
metal seal being used in the airbag initiator is becoming more standardized,
lending itself to a more automated manufacturing process. As pricing pressures
increase throughout the airbag component industry and particularly with
respect to initiators, initiator manufacturers may be inclined to vertically
integrate by manufacturing their own glass-to-metal seals to capture further
margins and profitability. The vertical integration of the Company's customers
could adversely affect the financial condition and results of operations of
the Company. See "Dependence on Key Customers and Contractual Relationships."
SUBORDINATION OF THE NOTES AND SUBSIDIARY GUARANTEES
The Old Notes are, and the New Notes will be, subordinated in right of
payment to all Senior Indebtedness of the Company, including all indebtedness
under the Revolving Credit Facility. As of August 23, 1997, the aggregate
amount of outstanding Senior Indebtedness of the Company was approximately
$2.2 million, and the Company had the ability to borrow up to an additional
$20.0 million under the Revolving Credit Facility.
Upon any payment or distribution of assets of the Company upon liquidation,
dissolution, reorganization or any similar proceeding, the holders of Senior
Indebtedness will be entitled to receive payment in full before the Holders of
Notes are entitled to receive any payment. In addition, the Company may not
make any payments in respect of the Notes during the continuance of a payment
default under any Designated Senior Indebtedness (as defined herein).
Moreover, if certain non-payment defaults exist under any Designated Senior
Indebtedness, the Company may not make any payments in respect of the Notes
for a specified period of time.
The obligations of the Company under the Revolving Credit Facility are,
subject to certain limitations, guaranteed by the Company's domestic wholly-
owned operating Subsidiaries. The Subsidiary Guarantees are subordinated to
Senior Indebtedness of each Subsidiary Guarantor to the same extent that the
Notes are subordinated to Senior Indebtedness of the Company, and the ability
to collect under any Subsidiary Guarantees may therefore be similarly limited.
The obligations of the Company and its Subsidiaries, whether as borrower or
guarantor, are collateralized under the Revolving Credit Facility by
substantially all of each such person's present and future assets and any
default thereunder could effectively permit the holders of Senior Indebtedness
to control the Company's and its subsidiaries' cash and other assets which
could indirectly prevent the Company from servicing its debt service
obligations on other indebtedness, including the Notes. The Notes will be
unsecured and, therefore, do not have the benefit of such collateral. If the
Company becomes insolvent or is liquidated or if the indebtedness under the
Revolving Credit Facility is accelerated, the lenders under the Revolving
Credit Facility will be entitled to payment in full from the proceeds of the
collateral prior to any payment to the Holders of the Notes. In such event, it
is possible that there would be no assets remaining from which claims of the
Holders of the Notes could be satisfied
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or, if any assets remain, such assets may be insufficient to fully satisfy
such claims. See "Description of the Notes--Ranking," "--Subsidiary
Guarantees" and "--Certain Covenants."
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued on May 6, 1997 to a small number of institutional investors
and institutional accredited investors and are eligible for trading in the
Private Offering, Resale and Trading through Automated Linkages (PORTAL)
Market, the National Association of Securities Dealers' screenbased, automated
market for trading of securities eligible for resale under Rule 144A. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for the remaining untendered Old Notes could be adversely
affected. 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 are higher or
lower than the initial offering price of the Old Notes 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 liquidity of any trading market for
the New Notes or that an active public market for the New Notes will develop.
The Company does not intend to apply for listing or quotation of the New Notes
on any securities exchange or stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market that develops for the
New Notes would not be subject to similar disruptions. Any such disruptions
may have an adverse effect on Holders of the New Notes.
CONTROLLING STOCKHOLDERS
Of the outstanding capital stock of the Company, 65% is held by the Windward
Group. Consequently, the Windward Group controls the Company. Pursuant to a
Stockholders Agreement, the Windward Group has the right to elect six out of
the Company's nine directors (with one of such directors being a designee of
MetLife, a significant investor in the Windward Group). See "Securities
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions--Stockholders Agreement."
POTENTIAL INABILITY TO REPURCHASE THE NOTES IN THE EVENT OF CHANGE IN CONTROL
Upon a Change of Control, the Company is obligated to make an offer to
purchase all outstanding Notes at a price equal to 101% of the principal
amount of the Notes, plus accrued interest thereon. The Revolving Credit
Facility will prohibit the Company from purchasing any Notes, and will also
provide that the occurrence of certain Change of Control events with respect
to the Company would constitute a default thereunder. In the event of a Change
of Control, the Company must offer to repay all borrowings under the Revolving
Credit Facility or obtain the consent of its lenders under the Revolving
Credit Facility to make the purchase of the Notes. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute a default under the Indenture, which,
in turn, would constitute a default under the Revolving Credit Facility. It
should be noted that the transfers among the members of the Windward Group and
the Investors therein would not cause a Change of Control. There can be no
assurance that the Company will have the financial ability to purchase the
Notes upon the occurrence of a Change of Control. There can be no assurance
that the Company will be able to comply with all of its obligations under the
Revolving Credit Facility and the Indenture. See "Description of the Notes--
Change of Control."
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DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small number of key executive
officers including certain members of the Selling Group, all of whom received
payments (some of which were substantial) in the Recapitalization. The loss of
the services of certain of these executives could have an adverse impact on
the Company. There can be no assurance that the services of such personnel
will continue to be made available. The Company has entered into employment
arrangements with certain key executive officers who own, together with their
affiliates, in the aggregate approximately 35% of the outstanding capital
stock of HCC. See "The Recapitalization" and "Management."
FRAUDULENT TRANSFER CONSIDERATIONS
The proceeds of the Offering were used primarily to (i) refinance
indebtedness incurred (the "Recapitalization Indebtedness") by the Company to
finance the purchase of Common Stock in the Recapitalization and (ii) to
repurchase the Mezzanine Units. Under relevant federal bankruptcy law or state
fraudulent transfer laws, the Notes under the circumstances described below
may be subject to avoidance or may be subordinated to existing or future
indebtedness of the Company (in addition to the Senior Indebtedness to which
the Notes are expressly subordinated). If a court in a suit by an unpaid
creditor or representative of creditors, such as a trustee in bankruptcy or
the Company as debtor-in-possession, were to find that after giving effect to
the sale of the Notes or the incurrence of the Recapitalization Indebtedness
and the application of the net proceeds therefrom either (a) the Company
received less than a reasonably equivalent value or fair consideration for the
issuance of the Notes or the Recapitalization Indebtedness (including by
reason of the fact the proceeds therefrom were used to repurchase Common Stock
and Mezzanine Units of the Company) and either (i) was insolvent at the time
of such issuance or was rendered insolvent thereby, (ii) was engaged in
business or transactions for which the assets remaining with the Company
constituted unreasonably small capital or (iii) intended to incur, or believed
that it would incur, debts beyond its ability to pay as such debts matured; or
(b) the Company issued the Notes or incurred the Recapitalization Indebtedness
with actual intent to hinder, delay or defraud its creditors, the court could
avoid the Notes and order that all or part of any payments on the Notes be
returned to the Company or to a fund for the benefit of its creditors, or
subordinate the Notes to all other indebtedness of the Company or take other
action detrimental to the holders of the Notes. In addition, the purchase of
the stock in the Recapitalization was and the repurchase of the equity portion
of the Mezzanine Units are subject to similar restrictions as those described
above pursuant to applicable state law.
The measure of insolvency for purposes of the foregoing varies based upon
the law of the jurisdiction applied. Generally, however, an entity would be
considered insolvent if the sum of its debts (including contingent
liabilities) is greater than all of its property at a fair valuation, or if
the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts
(including contingent liabilities), as they become absolute and matured. In
addition, an entity may be presumed insolvent under some fraudulent transfer
laws if it is not generally paying its debts as they become due. The Company
believes that, based upon forecasts and other financial information including
the Pro Forma Consolidated Financial Information included elsewhere in this
Prospectus, the Company was at the time of the Recapitalization, is at the
time the Notes are issued, and will continue to be, solvent; will have
sufficient capital to carry on its business; and will continue to be able to
pay its debts as they mature. Accordingly, the Company believes that in a
bankruptcy case or a lawsuit by creditors of the Company, none of the Notes
should be held to have been issued in violation of applicable federal
bankruptcy law or state fraudulent transfer laws. There can be no assurance,
however, as to what standard a court would apply to determine whether the
Company was "insolvent" as of the date the Notes were issued; or that,
regardless of the method of valuation, a court would not determine that the
Company was insolvent on such relevant dates. Nor can there be any assurance
that a court would not determine, regardless of whether the Company was
insolvent on the date the Notes were issued, that the payments constituted
fraudulent transfers on another of the grounds listed above.
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PRODUCTS LIABILITY EXPOSURE
The Company may be exposed to products liability claims in the future
relating to the performance of a GTMS product or the performance of a product
in which the Company's GTMS product was a component part. The Company
generally obtains indemnification from its customers and currently maintains
insurance coverage for products liability claims. There can be no assurance
that products liability claims will not be brought against the Company in the
future, either by injured customers of an end product manufacturer who used a
Company product as a component or by a direct purchaser from the Company. In
addition no assurance can be given that indemnification from the Company's
customers or coverage under insurance policies will be adequate to cover
future products liability claims against the Company. Moreover, liability
insurance is expensive, difficult to maintain and may be unobtainable in the
future on acceptable terms. The amount and scope of any insurance coverage may
be inadequate if a products liability claim is successfully asserted against
the Company.
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THE RECAPITALIZATION
Effective as of February 14, 1997, pursuant to a Stock Purchase and Sale
Agreement (the "Recapitalization Agreement"), dated as of December 23, 1996,
HCC, Andrew Goldfarb and certain affiliates of Mr. Goldfarb and his family
(collectively, the "Selling Stockholder"), certain members of management
(together with the Selling Stockholder, the "Selling Group"), Windward Capital
Associates, L.P. ("Windward") and certain entities Windward controls
(collectively, with Windward, the "Windward Group") and Metropolitan Life
Insurance Company ("MetLife") completed a recapitalization of the Company (the
"Recapitalization"). The Windward Group is a group of related entities which
make merchant banking investments pursuant to certain program agreements.
In connection with the Recapitalization, among other things: (i) the Company
entered into Credit Facilities, consisting of: (a) a $10 million five year
Revolving Credit Facility (the "Old Revolving Credit Facility"), (b) a $30
million, five year Tranche A Term Loan ("Term Loan A") and (c) a $30 million,
six and one-half year Tranche B Term Loan ("Term Loan B" and together with the
Old Revolving Credit Facility and Term Loan A, the "Old Credit Facilities");
(ii) HCC issued $19.3 million, net of discount, of 12% subordinated notes due
2004 to the Windward Group and MetLife (the "Mezzanine Notes") along with
8,614 shares of Common Stock and contingent anti-dilution warrants to purchase
1,461 shares of Common Stock (together valued at $3.2 million and representing
approximately 6% of the common equity of the Company on a fully diluted basis,
together with the Mezzanine Notes, the "Mezzanine Units") pursuant to the
Mezzanine Note Agreement (the "Mezzanine Note Agreement"), dated as of
February 14, 1997 and the Recapitalization Agreement for an aggregate purchase
price of $22.5 million; (iii) HCC repurchased a portion of the shares of
Common Stock beneficially owned by the Selling Group for $87.5 million,
including certain transaction expenses, in cash (a portion of which was paid
at closing and the remainder of which was deposited in escrow at closing and
paid to the stockholders on April 1, 1997 in order to comply with applicable
state law) and $5.0 million in contingent subordinated notes (the "Contingent
Notes") and the Selling Group retained 47,234 shares of Common Stock; (iv) the
Windward Group purchased 87,721 shares of Common Stock from HCC for $32.5
million in cash; and (v) HCC repaid $21.4 million of its outstanding
indebtedness. Pursuant to the terms of the Mezzanine Note Agreement, the
Warrants and the Recapitalization Agreement, HCC may, at any time on or prior
to August 13, 1997, repurchase all, but not less than all, of its outstanding
Mezzanine Units for $22.5 million (the aggregate original purchase price
thereof) plus accrued interest, if any, on the Mezzanine Notes to the date of
repurchase. In accounting for the Recapitalization, no fair value adjustments
were made to the book value of the Company's assets and no goodwill was
recognized.
HCC used a portion of the proceeds from the Offering to repurchase the
Mezzanine Units from the holders thereof. See "Use of Proceeds." Immediately
prior to the Recapitalization, the Selling Group owned 100% of the outstanding
Common Stock. As a result of the Recapitalization after giving effect to the
repurchase of the Mezzanine Units, the Windward Group owns 65% of the
outstanding Common Stock and the Selling Group (and certain other members of
management) owns 35% of the outstanding Common Stock.
The Contingent Notes issued to the Selling Group vest upon the achievement
by the Company of certain performance thresholds and are also subject to
immediate vesting upon certain events including (i) an initial public offering
in which certain market capitalization criteria are met, (ii) a sale resulting
in a Change in Control of the Company (as defined in the Contingent Notes) in
which certain equity valuation criteria are met, or (iii) an initial public
offering or a sale resulting in a Change in Control of the Company where the
Company achieves a certain performance threshold. The Contingent Notes rank
pari passu with the Mezzanine Notes and the indebtedness of the Company
evidenced by such Contingent Notes if and when vested is subordinate to Senior
Debt (as defined in the Contingent Notes) and the Notes. See "Description of
Certain Indebtedness--Contingent Notes."
The Recapitalization Agreement contains certain representations, warranties,
covenants and indemnities of the parties thereto. In connection with the
Recapitalization, HCC entered into a deferred
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purchase price agreement dated, February 14, 1997 (the "Deferred Purchase
Price Agreement") with the Selling Group, the Windward Group and MetLife. The
Deferred Purchase Price Agreement provides for the escrow of $6 million (the
"Deferred Amount") to secure a portion of the indemnification obligations to
the Company, including obligations in respect of environmental matters, of the
Selling Group. Any portion of the Deferred Amount which remains following
resolution of certain environmental matters and settlement of other
indemnification obligations in connection with the Recapitalization plus
interest thereon will be paid to the Selling Group. The escrow will remain in
effect until such time. See "Business--Environmental Matters."
In addition, in connection with the Recapitalization, HCC also established
certain management incentive programs, including a stock option plan (the
"Option Plan"), a contingent bonus plan (the "Bonus Plan"), and employment
agreements (the "Employment Agreements") to replace certain previous
arrangements. See "Management--Executive Compensation--Employment Agreements."
Prior to the Recapitalization, management received substantial cash payments
in the form of salary and bonus. Such payments for the fiscal years ended
April 1, 1995, March 30, 1996 and March 29, 1997 paid to the Company's senior
executives are set forth herein under "Management--Executive Compensation."
Following the Recapitalization, such persons will receive substantially lower
annual cash compensation, but will be entitled to participate in the Option
Plan and the Contingent Bonus Plan, described below. Certain of such persons
have also received Contingent Notes in the Recapitalization and are parties to
employment agreements. The Option Plan provides for a grant from time to time
to employees and directors of the Company of non-qualified stock options (the
"Options"). Twenty percent of the Options vest annually subject to the
satisfaction of certain annual performance criteria over five years, but are
also subject to immediate vesting upon a Change of Control so long as the
Windward Group realizes a specified compounded annual rate of return. The
remaining Options vest immediately upon a Change of Control where the Windward
Group realizes a certain rate of return. In addition, regardless of whether
the performance criteria are achieved, all Options, including the performance
based Options, will vest automatically on the seventh anniversary of the date
on which the Option Plan was adopted. See "Management--Option Plan." Pursuant
to the terms of the Bonus Plan, the contingent bonuses vest upon the
satisfaction by the Company of certain performance criteria and are also
subject to immediate vesting upon certain events including (i) an initial
public offering where certain market capitalization criteria are met, (ii) a
sale resulting in a Change in Control of the Company (as defined in the Bonus
Plan) where certain equity valuation criteria are met, or (iii) an initial
public offering or a sale resulting in a Change in Control of the Company
where the Company satisfies certain performance criteria within certain time
periods. See "Management--Contingent Bonus Plan."
In connection with the Recapitalization, HCC reimbursed the Windward Group
and its affiliates for its expenses incurred in connection with the
Recapitalization, including the fees and expenses due to financing sources and
advisers and also reimbursed the Selling Group for certain of its expenses in
connection with the Recapitalization. HCC also paid a fee to the purchasers of
the Mezzanine Units of $500,000 in exchange for the right to repurchase the
Mezzanine Units on or prior to August 13, 1997. HCC also entered into a
Financial Advisory Services Agreement with Windward Capital Partners, L.P., an
affiliate of Windward. See "Certain Relationships and Related Transactions."
RECENT DEVELOPMENTS
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of the Connector Industries of America division of
Uni-Star Industries Inc., a glass-to-metal sealing business which competed
with the Company. The purchase price included $2.1 million in cash and a
contingent payment of $400,000 based upon the volume of business retained in
the immediately subsequent 18 month period.
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USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds received by the Company from the sale of the Old Notes after
deduction of discounts and commissions and offering expenses were $86.3
million. The net proceeds of the Offering were used to (i) repay in full Term
Loan A and Term Loan B which were incurred in connection with the
Recapitalization to repurchase Common Stock in the Recapitalization (ii)
redeem all of the Mezzanine Units issued in connection with the
Recapitalization and (iii) provide for working capital and general corporate
purposes. See "The Recapitalization." On May 6, 1997, the Company amended the
Old Revolving Credit Facility to, among other things, increase the amount
available thereunder from $10.0 million to $20.0 million. See "Description of
Certain Indebtedness."
Borrowings under Term Loan A due February 2002 and Term Loan B due August
2003 bore interest, at the Company's option, at rates based on LIBOR or the
Base Rate (each as defined in the Credit Facilities). The weighted average
interest rate under Term Loan A and Term Loan B as of February 14, 1997 was
9.75%. The Mezzanine Notes were subordinated notes of the Company due 2004
bearing an interest rate of 12%. The Company used the net proceeds of the
Offering to redeem the Mezzanine Units which were owned 91% by Windward/Park
HCC, L.L.C. (the Mezzanine Notes were held directly by MetLife, the sole
member other than Windward of Windward/Park HCC, L.L.C.), 7% by
Windward/Merban L.P. and 2% by Windward/Merchant, L.P.
The sources and uses of funds in connection with the Offering were as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
The Notes.................................................... $90.0
-----
Total sources.............................................. $90.0
=====
USES OF FUNDS:
Repay Term Loan A............................................ $30.0
Repay Term Loan B............................................ 30.0
Redeem Mezzanine Units....................................... 22.5
Working capital.............................................. 3.8
Fees and expenses............................................ 3.7
-----
Total uses................................................. $90.0
=====
</TABLE>
26
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of August 23, 1997. This table should be read in conjunction with the
consolidated financial statements of the Company, together with the notes
thereto, the "Unaudited Pro Forma Consolidated Financial Information,"
together with the notes thereto, and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
AS OF
AUGUST 23,
1997
----------
(IN MILLIONS)
<S> <C>
Cash and cash equivalents.................................. $ 10.3
======
Revolving Credit Facility(/1/)............................. $ --
The Notes.................................................. 90.0
Other indebtedness......................................... 2.2
------
Total debt............................................... 92.2
Total stockholders' deficit................................ (57.3)
------
Total capitalization....................................... $ 34.9
======
</TABLE>
- --------
(/1/) The Revolving Credit Facility represents a five-year $20.0 million
committed facility. See "Description of Certain Indebtedness."
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of earnings assume
that the Recapitalization and the Offering occurred at the beginning of the
fiscal year ended March 29, 1997. Pursuant to the Recapitalization, which
occurred on February 14, 1997: (i) the Company entered into a credit facility
consisting of a $10.0 million five year Revolving Credit Facility, a $30.0
million Term Loan A and a $30.0 million Term Loan B; (ii) HCC issued $19.3
million, net of discount, in Mezzanine Notes to the Windward Group and
Metlife, along with accompanying shares of Common Stock and contingent anti-
dilution warrants (together valued at $3.2 million) for an aggregate
consideration of $22.5 million; (iii) HCC redeemed a portion of the shares of
its Common Stock owned by the Selling Group for $87.5 million in cash,
including certain transaction expenses, and $5.0 million in contingent
subordinated notes; (iv) the Windward Group purchased shares of Common Stock
from the Company for $32.5 million in cash; and (v) HCC repaid $21.4 million
of its outstanding indebtedness. In connection with the Offering, which
occurred on May 6, 1997, the Company repaid all outstanding amounts under Term
Loan A and Term Loan B and repurchased the Mezzanine Notes.
The unaudited pro forma consolidated financial statements are not
necessarily indicative of the results that would have occurred if the
foregoing transactions had been consummated as of the indicated dates or which
may occur in the future. The unaudited pro forma consolidated financial
statements should be read in conjunction with the historical audited and
unaudited interim consolidated financial statements of HCC Industries Inc. and
Subsidiaries and the related notes thereto and the "Selected Consolidated
Historical Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operation", included elsewhere in this
Prospectus.
28
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED MARCH 29, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
RECAPITALIZATION
HISTORICAL ADJUSTMENTS AND THE OFFERING
---------- ----------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales............................ $56,683 $56,683
Cost of goods sold................... 35,729 35,729
------- -------
Gross profit........................ 20,954 20,954
Selling, general and
administrative expenses............. 9,308 (4,562)(a) 4,746
Non-recurring expense................ 10,000 10,000
------- -------
Earnings from operations............ 1,646 6,208
Other income (expense):
Interest and other income........... 479 479
Interest expense.................... (2,946) 2,409 (b) (10,707)
(10,170)(d)
------- -------
Loss before taxes and extraordinary
item............................... (821) (4,020)
Taxes benefit on loss................ (293) 2,437 (c) (1,425)
------- -------
Loss before extraordinary item...... (528) (2,595)
Extraordinary loss on retirement of
debt, net of tax benefit............ (1,186) 1,186 (e) --
------- -------
Net loss............................ $(1,714) $(2,595)
======= =======
Loss per share before extraordinary
loss................................ $ (1.46) $(19.23)
Extraordinary loss per share......... (3.29) --
------- -------
Net loss per share................... $ (4.75) $(19.23)
======= =======
Weighted average shares outstanding.. 360,585 134,955
======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
29
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED
JUNE 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
HISTORICAL ADJUSTMENTS OFFERING
---------- ----------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
DATA)
Net sales.................................... $15,505 $15,505
Cost of goods sold........................... 9,319 9,319
------- -------
Gross profit............................... 6,186 6,186
Selling, general and administrative expenses. 2,129 2,129
------- -------
Earnings from operations................... 4,057 4,057
Other income (expense):
Interest and other income.................. 100 100
Interest expense........................... (2,605) 2,605(f) (2,590)
(2,590)(d)
------- -------
Earnings before taxes and extraordinary
item...................................... 1,552 1,567
Taxes on earnings............................ 609 6(c) 615
------- -------
Earnings before extraordinary item......... 943 952
Extraordinary loss on retirement of debt, net
of tax benefit.............................. (1,002) 1,002(g) --
------- -------
Net earnings (loss)........................ $ (59) $ 952
======= =======
Earnings (loss) per share before extraordi-
nary loss................................... $ 6.84 $ 7.05
Extraordinary loss per share................. (7.27) --
------- -------
Net earnings (loss) per share................ $ (.43) $ 7.05
======= =======
Weighted average shares outstanding.......... 137,826 134,995
======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
30
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(a) To reverse compensation paid to Selling Group and certain members of
management in excess of amounts to be paid under new employment agreements and
bonus plan.
(b) To reverse interest expense, amortization of discount and financing
costs related to indebtedness retired with proceeds from the Recapitalization
and the debt incurred in connection with the Recapitalization.
(c) To adjust taxes on earnings based on the effective tax rate for the
period.
(d) To record interest expense and amortization of financing costs related
to the issuance of the Notes. The Notes accrue interest at 10.75%. The
financing costs are amortized over a ten year period.
(e) Excludes extraordinary loss on the debt retired from the proceeds from
the Recapitalization and the Offering.
(f) To reverse interest expense, amortization of discount and financing
costs related to indebtedness retired with the proceeds of the Offering.
(g) To reverse extraordinary loss on the debt retired from the proceeds of
the Offering.
31
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following selected consolidated historical financial information for
each of the five years ended April 3, 1993, April 2, 1994, April 1, 1995,
March 30, 1996 and March 29, 1997 has been derived, in part, from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The selected interim consolidated financial information as of and
for the three month period ended June 28, 1997 and June 29, 1996 has been
derived from the unaudited consolidated financial statements of the Company.
In the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring accruals,
necessary for the fair presentation of the financial information for such
periods. Results for the interim periods are not necessarily indicative of the
results for the full fiscal year. The information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and related notes thereto, all included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------- ------------------
APRIL 3, APRIL 2, APRIL 1, MARCH 30, MARCH 29, JUNE 29, JUNE 28,
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $28,765 $29,663 $40,307 $52,207 $ 56,683 $14,747 $15,505
Cost of goods sold...... 20,432 20,458 25,423 32,562 35,729 9,222 9,319
------- ------- ------- ------- -------- ------- -------
Gross profit............ 8,333 9,205 14,884 19,645 20,954 5,525 6,186
Selling, general and ad-
ministrative expenses.. 5,259 5,364 6,274 9,107 9,308 2,234 2,129
Non-recurring ex-
pense(/1/)............. -- -- -- -- 10,000 -- --
------- ------- ------- ------- -------- ------- -------
Earnings from opera-
tions.................. 3,074 3,841 8,610 10,538 1,646 3,291 4,057
Interest and other in-
come................... 314 646 136 279 479 108 100
Interest expense........ (1,985) (1,893) (1,715) (1,924) (2,946) (387) (2,605)
Other expense (/2/)..... -- -- (1,369) -- -- -- --
------- ------- ------- ------- -------- ------- -------
Earnings (loss) before
taxes, change in
accounting principle,
and extraordinary loss. 1,403 2,594 5,662 8,893 (821) 3,012 1,552
Taxes (benefit) on earn-
ings................... 660 1,140 1,810 3,230 (293) 1,174 609
------- ------- ------- ------- -------- ------- -------
Earnings (loss) before
change in accounting
principle and
extraordinary loss..... 743 1,454 3,852 5,663 (528) 1,838 943
Change in accounting
principle (/3/)........ -- 1,782 -- -- -- -- --
Extraordinary loss, net
of tax (/8/)........... -- -- -- -- (1,186) -- (1,002)
------- ------- ------- ------- -------- ------- -------
Net earnings (loss)..... $ 743 $ 3,236 $ 3,852 $ 5,663 $ (1,714) $ 1,838 $ (59)
======= ======= ======= ======= ======== ======= =======
Earnings (loss) per
share before change in
accounting principle
and extraordinary loss. $ 1.44 $ 2.83 $ 7.76 $ 11.44 $ (1.46) $ 3.68 $ 6.84
Change in accounting
principle per share.... -- 3.46 -- -- -- -- --
Extraordinary loss per
share.................. -- -- -- -- (3.29) -- (7.27)
------- ------- ------- ------- -------- ------- -------
Net earnings (loss) per
share.................. $ 1.44 $ 6.29 $ 7.76 $ 11.44 $ (4.75) $ 3.68 $ (.43)
======= ======= ======= ======= ======== ======= =======
Weighted average shares
outstanding............ 514,280 514,280 496,166 494,968 360,585 499,866 137,826
======= ======= ======= ======= ======== ======= =======
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $24,586 $23,819 $27,061 $33,668 $116,141 $36,397 $54,933
Working capital......... 1,142 2,403 5,541 10,387 7,594 12,063 12,726
Long-term debt, less
current maturities..... 11,158 11,848 9,846 9,811 78,916 10,117 91,697
Stockholders' equity
(deficit).............. 2,471 5,707 9,197 14,885 (53,340) 16,722 (57,127)
OTHER FINANCIAL DATA:
Capital expenditures.... 224 547 1,155 2,032 3,369 762 694
Depreciation and amorti-
zation................. 940 989 1,138 1,123 1,384 307 377
EBITDA, as adjusted
(/5/).................. 4,014 4,830 9,748 11,661 3,030 3,598 4,434
EBITDA margin, as ad-
justed................. 14.0% 16.3% 24.2% 22.3% 5.3% 24.4% 28.6%
Non-recurring charges
(/4/).................. -- 583 2,100 4,916 14,588 1,200 --
Ratio of EBITDA, as ad-
justed, to interest
expense................ 2.0x 2.6x 5.7x 6.1x 1.0x 9.3x 1.7x
Ratio of earnings to
fixed charges (/6/).... 1.7x 2.4x 4.3x 5.6x -- (/7/) 8.8x 1.6x
Cash flows provided by
(used in):
Operating activities... 2,185 100 5,696 5,062 1,810 2,583 1,758
Investing activities... (164) (489) 136 (615) (1,768) (297) (2,894)
Financing activities... (2,908) 97 (2,520) (1,424) 152 (153) 3,075
</TABLE>
32
<PAGE>
- --------
(/1/) Represents $10.0 million non-recurring expense for environmental
remediation. In connection with the Recapitalization, a $6.0 million
escrow was established primarily to fund the estimated after-tax cost
(estimated tax benefit of $4.0 million) associated with these
environmental matters.
(/2/) Represents loss on sale of real property.
(/3/) Represents gain on cumulative effect of change in accounting principle
(SFAS 109).
(/4/) Non-recurring charges represent certain compensation and environmental
costs which will not recur subsequent to the Recapitalization. The non-
recurring compensation amounts were derived by subtracting the
compensation under contracts entered into in conjunction with the
Recapitalization from the historical compensation expense. The non-
recurring compensation amounts (in thousands) for the fiscal years ended
April 2, 1994, April 1, 1995, March 30, 1996 and March 29, 1997 and for
the three months ended June 29, 1996 were, respectively, $450, $1,751,
$4,577, $4,624 and $1,149.
(/5/) EBITDA, as adjusted, represents net earnings before taking into
consideration gain on change in accounting principle, extraordinary
loss, taxes on earnings, interest income, other non-cash expense,
interest expense, depreciation and amortization. This data is relevant
to an understanding of the economics of the Company's business as it
indicates cash flow available from operations (and/or trends in cash
flow available from operations) to service debt and satisfy certain
fixed obligations. EBITDA, as adjusted, should not be construed by the
reader as an alternative to operating income, as an indicator of the
Company's operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) or as a measure of
liquidity. In addition, EBITDA, as adjusted, measures presented may not
be comparable to other similarly titled measures of other companies.
(/6/) For purposes of this ratio, earnings consist of earnings before income
taxes. Fixed charges consist of interest expense and the portion of
rents representative of an interest factor. The ratio of earnings to
fixed charges is computed by adding earnings before income taxes and
fixed charges and dividing by fixed charges.
(/7/) The Company's earnings were insufficient to cover interest expense and
fixed charges for the fiscal year ended March 29, 1997. The dollar
amount of the deficiency was $821,000.
(/8/) Represents loss on retirement of debt, net of tax benefit.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of the results of operations,
financial condition and liquidity of the Company should be read in conjunction
with the consolidated financial statements of the Company and the "Unaudited
Pro Forma Consolidated Financial Information" and the related notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company is the largest custom manufacturer of high precision
hermetically sealed electronic connection devices in the United States. High
precision hermetic seals are used primarily to permit the flow of electricity
across a barrier which is used to separate different atmospheric media (such
as gas or liquid to air or vacuum) existing on opposite sides of the barrier.
A hermetic seal is generally accomplished through the creation of a GTMS.
The Company's GTMS products are custom designed for specific applications to
meet prescribed levels of performance in terms of pressure, temperature and
vibration. Hermetically sealed components are found in the electronic
equipment used in automobiles, airplanes, process control devices, military
equipment and vehicles, electronic sensors, medical devices and testing
equipment, petrochemical related equipment, telecommunications equipment and
industrial process and control applications. The Company believes based upon
internal estimates that it is a leading supplier of GTMS products to each of
the industries that it supplies.
The Company estimates that the total market for hermetic seals is $600
million, of which approximately half of the market services high-end custom
applications in which the Company competes. The Company believes based upon
internal analysis that the market for custom manufactured hermetically sealed
products is extremely fragmented, with no other competitor offering the same
breadth of products as the Company.
The Company has been an industry leader in the manufacture of glass-to-metal
seals since it developed its technology in 1945. While a substantial portion
of the Company's growth in the last several years has come from sales to the
automotive industry, the Company has also recognized consistent growth in its
sales of GTMS products to the aerospace, petrochemical and general industrial
markets.
The Company believes that its commitment to provide consistent, high quality
products and customer service, flexible manufacturing and custom designed
products at competitive prices, forms the basis for its strong and diversified
customer relationships. The Company works closely with its customers to
jointly develop and design new products and to improve the performance and
lower the cost of existing products. The Company shares product development
and enters into teaming arrangements with its key customers to further
strengthen and broaden its relationships. The Company believes that this
strategy, together with the successful performance under existing contracts
has led to additional long-term business from key customers and new customers.
The Company's products are sold primarily in North America (95% of fiscal
year 1997 sales) and Europe (5% of fiscal year 1997 sales). Approximately 70%
of the Company's consolidated sales for fiscal 1997 are to customers with
which the Company has contractual agreements, sole source relationships,
letters of intent or long-term purchase orders. See "Risk Factors--Dependence
on Key Customers and Contractual Relationships." The Company's sales have
grown at a compound annual growth rate of 15% over the last five years and
expanded at 24% annually from 1994 to 1997.
Approximately 59% of the Company's sales for fiscal 1997 are to non-
automotive industries, principally to the aerospace, petrochemical and general
industrial markets. These sales are made to a broad customer base and
represent a diverse product mix. While many of these customers are large
companies, there are no significant concentrations of customers, products or
programs.
34
<PAGE>
The Company's non-automotive business is usually not governed by long-term
commitments with established prices. The Company believes the trend within its
customer base is toward placing more emphasis on product quality and delivery
and relatively less emphasis on pricing. Price has generally been a less
significant competitive factor than the quality and design of the GTMS because
1) the GTMS cost is typically a small percentage of the total cost of the end
products in which they are used, 2) the importance of the uses to which many
of the Company's products are put and 3) the growing trend among OEMs to seek
long-term partnerships with fewer core suppliers. Historically, as suppliers
have increased their prices for goods and services provided to the Company,
the Company has been able to pass the increase on to customers by an amount
sufficient to prevent any material deterioration in the Company's operating
margins. Over the last five years, though, the Company's costs and pricing
have been relatively stable.
A large part of the Company's sales to the automotive sector are governed by
long-term contracts. These contracts generally have established prices with
decreases in each succeeding year and certain volume discounts. The Company
believes that the scheduled price decreases will be offset by the efficiencies
it expects to achieve from higher production levels and its ability to
continually improve its production processes.
The Company's improvement in gross margin is due to the leveraging of its
fixed production costs over a larger sales base (i.e. improved operating
leverage) and improved production efficiencies due to increased automation and
vertical integration of the Company's production processes.
Selling, general and administrative expenses ("S,G&A") have generally
increased during the periods primarily as a result of increased compensation
costs. Underlying S,G&A expenses (excluding certain compensation costs that
will not recur after the Recapitalization) have remained relatively stable
despite the Company's significant increase in sales due to the increased
percentage of automotive sales (which are not subject to sales commissions)
and to the nominal additional administrative overhead necessary to manage the
Company's operations.
RESULTS OF OPERATIONS (IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Year For the three months ended
---------------------------------------------------- ---------------------------------
June 29, June 28,
1995 Percent 1996 Percent 1997 Percent 1996 Percent 1997 Percent
------ ------- ------ ------- ------ ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 40.3 100.0% $ 52.2 100.0% $ 56.7 100.0% $14.7 100.0% $15.5 100.0%
Gross profit............ 14.9 37.0% 19.6 37.5% 21.0 37.0% 5.5 37.4% 6.2 40.0%
Selling, general and
administrative
expenses............... 6.3 15.6% 9.1 17.4% 9.3 16.4% 2.2 15.0% 2.1 13.5%
Non-recurring expense... -- -- -- -- 10.0 17.6% -- -- -- --
Earnings from opera-
tions.................. 8.6 21.3% 10.5 20.1% 1.6 2.8% 3.3 22.4% 4.1 26.5%
Other income/expense.... (3.0)(/1/) 7.4% (1.6) 3.1% (2.5) 4.4% (0.3) 2.0% (2.5) 16.1%
Extraordinary loss(/2/). -- -- -- -- (1.2) 2.1% -- -- (1.0) 6.5%
Net earnings (loss)..... $ 3.9 9.7% $ 5.7 10.9% $ (1.7) 3.0% $ 1.8 12.2% $(0.1) 0.6%
</TABLE>
- --------
(/1/)Includes $1.4 million loss on sale of real property.
(/2/)Represents extraordinary loss on retirement of debt, net of tax benefit.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
The Company's sales increased by approximately 8.6% or $4.5 million to $56.7
million for fiscal 1997 from $52.2 million for fiscal 1996.
This increase was attributable to approximately equal dollar volume
increases in the Company's automotive and non-automotive products. On the
automotive side, shipments of airbag initiator products increased
significantly due to increased volumes of existing programs. The increased
initiator shipments were partially offset by scheduled price decreases on the
Special Devices, Inc. ("SDI") initiator program
35
<PAGE>
and the scheduled completion of an electronic sensor program. In non-
automotive products, the Company experienced consistent growth in all of its
aerospace, industrial and petrochemical products.
Gross Profit
Gross profit increased by approximately 7.1% or $1.4 million, to $21.0
million for fiscal 1997 from $19.6 million for fiscal 1996. Gross margin
during this period decreased from 37.5% to 37.0%.
The increase in gross profit was primarily attributable to the increased
sales volume. The decrease in gross margin was primarily attributable to an
increase in overtime labor costs associated with the relocation and expansion
of Hermetic Seal's machine shop to a new facility during the year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately 2.2%
or $0.2 million to $9.3 million for fiscal 1997 from $9.1 million for fiscal
1996. S,G&A expenses as a percent to sales decreased to 16.4% from 17.4% for
the prior period.
The $0.2 million increase in base S,G&A expenses reflects the higher costs
of supporting the increased sales volume. The improvement in the percentage of
S,G&A expenses to sales reflects the improved leverage on the fixed portion of
the expenses.
Earnings from Operations
Operating earnings decreased by approximately 84.8% or $8.9 million to $1.6
million in fiscal 1997 from $10.5 million for the prior year. Operating
margins for the period decreased from 20.1% in fiscal 1996 to 2.8% for fiscal
1997.
The decrease in operating earnings and margin was attributable to the $10.0
million non-recurring expense recorded in fiscal 1997 related to estimated
environmental remediation (see "Business--Environmental Matters"). The non-
recurring expense was partially offset by the same factors that contributed to
the increase in gross profit and improvements in S,G&A expenses as a percent
to sales. Excluding this non-recurring expense, operating earnings increased
by approximately 10.5% or $1.1 million to $11.6 million in fiscal 1997 from
$10.5 million in fiscal 1996.
Other Expense, net
Other expense, net increased by approximately 56.3% or $0.9 million to $2.5
million in fiscal 1997 from $1.6 million for fiscal 1996. This increase was
attributable to the increased interest expense of $1.0 million partially
offset by increased interest income of $0.2 million. The higher interest costs
were due, in part, to additional debt incurred to finance the Recapitalization
and additional debt incurred to finance capital expenditures. The increased
interest income of $0.2 million is the result of higher treasury balances in
1997.
Net Earnings (Loss)
Net earnings decreased by approximately $7.4 million to a $1.7 million loss
for fiscal 1997 from net earnings of $5.7 million for fiscal 1996.
The decrease in net earnings was attributable to the $10.0 million non-
recurring expense, the increased debt service costs and extraordinary loss
incurred in connection with the Recapitalization. Excluding the non-recurring
expense, net earnings decreased by approximately 24.6% or $1.4 million to $4.3
million for fiscal 1997.
36
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales
The Company's sales increased by approximately 29.5%, or $11.9 million to
$52.2 million for fiscal 1996 from $40.3 million for fiscal 1995.
This increase was attributable to approximately equal dollar volume
increases in automotive and non-automotive products. Sales of automotive
products increased by approximately 39% over the prior year. This increase was
primarily due to substantially higher shipments on an electronic sensor
program. Initiator sales increased only slightly in fiscal 1996 net of
scheduled price decreases on the SDI initiator program.
Non-automotive products exhibited consistent growth across all product
categories. In total, sales of non-automotive products increased by
approximately 25% in fiscal 1996 over the prior year. The Company believes
this growth is a combination of market growth and increased market share.
Gross Profit
Gross profit increased by approximately 31.5% or $4.7 million, to $19.6
million for fiscal 1996 from $14.9 million for fiscal 1995. Gross margin
during this period increased from 37.0% to 37.5%.
This increase in gross profit was primarily attributable to the increased
sales volume. The increase in gross margin is attributable to improved
operating leverage on the higher sales volume and improving efficiencies due
to increasing vertical integration. Raw material prices and labor costs have
remained stable in both periods. The Company continued to invest in its
machining operations to increase its manufacturing capacity and vertical
integration.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
44.4% or $2.8 million to $9.1 million for fiscal 1996 from $6.3 million for
fiscal 1995. S,G&A expenses as a percent to sales increased from 15.6% to
17.4%.
This increase was primarily attributable to higher costs associated with
compensation expenditures. Eliminating the compensation costs from the
analysis reflects an increase in base expenses of 6.5% or $0.3 million to $4.9
million (1996) from $4.6 million (1995). As a percentage of sales, the base
expenses declined from 11.4% to 9.4%. The $0.3 million increase in base S,G&A
expenses reflects the higher costs of supporting the increased sales volume.
The improvement in percentage to sales reflects the improved leverage on the
fixed portion of the expenses.
Earnings from Operations
Operating earnings increased by approximately 22.1% or $1.9 million to $10.5
million for fiscal 1996 from $8.6 million for fiscal 1995. Operating margins
for the period decreased from 21.3% for fiscal 1995 to 20.1% for fiscal 1996.
The increase in operating earnings was attributable to the same factors that
contributed to the increase in gross profit and gross margin and improvements
in S,G&A expenses as a percent to sales.
Other Expense, net
Other expense, net decreased by approximately 46.7% or $1.4 million to $1.6
million for fiscal 1996 from $3.0 million for fiscal 1995. This decrease was
primarily attributable to the non-recurring loss of $1.4 million incurred in
fiscal 1995 on the sale of real property.
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Net Earnings
Net earnings increased by approximately 46.2% or $1.8 million to $5.7
million for fiscal 1996 compared to $3.9 million for fiscal 1995. Net margin
for the period increased to 10.9% from 9.7% in the prior period.
The increase in net earnings and net margin were attributable to the same
factors contributing to the increase in gross profit and gross margin and
improvements in S,G&A expenses as a percent to sales.
THREE MONTHS ENDED JUNE 28, 1997 COMPARED TO THREE MONTHS ENDED JUNE 29, 1996
Net Sales
The Company's sales increased by approximately 5.4% or $0.8 million to $15.5
million for the three months ended June 28, 1997 compared to sales of $14.7
million for the three months ended June 29, 1996.
This increase was primarily attributable to volume increases on the
Company's automotive products. On the automotive side, shipments of airbag
initiator products increased significantly due to increased volumes on
existing programs. The Company's airbag initiator shipments increased 84% for
the three months ended June 28, 1997 compared to the three months ended June
29, 1996. Revenue from the increased initiator shipments was partially offset
by contractual price decreases on certain initiator programs. The increased
airbag initiator shipments were further suppressed by the scheduled completion
of a crash sensor product produced for TRW. The TRW crash sensor program,
which was completed in August 1996, resulted in an 87% decrease in automotive
sales to TRW in the three months ended June 28, 1997 compared to the three
months ended June 29, 1996. In non-automotive products, the Company
experienced moderate growth in its aerospace, industrial and petrochemical
products.
Gross Profit
Gross profit increased by approximately 12.7% or $0.7 million, to $6.2
million for the three months ended June 28, 1997 compared to $5.5 for the
three months ended June 29, 1996. Gross margin increased to 40.0% for the
three months ended June 28, 1997 from 37.4% for the three months ended June
29, 1996.
The increase in gross profit was directly attributable to the increased
sales volume. The increase in gross margin is primarily attributable to an
improved sales mix between product lines coupled with efficiencies gained
through operating leverage on the higher sales volume. The gross margins were
also benefited by shipments of airbag initiators from inventory (that had been
built in the fourth quarter of 1997). This circumstance is not expected to
recur in subsequent quarters of fiscal 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately 4.5%
or $0.1 million to $2.1 million for the three months ended June 28, 1997
compared to $2.2 million for the three months ended June 29, 1996. S, G & A
expenses as a percent to sales decreased to 13.5% in the three months ended
June 28, 1997 from 15.0% for the three months ended June 29, 1996.
The $0.1 million decrease in base S, G & A expenses reflects the elimination
of certain non-recurring compensation costs in the three months ended June 28,
1997. The reduced compensation costs were partially offset by higher costs of
supporting the increased sales volume. The improvement in the percentage of S,
G & A expenses to sales reflects the overall lower S, G & A expenses coupled
with the improved leverage on the fixed portion of those expenses.
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Earnings from Operations
Operating earnings increased approximately 24.2% or $0.8 million to $4.1
million for the three months ended June 28, 1997 compared to $3.3 million for
the three months ended June 29, 1996. Operating margins for the period
increased to 26.5% in the three months ended June 28, 1997 from 22.4% for the
three months ended June 29, 1996.
The increase in operating earnings and margin was attributable to the same
factors that contributed to the increase in gross profit and gross margin and
improvements in S, G & A expenses as a percent to sales.
Other Expense, net
Other expense, net increased $2.2 million to $2.5 million in the three
months ended June 28, 1997 from $0.3 million for the three months ended June
29, 1996. This increase was attributable to the increased interest expense
associated with the $82.5 million of indebtedness incurred in connection with
the Recapitalization, followed by the $90 million in senior subordinated note
indebtedness incurred in connection with the Offering. The Company has $92.9
million of indebtedness as of June 28, 1997 compared to $11.5 million at June
29, 1996.
Net Earnings (Loss)
Net earnings decreased by approximately $1.9 million to a $0.1 million loss
for the three months ended June 28, 1997 to $1.8 in earnings for the three
months ended June 29, 1996.
The decrease in net earnings was primarily attributable to the increase in
interest expense as discussed above as well as the $1.0 million extraordinary
loss on the retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
FISCAL 1997 COMPARED TO FISCAL 1996
Net cash provided by operating activities was $1.8 million for fiscal 1997
compared to $5.1 million for fiscal 1996. The decrease of $3.3 million was
primarily attributable to a decrease in earnings from operations of $0.2
million and net cash used in working capital of $3.1 million. The net cash
used for working capital was primarily a result of an increase in other assets
partially offset by a decrease in accounts receivable.
Net cash used in investing activities was $1.8 million for fiscal 1997
compared to $0.6 million for fiscal 1996. The $1.2 million increase was
primarily attributable to an increase in fixed asset additions.
Net cash provided by financing activities was $0.2 million for fiscal 1997
compared to $1.4 million used in fiscal 1996. The increase of $1.6 million was
primarily attributable to net cash proceeds received from the Recapitalization
which included the repurchase of stock, sale of stock and issuance of long-
term debt by the Company.
FISCAL 1996 COMPARED TO FISCAL 1995
Net cash provided by operating activities was $5.1 million for fiscal 1996
compared to $5.7 million for 1995. This decrease of $0.6 million was primarily
attributable to an increase in earnings from operations of $0.8 million offset
by net cash used in working capital of $1.4 million. The net cash used for
working capital was primarily for increases in accounts receivable and
inventories needed to support the increased sales volume.
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Net cash used in investing activities was $0.6 million for fiscal 1996
compared to a nominal amount provided in 1995. This increase of $0.7 million
was primarily attributable to cash proceeds received from the sale of real
property in 1995.
Net cash used in financing activities was $1.4 million for fiscal 1996
compared to $2.5 million for 1995. This decrease of $1.1 million was primarily
attributable to a decrease in principal payments on long-term debt.
THREE MONTHS ENDED JUNE 28, 1997 COMPARED TO THREE MONTHS ENDED JUNE 29, 1996
Net cash provided by operating activities was $1.8 million for the three
months ended June 28, 1997 compared to $2.6 million for the three months ended
June 29, 1996. The decrease of $0.8 million was primarily attributable to a
decrease in earnings from operations attributable to increased interest
expense.
Net cash used in investing activities was $2.9 million for the three months
ended June 28, 1997 compared to $0.3 million for the three months ended June
29, 1996. The $2.6 million increase was primarily attributable to the $2.2
million business acquisition on June 20, 1997 and $0.3 increase in fixed asset
additions.
Liquidity
Subsequent to the Offering, the Company's liquidity needs should arise from
working capital requirements, capital expenditures and debt service. As of
June 28, 1997, the Company's outstanding indebtedness is $92.9 million,
consisting of $90.0 million principal amount of the senior subordinated notes
and $2.9 million of other borrowings. The Company amended the Revolving Credit
Facility subsequent to the Offering to augment its liquidity requirements by
increasing the size of the facility to $20.0 million. Borrowings under the
Revolving Credit Facility may be used for general and other corporate
purposes. To date, the Company has not used any amounts under the Revolving
Credit Facility.
The Company, Windward and the members of the Windward Group have been
engaged in discussions regarding the payment of a financing fee to members of
the Windward Group in connection with the Recapitalization. On October 28,
1997, the disinterested members of the board of directors of HCC voted
unanimously to pay Windward a $1.25 million financing fee in connection with
the Recapitalization. The fee will be accounted for as a non-recurring charge
against earnings from operations in the period when incurred.
Debt Service
Subsequent to the Offering, the Company has $90.0 million in senior
subordinated note indebtedness. Interest expense will have a greater
proportionate impact on net income in subsequent periods in comparison with
the periods before the Recapitalization. The Company is not subject to any
amortization requirements under the Notes prior to maturity.
Future Financing and Cash Flows
The Company believes that cash flow from operations and the availability of
borrowings under the Revolving Credit Facility will provide adequate funds for
ongoing operations, planned capital expenditures and debt service during the
term of such facility. To the extent certain performance thresholds with
respect to the Contingent Notes and Contingent Bonuses are met, and such
obligations become vested, the Company believes that cash flow from operations
and the availability of borrowings will be sufficient to fund such
obligations.
Capital Expenditures
The Company's historical capital expenditures have substantially resulted
from investments in equipment to augment the Company's manufacturing capacity
and implement its strategy of vertical
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integration. The Company's capital expenditures were $1.2 million, $2.0
million and $3.4 million for fiscal 1995, 1996 and 1997, respectively. Capital
expenditures in the first quarter of 1997 were $0.7 million.
The Company's expenses for plant and equipment maintenance are approximately
$0.6 million annually. These maintenance costs are not treated as capital
expenditures.
Capital expenditures for fiscal 1998 are expected to relate principally to
continuing investments in equipment to expand manufacturing capacity in
machining, glass production, sealing and plating, as well as automation
equipment to lower production costs on the high volume production lines.
Expected capital expenditures for fiscal 1998 are approximately $3.5 million
and will be financed through working capital and the Revolving Credit
Facility.
Recent Acquisition
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of a glass-to-metal sealing company. The purchase
price included $2.1 million in cash and a contingent payment of $400,000 based
upon the volume of business retained in the immediately subsequent 18 month
period. In its last fiscal year of operations, the acquired company generated
sales of approximately $3.2 million.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". The standard establishes guidelines for the reporting
and display of comprehensive income and its components in financial
statements. Disclosure of comprehensive income and its components will be
required beginning with the Company's fiscal year ending 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The new
rules will be effective for the Company's 1999 fiscal year end. The Company
has not evaluated the impact, if any, of the new standard.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on December 3, 1997; provided, however, that if the
Company, in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $90.0 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about November 3, 1997, to all holders
of Old Notes known to the Company. The Company's obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth below under "--Certain Conditions to the Exchange
Offer."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not therefore accepted for
exchange, upon the occurrence of any of the events specified below under "--
Certain Conditions to the Exchange Offer." The Company will give oral or
written notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must (i) transmit
a properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to IBJ Schroder Bank &
Trust Company, as Exchange Agent, at the address set forth below under "--
Exchange Agent", or (ii) if such Old Notes are tendered pursuant to the
procedures for book-entry transfer set forth below, a holder tendering Old
Notes may transmit an Agent's Message (defined herein) to the Exchange Agent
in lieu of the Letter of Transmittal, in either case on or prior to the
Expiration Date. In addition, either (i) certificates for such Old Notes must
be received by the Exchange Agent along with the Letter of Transmittal, or
(ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, along with the Letter of Transmittal or an Agent's Message,
as the case may be, must be received by the
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Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. The term "Agent's
Message" means a message, transmitted to the Book-Entry Transfer Facility and
received by the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received
an express acknowledgement from the tendering Participant (defined herein)
that such Participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce the Letter of Transmittal against
such Participant.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below) in the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly exercised by, the registered Holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Issuer or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers or corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
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By tendering, each holder will represent to the Company 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, and that neither the holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a holder that
is not a broker-dealer, each such holder, by tendering, will also represent to
the Company that such holder is not engaged in, or intends to engage in, a
distribution of the New Notes. If any holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company,
or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New
Notes to be acquired pursuant to the Exchange Offer, such holder or any such
other person (i) could not rely on the applicable interpretations of the staff
of the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-marking activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." 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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. From and including November 3, 1997 until but excluding the date of
consummation of the Exchange Offer, the Old Notes will bear interest at 11
1/4% per annum (increasing at .5% per annum at the end of each 90-day period
following November 3, 1997, but in no event will the interest rate exceed 12
3/4%) payable in cash semiannually in arrears on May 15 and November 15
commencing November 15, 1997. The New Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no
interest has been paid on the Old Notes, from May 6, 1997. Accordingly, if the
relevant record date for interest payment occurs after the consummation of the
Exchange Offer, registered holders of New Notes on such record date will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from May 6, 1997. If, however, the
relevant record date for interest payment occurs prior to the consummation of
the Exchange Offer registered holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from May 6, 1997. Old Notes accepted
for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of interest on
such Old Notes otherwise payable on any interest payment date the record date
for which occurs on or after consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If
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any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Notes are submitted for a
greater principal amount at maturity than the holder desired to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expenses to the
tendering holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of
the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees, or an Agent's Message in lieu of a Letter
of Transmittal, and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit
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the serial numbers of the particular certificates to be withdrawn and signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice
of withdrawal must specify the name and number of the account at the Book-
Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for
any reason will be returned to the holder thereof without cost to such holder
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the
New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order of decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the (Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the SEC referred to on the cover page of
this Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of
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<PAGE>
operations or prospects of the Company and its subsidiaries taken as a
whole that, in the sole judgment of the Company, is or may be adverse to
the Company, or the Company shall have become aware of facts that, in the
sole judgment of the Company, have or may have adverse significance with
respect to the value of the Old Notes or the New Notes;
which in the sole judgment of the Company in any case, and regardless of the
circumstances (including any action by the Issuer) giving rise to any event
described above, makes it inadvisable to proceed with the Exchange Offer
and/or with such acceptance for exchange or with such exchange.
The foregoing conditions are for sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company 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.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. 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:
Delivery To: IBJ Schroder Bank & Trust Company, Exchange Agent
By Registered or Certified Mail: By Overnight Courier or Hand:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 100274-0084
Attention: Reorganization Attention: Securities Processing
Operations Department Window Subcellar One (SC-1)
By Facsimile:
(212) 858-2611
Confirm by Telephone:
(212) 858-2103
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
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FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$250,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Old Notes under the Securities Act.
See "Description of the Notes--Registration Rights." Based on interpretations
by the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the
distribution of such New Notes. However, the Company does not intend to
request the SEC to consider, and the SEC has not considered, the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the SEC would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If any holder is
an affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder (i) could not rely
on the applicable interpretations of the staff of the SEC and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the state securities laws, the New
Notes may not be offered or sold in any state unless they have been registered
or qualified for sale in such state or an exemption from registration or
qualification is available and is complied with. The Offer and sale of the New
Notes to "qualified institutional buyers" (as such term is defined under Rule
144A of the Securities Act) is generally exempt from registration or
qualification under the state securities laws the Company currently does not
intend to register or qualify the sale of the New Notes in any state where an
exemption from registration or qualification is required and not available.
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BUSINESS
GENERAL
The Company is the largest custom manufacturer of high precision
hermetically sealed electronic connection devices in the United States. High
precision hermetic seals are used primarily to permit the flow of electricity
across a barrier used to separate different atmospheric media (such as gas or
liquid to air or vacuum) existing on opposite sides of the barrier. The
hermetic seals manufactured by the Company generally fall into four
categories--terminals, headers, connectors and microelectronic packages. A
"terminal" is a device characterized by having only a single contact pin,
while a "header" has multiple contact pins inserted in a frame. A "connector"
is a type of terminal or header which can be mechanically coupled to or
uncoupled from another connection. A "microelectronic package" is a container
for thick and thin film substrates onto which hybrid circuitry has been
etched. The Company operates in the premium segment of the market by providing
high precision glass-to-metal seals, custom designed to meet specific customer
requirements. Each GTMS generally consists of a metal body or housing, metal
contact pins, and an insulator fabricated from glass, ceramic or glass/ceramic
mixtures. GTMS range in size from a two foot long, eight inch diameter
cylindrical connector utilized for through-hull communication links for
nuclear submarines, to a 40/1000 inch outside diameter (12/1000 inch inside
diameter) implant to measure pressure in the heart chamber.
The Company believes that it has been an industry leader in the design and
manufacture of GTMS since it developed its GTMS process in 1945. The Company
has developed over 75,000 different configurations, primarily for the
following industries: (1) automotive (for use in, for example, the initiators
in airbags and seat belt pretensioners); (2) aerospace and military
electronics (for use in, for example, gyro guidance devices, flight
instrumentation, jet engine controls, and space suit controls); (3) test and
measurement (for use in, for example, temperature and pressure transducers,
infrared detection instrumentation, electro-optical devices and fuel injection
monitoring devices); (4) medical electronics (for use in, for example,
pacemakers, kidney dialysis machines and devices for monitoring vital life
signs); (5) telecommunications (for use in, for example, coaxial cables); and
(6) energy (for use in, for example, oil drilling equipment and down-hole
logging instrumentation and for conventional and nuclear electric power
generating plants).
Approximately 70% of the Company's consolidated sales for fiscal 1997 were
to customers with which the Company had contractual agreements, sole source
relationships, letters of intent or long-term purchase orders. A substantial
portion of these business relationships are informal and certain of the
Company's contractual arrangements may be terminated at will by the customer.
See "Risk Factors--Dependence on Key Customers and Contractual Relationships."
The Company's sales have grown at a compound annual growth rate of 15% over
the last five years.
While a substantial portion of the Company's growth over the last several
years has come from sales to the automotive industry, particularly
hermetically sealed connectors for use in airbag initiators, the Company has
also recognized consistent growth in its sales of GTMS products to the
aerospace, petrochemical and general industrial markets. EBIT and EBITDA
margins have averaged 15% and 18%, respectively, over the last three years.
The Company believes this has been the result of its commitment to customer
service, development of close working relationships with many of its customers
and the value-added nature of its products.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
Long-Term Customer Relationships. Many of the Company's customers, including
SDI and TRW, have been customers for over ten years. The Company believes that
both automotive and aerospace OEMs continue to seek long-term partnerships
with fewer core suppliers. The Company's relationships are
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strengthened by the fact that many of its arrangements with its customers
provide for the Company to act as the sole source of supply for the customer.
The Company estimates that approximately 70% of the Company's consolidated
sales for fiscal year 1997 were from contractual agreements, sole source
relationships, letters of intent or long-term purchase orders.
Market Leadership. A number of the Company's products hold leading market
positions in their respective niche markets. The Company currently believes
based upon internal estimates that it produces hermetically sealed products
for approximately 50% of the airbag initiators produced in the U.S. The
Company believes, based upon long-term relationships with ICI and SDI, that it
is well positioned to continue to increase its market share, as well as expand
its sales internationally.
Commitment to Quality and Service. The Company believes that its commitment
to provide consistent, high quality products and services and flexible
manufacturing and custom designed products at competitive prices, forms the
basis for its strong and diversified customer relationships. The Company
manufactures most of its parts to specific customer requirements. The Company
utilizes Statistical Process Control, Design Failure Mode Effects Analysis,
Process Failure Mode Analysis, and a strict adherence to complete
manufacturing documentation in order to manufacture high quality products for
internal use as well as external customer sales. The Company believes that its
knowledge and use of these procedures give the Company a competitive
advantage. Sealtron became registered to ISO 9001 in September 1996. Hermetic
and Glasseal expect to be registered to ISO 9001 within twelve months and to
be registered to QS 9000 (the automotive standard) within 24 months.
Proprietary Technology. The Company operates in the automotive, aerospace
and general industrial technologies markets in which products typically
require sophisticated engineering and production techniques. The Company
designs and manufactures new products to fulfill customer needs, and has
developed proprietary manufacturing technology since its founding in 1945. The
Company believes that this proprietary technology helps enable it to attract
and retain customers who require customized, high tolerance products. The
Company estimates that it has produced over 75,000 different variations of
GTMS.
Low Cost Operations. The Company believes that its extensive "in-house"
capabilities and vertical integration are competitive advantages that have
allowed it to become a low cost producer. By controlling the tolerance of the
component parts, the Company has been able to reduce scrap and to increase the
yields of its products. Furthermore, the Company is continually developing and
assessing its programs designed to increase efficiency and enhance economies
of scale in order to further reduce costs.
Diverse Products and Customers. The Company has a diverse customer base,
with sales of numerous product variations to approximately 1,200 customers in
fiscal 1997. Sales to SDI, the Company's largest customer, accounted for
approximately 27% of the Company's consolidated sales for the fiscal year
ended March 29, 1997. Over the past several years, the Company has recognized
consistent growth in sales of GTMS products to the automotive, aerospace and
general industrial markets.
BUSINESS STRATEGY
The Company's strategy is to expand its business through:
Focusing on Core Strengths. The Company continues to focus on what it
believes are its core strengths and to invest in those businesses that are
consistent with those strengths and which exhibit high growth potential. Core
strengths include the timely custom design and manufacturing of high
tolerance, high reliability components and the effective program management of
long term contracts and supply agreements.
Leveraging Customer Relationships. The Company works closely with its
customers to jointly develop and design new products and to improve the
performance and lower the cost of the Company's
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<PAGE>
customers' products. The Company has sole source supply contracts, shares
product development, and enters into other teaming arrangements with its key
customers to further strengthen and broaden its relationships. The Company
believes that this strategy, together with the successful performance under
existing contracts has led to additional long-term business from key existing
customers and new customers.
Pursuing Selective Acquisitions. The Company intends to pursue selective
acquisitions and to add products and capabilities that are complementary to
its existing operations. Priority is expected to be given to acquiring
businesses whose products can be manufactured in the Company's existing
facilities ("fold-in" acquisitions). The Company's operations are
characterized by a relatively high level of operating leverage; therefore,
such fold-in acquisitions should allow the Company to allocate costs across
broader synergistic product lines and represent additional volume through the
Company's existing facilities which should provide opportunities to improve
profitability.
Expanding Internationally. The Company is considering the expansion of its
operations in Europe. The primary motivation in a geographic expansion would
most likely be to service the growth of its current customers' operations as
they expand their production operations abroad.
INDUSTRIES
The Company estimates the total size of the GTMS market to be $600 million,
with approximately one-half estimated to be the specialized, high precision
segments in which the Company competes. The Company believes based upon
internal analysis that the market for high-end hermetically sealed products is
extremely fragmented, with no other competitor offering the same breadth of
products as the Company. The Company believes that its focus on the high-end,
custom segment of the GTMS market enables it to achieve higher margins.
The Company sells its products to four principal industries: (i) the
automotive parts industry for use in airbag initiators, automotive crash
sensors, climate control devices and anti-lock braking systems; (ii) the
aerospace industry for use primarily in commercial and military aviation and
electronics; (iii) general industry for use primarily in process control, and
other industrial, medical and telecommunications applications; and (iv) the
petrochemical industry, for use primarily in oil and gas downhole analysis
equipment. See "Risk Factors--Industry Risks."
Automotive
The Company provides GTMS products used in initiators for airbag devices. At
present, each airbag device requires at least one initiator (the device that
deploys the airbag). The automotive airbag industry has undergone dynamic
growth over the recent past stemming from increased consumer demand for
automotive safety devices and federal regulations requiring such devices.
Currently, regulations adopted by the National Highway Traffic Safety
Administration require that airbags be the automatic frontal crash protection
system used for both the driver and front passenger in at least 95% of
passenger automobiles manufactured from September 1, 1996 to August 31, 1997
for sale in the U.S., and in 100% of passenger automobiles manufactured
thereafter. For light trucks and vans, the regulations require that airbags be
the automatic frontal crash protection system used for at least the driver in
no less than 80% of light trucks and vans manufactured from September 1, 1997
to August 31, 1998 for sale in the U.S., and for both the driver and front
passenger in 100% of light trucks and vans manufactured thereafter.
From model years 1993 to 1995, worldwide airbag production grew from 15.0
million to 40.0 million units, according to EIU. Further, according to EIU
worldwide airbag demand is expected to increase to 104 million units by 2005,
a CAGR of 10% from 1995 to 2005. Growth in airbag installations is expected to
continue beyond the turn of the century due to the full penetration of driver-
side and passenger-side front-seat airbags and increased penetration of side
impact and other types of airbags and increased rate of foreign installations.
In addition to driver and passenger airbags, many auto makers are moving
toward a full protection system which would also include side impact airbags
and seat belt pretensioners. These systems also require initiators. According
to EIU, the domestic use of side airbags is projected to increase from zero
units in 1995 to approximately 21 million units in 2005.
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Although not mandated by law, initiator-based safety systems are also
employed in automobiles produced and sold in Europe and Asia, although fewer
than in the U.S. The systems utilized in Europe and Asia include airbag
systems similar to those in use in the U.S. and seat-belt pretensioners that
employ initiators. While the majority of airbag initiators manufactured for
use in cars outside the U.S. employ plastic initiators, there is a trend
toward using GTMS in such products due to their increased reliability.
Commercial and Military Aviation and Electronics
The Company provides hermetic seals that are used for a number of different
applications in commercial and military aviation and electronics, primarily to
protect guidance and sensor devices from the effects of changes in atmospheric
conditions. The Company believes based upon internal estimates that GTMS
products are utilized in almost every model of commercial aircraft currently
in production and its customers include essentially all major aerospace
suppliers. The Company's sales to the aerospace industry are dependent to a
certain extent on new construction of commercial and military aircraft. The
Company competes with a number of different suppliers in this market, based on
quality, delivery and price.
According to a report prepared by an aviation industry source, worldwide air
travel is expected to grow 75% for the period 1996 to 2006, and at a CAGR of
5.5% over the period 1996 to 2016. Such report also estimates total investment
in new airplanes over this period at $1.1 trillion and estimates the world
fleet to grow from 11,500 airplanes in 1996 to 23,000 airplanes in 2016. The
Company believes the above-referenced report is complete and accurate, but is
not relying upon the preparer of such report as an expert.
General and Industrial
The Company provides GTMS used in pressure and temperature transducers
(sensors), industrial process control equipment, capacitor end-seals for
electronic devices and other industrial, medical and telecommunications
applications to a number of manufacturers. The Company believes that its
ability to help customers develop products to meet demanding specifications
allow for significant opportunities within this market segment, including
those customers not currently served by the Company's products. The Company
also believes that the increased sophistication of equipment and increased
level of automation being used in industrial applications will increase demand
for GTMS products.
Petrochemical
The Company provides GTMS used for down-hole logging equipment in the oil
and gas industry primarily under long-term contracts to oil field equipment
and service companies. The Company's sales to this industry during any period
are somewhat dependent on the current level of exploration and drilling in the
oil and gas industry and current demand for and price of crude oil. The
Company believes that it is one of only two significant providers of GTMS to
this industry. The Company expects that the trend toward more sophisticated
measurement-while-drilling equipment in the petrochemical industry is likely
to lead to more demand for the Company's products.
CUSTOMERS AND APPLICATIONS
In the past year, the Company has sold products to over 1,200 customers.
Approximately 80% of the Company's consolidated sales are represented by the
Company's top 88 customers. The Company's largest customer, SDI (a maker of
airbag initiators), represented approximately 27% of consolidated sales for
the fiscal year ended March 29, 1997. The Company's ten largest customers
accounted for approximately 47% of net sales for fiscal year 1997.
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Approximately 70% of the Company's consolidated sales for fiscal year 1997
were to customers with which the Company had contractual agreements, sole
source relationships, letters of intent or long-term purchase orders. The
Company only begins to manufacture products upon receipt of a purchase order.
Approximately 41% of the Company's consolidated sales for fiscal year 1997 are
to automotive parts suppliers, primarily makers of airbag initiators such as
SDI and ICI. The Company's relationship with SDI includes a five-year contract
through the year 1999 to produce at least 75% of SDI's GTMS for its initiators
provided the Company maintains pricing and quality which are generally
equivalent to or better than other suppliers. The Company believes that it
currently provides nearly all of SDI's GTMS components. SDI has recently
announced its intention to internally produce 100,000 glass-to-metal seal
units per week in partial substitution of the glass-to-metal seal units
supplied to SDI by the Company. In addition, SDI is seeking to renegotiate the
terms of its contract with the Company, including with respect to price and
the minimum percentage of glass-to-metal seal units SDI must buy from the
Company. Pursuant to many of its long-term contracts the Company has the
ability to renegotiate its prices if the Company experiences material cost
increases for raw materials. See "Risk Factors--Dependence on Key Customers
and Contractual Relationships."
The following table sets forth the Company's principal end-user markets,
certain applications for its products and certain of the Company's customers
in fiscal year 1997.
<TABLE>
<CAPTION>
End Markets Automotive Aerospace Industrial/Petrochemical
- ----------- ---------- --------- ------------------------
<S> <C> <C> <C>
Applications: Airbag Jet Engine Process Control Sensors
Initiators Monitors Down Hole Drilling Sensors
Crash Sensors Avionics Lithium Batteries
Thermistors Fuel Gauge Telecommunication
Airbag Pressure Indicators Switching Devices
Switches Temperature Hybrid Circuit Packaging
ABS Sensors
Variable Speed De-icing Sensors
Transmission Air Speed
Controls Indicators
- ------------------------------------------------------------------------------------------
Customers*: SDI Allied Signal ABB
ICI Rosemount Baker-Hughes
TRW Aerospace Schlumberger
Honeywell Halliburton
Hughes Western Atlas
Litton Kemet
Eaton Sprague
Sawtek
Omni Rel
Power Conversion, Inc.
- ------------------------------------------------------------------------------------------
Specific example of Airbag initiator Temperature Sensors High pressure electrical
product application: bulkheads for down-hole
use (oil exploration)
What the product does: Electric current Passes electric Carries electrical signals
flows from crash current from between geological
sensor through sensors that detect formation measurement
initiator to begin excessive heat tools and sensors
inflation of the and/or fire in
airbag. aircraft
Result: Airbag is inflated Warning signal and Allows precise measurement
in approximately 6 automatic release of geology while
to 14 milliseconds of fire retardant protecting sensitive
equipment from extreme
heat and pressure
</TABLE>
- --------
* Other than SDI, ICI and TRW, all of the customers listed represented
individually less than 4% of the Company's consolidated sales for fiscal
year 1997.
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MANUFACTURING PROCESS
A GTMS is made by assembling three sets of component parts (metal contacts
or pins, glass bead(s) and an outer metal housing or shell) on a graphite
fixture. This assembly is put through a controlled atmosphere furnace at
approximately 1,800 degrees Fahrenheit until the glass becomes molten. The
graphite fixture is used to hold the components in place while the glass is
molten. As the assembly cools, a physical and chemical bond is formed between
the glass and the shell as well as the glass and the pin, thus forming a
hermetic seal.
[GRAPHICS]
The Company believes that its extensive "in-house" capabilities are a key
competitive advantage that has allowed it to become a low cost producer. By
specifically controlling the tolerance of the component parts, the Company
believes that it is able to increase the end yields of its product. This
attention to quality throughout the manufacturing process also helps to ensure
the timely delivery of its products. It also enables the Company to respond
very quickly to prototype and new product development opportunities.
The Company manufactures most of its parts to specific customer
requirements. All three of the Company's operating subsidiaries use Computer
Aided Design ("CAD") to produce the drawings and specifications required by
the customer. The Company estimates that it has produced over 75,000 different
variations of GTMS since 1945. This extensive library of designs enables the
Company to suggest design changes to its customers that reduce manufacturing
costs without sacrificing quality and therefore reduce the cost to the
customer (value engineering). The Company has a staff of 30 engineers who work
with sales people to provide solutions to customers' problems.
The Company has made a significant investment in Computer Numerically
Controlled ("CNC") machine tools in order to manufacture the metal shells and
pins to demanding customer specifications. The Company also machines most of
its own graphite fixtures thereby allowing it to maintain process quality.
Many of the glass preforms used in the Company's products are manufactured
internally as well. The Company is preparing to embark on a program to
significantly expand its glass manufacturing capability.
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This may also allow the Company to sell glass to outside customers as an
additional source of revenues. The Company has many proprietary formulas for
glass and glass/ceramic mixtures that it has developed in over 50 years of
manufacturing.
The Company utilizes Statistical Process Control ("SPC"), Design Failure
Mode Effects Analysis, Process Failure Mode Effects Analysis and a strict
adherence to complete manufacturing documentation in order to manufacture high
quality products for internal use as well as external customer sales. The
Company believes that its knowledge and use of these procedures give the
Company a competitive advantage. Sealtron became registered to ISO 9001 in
September 1996. Hermetic and Glasseal expect to be registered to ISO 9001
within twelve months and to be registered to QS 9000 (the automotive standard)
within 24 months. The ISO 9001 registration, an international standard of
quality, should facilitate business expansion in Europe.
MARKETING AND SALES
The Company's products are marketed throughout the United States to
customers in a wide variety of industries, both by Company-employed
salespersons, who work out of the Company's plants, and by a number of
independent regional manufacturers' sale representatives. The 14 Company-
employed salespersons receive a base salary plus bonus potential. Sales in
Europe are through a two person office in Northhampton, England. As part of
the Company's growth strategy, the Company believes that it can capture an
increasing share of the business outside the United States. Economic,
political, governmental and regulatory conditions in such international
markets could adversely affect the Company's ability to successfully enter or
operate in such markets. Therefore, no assurances can be given that the
Company's attempts to expand its business into such international markets will
be successful. The Company currently has 18 independent regional
manufacturers-sales representatives spread geographically across the U.S. and
Europe. These representatives, who do not exclusively sell the Company's
products, are remunerated on a commission basis. The Company believes there is
a significant opportunity to increase its sales through expansion of its sales
and distribution efforts, both within the markets it currently serves and in
new markets.
COMPETITION
The Company believes based upon internal analysis that most of the Company's
competitors in the GTMS sector of the industry in which it competes are
smaller and have less technological and manufacturing expertise than the
Company. The Company believes that it occupies a favorable competitive
position because of its experience in engineering and production techniques.
Price has generally been a less significant competitive factor than the
quality and design of the GTMS because their cost typically is a small
percentage of the total cost of the end products in which they are used and
because of the importance of the uses to which many of the Company's products
are put. In addition, products for airbag initiators are qualified for
particular new automotive models and new products are subject to design and
process verification testing (prior to which there are no sales) which
typically takes 8 to 24 months and therefore helps to inhibit new entry into
the market. The Company is currently qualified to supply all of SDI's
initiators and is qualified to supply or is in process verification testing on
all of ICI's initiators.
BACKLOG
As of September 27, 1997, the Company had a backlog of $28.2 million. As of
March 29, 1997, the Company had a backlog of $28.8 million as compared to
$24.3 million as of March 30, 1996. The Company has historically maintained a
strong backlog of orders. The Company sells a majority of its products
pursuant to contractual agreements, sole source relationships, letters of
intent or long-term purchase orders, each of which may permit early
termination by the customer. However, due to the specialized, highly
engineered nature of the Company's product, it is not practical in many cases
for customers to shift their business to other suppliers without incurring
significant switching and opportunity costs.
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EMPLOYEES
At September 27, 1997, the Company had approximately 740 employees,
substantially all of whom were located in the United States. None of the
Company's employees is subject to a union contract. The hourly workers
employed by Sealtron had been subject to a collective-bargaining agreement
between the Company and the United Paperworkers International Union, Local No.
7350, a union affiliated with the AFL-CIO. On February 28, 1997, the union was
decertified. The Company has not had a strike in over 30 years and considers
its relations with its employees to be satisfactory.
RAW MATERIALS
The Company obtains raw materials, component parts and supplies from a
variety of sources and generally from more than one supplier. The Company's
principal raw materials are steel and glass. The Company's suppliers and
sources of raw materials are based in the United States and the Company
believes that its sources are adequate for its needs for the foreseeable
future. The loss of any one supplier would not have a material adverse effect
on the Company's financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous Environmental Laws,
including those regulating air emissions and discharges to water, and the
storage, handling and disposal of solid and hazardous waste. The Company
believes that it is in substantial compliance with such laws and regulations.
Because Environmental Laws are becoming increasingly more stringent, the
Company's environmental capital expenditures and costs for environmental
compliance may increase in the future.
Under certain Environmental Laws, in particular CERCLA, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Generally, liability under CERCLA is joint and several and
remediation can extend to properties owned by third parties. Persons who
arrange for the disposal or treatment of hazardous or toxic substances or
otherwise cause the release of such substances into the environment may also
be liable under such laws for the costs of removal or remediation of such
substances at a disposal or treatment facility or other location where the
substances have migrated or come to be located, whether or not such facility
or location is or ever was operated by such person and regardless of whether
the method of disposal or treatment was legal at the time. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for the presence of such hazardous or toxic substances, and the
liability under such laws has been interpreted to be strict, joint and several
unless the harm is divisible and there is a reasonable basis for the
allocation of responsibility. In addition, the presence of hazardous or toxic
substances, or the failure to remedy such property properly may adversely
affect the market value of the property, as well as the owner's ability to
sell or lease the property. The Company has potential liability under
Environmental Laws for the remediation of contamination at two of its
facilities. See "Risk Factors--Potential Exposure to Environmental
Liabilities."
Rosemead, California
Past releases of solvents or other hazardous substances at the Company's
facility in Rosemead, California may have caused contamination of on-site soil
and contributed to on-site and regional groundwater contamination.
Regional Groundwater Contamination. A portion of the San Gabriel Valley in
which the Rosemead facility is located was designated by the EPA as a federal
Superfund site in 1984. To facilitate cleanup and improve administration of
the site, the EPA subdivided the valley into seven geographically distinct
"operable units." The Company has been named as a potentially responsible
party ("PRP") under CERCLA for the El Monte Operable Unit. The El Monte
Operable Unit underlies the City of El Monte and portions of the Cities of
Temple City and Rosemead and has boundaries which are defined roughly by the
56
<PAGE>
extent of known solvent contamination in the shallow groundwater. To the
extent the Rosemead facility contributed to the regional contamination, such
contribution is in connection with alleged spills of the degreasing solvent
tetracholoroethylene (PCE) during the period from the 1950's until sometime in
the mid-1980's when the Company stopped using this solvent.
Many other companies are believed to be contributors to the groundwater
contamination in the El Monte Operable Unit. The Company and 14 other such
companies have formed the Northwest El Monte Community Task Force (the "Task
Force") to undertake the investigation of the remediation, to identify other
potential contributors and potentially to undertake required remediation. In
March of 1995, the Task Force entered into a Consent Administrative Order with
the EPA to perform a Remedial Investigation and Feasibility Study (RI/FS) of
the operable unit. The RI/FS which began in October of 1995 was originally
scheduled for 90 weeks. It presently appears that the RI/FS will not be
complete before October 1997. The RI/FS costs of approximately $1.9 million to
date have been funded with about one-quarter of the costs coming from
governmental entities and the balance paid pursuant to a confidential interim
allocation agreement of Task Force members. The interim agreement with respect
to the allocation of RI/FS expenses is not binding on any of the participants
regarding the allocation of remediation expenses.
On-site Soil and Groundwater Cleanup Costs. In addition to the Operable Unit
Remediation costs, the Company has voluntarily undertaken both on-site soil
and groundwater remediation. In 1995, pursuant to a contract with Fero
Engineering, the Company installed a soil vapor extraction system which has,
to date, reduced contamination in the soil. The system has been functioning
for more than twelve months and although it is not possible to determine how
long it will take to complete the remediation, the Company and Fero
Engineering believe that the system may need to be in place for an additional
two to three years at an operating and maintenance cost of $20,000/year.
Recently, the Company completed a groundwater extraction system in
conjunction with its neighbor, Crown City Plating Company. This system
extracts contaminated water from below the facility and pumps the water for
use in Crown City's manufacturing process prior to discharge to the municipal
sanitary sewer. The system has been operational since August 1996 and is
designed to capture contaminant flow from under the facility containing and
cleaning the groundwater before it impacts the regional groundwater flow.
Although the system has been successful, it is premature to determine how long
operation of it will be needed to remediate the groundwater to acceptable
levels, or if the operation of the system will be discontinued and replaced
with a regional groundwater remediation program. The Company estimates the
ongoing operating and maintenance costs for this system to be $30,000/year.
The Company believes that its financial liability with respect to regional
groundwater contamination may be substantially reduced by acting on its own
initiative to commence early remediation of groundwater contamination on its
property.
Avon, Massachusetts
The Company's facility in Avon, Massachusetts, currently inactive, was
purchased in 1985 and operated as its Hermetite facility until August of 1989
at which time all equipment was removed. Subsequent to its closure, the
Company identified significant levels of solvents trichloroethylene ("TCE")
and 1,1,1, trichloroethane ("TCA") in the groundwater. Subsurface
investigations have delineated a plume of contaminants extending from the
facility, beneath the neighboring Den Lea property and into a town public
water supply wellfield about 800 feet to the southeast of the property. Since
the discovery of contaminants in 1991, the level of contaminants at the
facility has decreased. Despite the fact that contaminants continue to move
toward the wellfield, the levels at the well field remain within acceptable
drinking water standards.
The Avon property is subject to Massachusetts "Chapter 21E," the state's
hazardous site cleanup program. The site was initially classified in the
program's "Tier 1A" category, the highest tier based on the
57
<PAGE>
proximity to the town wellfield. The property has since been reclassified to a
less stringent "Tier 1B" category based on the level of contaminants. Under
Tier 1B procedures, the Company may design its own remediation program subject
to state oversight, auditing, and scheduling.
Pursuant to this procedure, the Company, through GZA GeoEnvironmental, Inc.,
its licensed consultants, designed a pump and treat remediation system which
is intended to capture the contaminants before they reach the town wells. In
July 1996, the program was approved by the Massachusetts Department of
Environmental Protection and the Company entered into an agreement with
Environmental Reclamation, Inc. to construct the remediation system. The
system has been designed so that its capacity can be expanded to clean the
site in less time if desired by increasing the number of extraction wells. The
initial cost of the system and the first year of operation and maintenance is
$116,000. Construction of the system has been completed and the system has
recently become operational. If no additional extraction wells are used, the
Company estimates that cleanup could take 20 years at $20,000 per year. Once
the system is in place, the Company will determine whether it is cost
beneficial to accelerate the cleanup of the site.
The Company may have to satisfy the claims asserted by its neighbor Den Lea
Corporation which owns an adjacent piece of property. In 1992, Den Lea sued
the Company for $400,000 in property damage caused by the migrating
contamination. In 1993, the suit was withdrawn "without prejudice" based on
the Company's assurance that it would remediate the site. The Company has also
agreed in early 1996 with Den Lea that it can market its property together
with the Company's parcel as a package. However, Den Lea could refile the
lawsuit at any time if its efforts to sell its property in the future are
unsuccessful.
Remediation
It is not presently possible to determine definitively the ultimate cost to
the Company for regional groundwater remediation in Rosemead. Such a
definitive determination cannot be made until (i) the completion of the RI/FS,
and the subsequent selection and approval by regulatory authorities of a
remediation strategy and program, if any, which may not be complete for
twenty-four to thirty-six months and (ii) an agreement among Task Force
members is reached regarding the Company's allocable share of remediation
liability. Based on the analysis of environmental engineering consultants, the
Company believes its present value cost exposure at the Avon site to be
somewhere between $500,000 and approximately $2,500,000, with the upper end
estimate based upon the necessity of operating an expanded treatment system
for twenty years and including the costs of resolving third party claims.
Based upon the analysis of such environmental engineering consultants, the
Company has established a $10 million reserve, prior to accounting for taxes,
in respect of all such environmental matters.
Pursuant to the Recapitalization Agreement, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of contingent
environmental and other liabilities, subject to a cap for all indemnified
liabilities of $30 million. Pursuant to the Recapitalization Agreement, the
Deferred Amount has been escrowed to secure indemnity claims of the Company
and others, including with respect to environmental liabilities. Although
there can be no assurances, the Company believes that the Deferred Amount
should be adequate to cover the costs of the remediation. In the event the
Deferred Amount is inadequate to cover the costs of remediation, the Company
has been informed by the individual members of the Selling Group that they
will draw upon personal funds to cover such excess costs. If the Selling Group
has aggregate indemnification liabilities in respect of environmental matters
in excess of $30 million, the Company has agreed to indemnify the Selling
Group for such claims to the extent such claims exceed $30 million. See "Risk
Factors--Potential Exposure to Environmental Liabilities."
In addition, the Company has insurance that may cover at least a portion of
its costs. Presently, 75% of the Company's legal costs are being reimbursed by
some of the Company's insurance carriers under a reservation of rights by the
Company and the insurance company for the balance of the legal costs.
58
<PAGE>
FACILITIES
The Company's principal executive offices are owned by the Company and are
located in the Hermetic Seal facility located in Rosemead, California.
Additionally, the Company has operating facilities in El Monte, California;
Lakewood, New Jersey; and Reading, Ohio, as set forth below. The Company also
owns approximately 47,400 square feet of plant and office space in Avon,
Massachusetts, which is currently vacant.
<TABLE>
<CAPTION>
Location Owned/Leased Square Feet
-------- ------------ -----------
<S> <C> <C>
Rosemead, CA..................................... Owned 37,000
El Monte, CA..................................... Leased 38,000
Lakewood, NJ..................................... Owned 50,000
Reading, OH...................................... Owned 37,000
</TABLE>
LEGAL PROCEEDINGS
There are various claims and legal proceedings against the Company relating
to its operations in the normal course of business, none of which the Company
believes is material. The Company generally obtains indemnification agreements
from its customers and currently maintains insurance coverage for product
liability claims. There can be no assurance that indemnification from its
customers and coverage under insurance policies will be adequate to cover any
future product liability claims against the Company. In addition, liability
insurance coverage is expensive, difficult to maintain and may be unobtainable
in the future on acceptable terms. With respect to certain environmental
claims against the Company, see "--Environmental Matters."
59
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director is elected for a one (1)
year term or until such person's successor is duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Andrew Goldfarb .................. 49 Chairman, President and Chief Executive
Officer of HCC
Christopher H. Bateman............ 45 Director, Vice President and Chief
Financial Officer of HCC
Richard Ferraid................... 41 Director of HCC and President of Glasseal
Robert H. Barton III.............. 63 Director of HCC
Gary L. Swenson................... 59 Director of HCC
Noel E. Urben..................... 59 Director of HCC
Thomas J. Sikorski................ 35 Director of HCC
John M. Leonis.................... 63 Director of HCC
</TABLE>
Mr. Goldfarb joined the Company in 1976 and has served in various capacities
and currently serves as the Chairman, Chief Executive Officer and President of
HCC. Mr. Goldfarb has been a director of the Company since 1979.
Mr. Bateman joined the Company in 1986 from Touche Ross & Co. and has served
in various capacities and currently serves as a Vice President and the Chief
Financial Officer of HCC. Mr. Bateman has been a director of the Company since
1989.
Mr. Ferraid joined the Company in 1992 and has served in various capacities
and currently serves as the President of Glasseal. Mr. Ferraid became a
director of the Company in February 1997 following the consummation of the
Recapitalization. Mr. Ferraid previously worked at Electrical Industries, a
competitor of the Company. Mr. Ferraid has 18 years of experience in the GTMS
industry.
Mr. Barton was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Barton was elected Chairman of
French Holdings, Inc. in October 1996 and Chairman and CEO of American Bumper
Mfg. in April 1997. Mr. Barton was Chief Executive Officer of Alcoa Fujikura
Ltd. from May 1984 to December 1996. He currently serves on the Board of
Directors of and as senior advisor to Alcoa Fujikura Ltd., and serves on the
Board of Directors of J.L. French Corporation.
Mr. Swenson was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Swenson has been President and
Senior Managing Director of Windward Capital Partners, L.P. since its founding
in 1994, and was a Managing Director at CS First Boston Corporation from 1974
to 1994. Mr. Swenson currently serves on the Board of Directors of J.L. French
Corporation and Furr's Supermarkets, Inc. Mr. Swenson is Mr. Sikorski's
father-in-law.
Mr. Urben was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Urben has been a Senior Managing
Director at Windward Capital Partners, L.P. since 1995, and prior to that he
was the President and a director of BT Capital Corporation. Mr. Urben
currently serves on the Board of Directors of Strouds, Inc., Tycom Corporation
and J.L. French Corporation.
Mr. Sikorski was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Sikorski has been a Managing
Director of Windward Capital Partners, L.P. since its founding in 1994. Prior
to joining Windward Capital Partners, L.P., Mr. Sikorski was Director of
Private Equity Investments at MetLife from 1992 to 1994 and prior to that was
a Vice President in the Leveraged Buyout Group at the First Boston Corporation
from 1986 to 1992. Mr. Sikorski currently serves on the Board of Directors of
Furr's Supermarkets, Inc. and Coating Technologies International. Mr. Sikorski
is Mr. Swenson's son-in-law.
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<PAGE>
Mr. Leonis was elected a director of HCC in July 1997. Mr. Leonis is
currently chairman of the Board of Directors and Chief Executive Officer of
Litton Industries, Inc. Mr. Leonis has worked at Litton Industries, Inc. in
various capacities for 36 years. Mr. Leonis currently serves as a member of
the Board of Directors of the Los Angeles World Affairs Council and Town Hall,
and a member of the Board of Governors of the Aerospace Industries
Association.
EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the two most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of March 29, 1997 (collectively with the Chief
Executive Officer, the "Named Executive Officers") for services rendered in
all capacities to the Company for the year ended March 29, 1997.
SUMMARY COMPENSATION TABLE(/1/)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION(/2/)
- --------------------------- ---- -------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Andrew Goldfarb......... 1997 $462,467 $ -- -- $25,319
Chairman of the Board 1996 $485,362 $2,545,000 -- $15,362
of Directors, Chief Ex- 1995 $468,028 $ 825,000 -- $95,801
ecutive Officer and
President of HCC
Christopher Bateman..... 1997 $200,575 $ -- 3,195 $20,108
Chief Financial Officer 1996 $200,000 $ 642,500 -- $17,020
and Vice President 1995 $193,009 $ 207,500 -- $58,548
of HCC
Richard Ferraid......... 1997 $200,000 $ 75,000 3,590 $13,608
President of Glasseal 1996 $148,438 $ 250,000 -- $13,464
1995 $ 96,563 $ 100,000 -- $13,420
</TABLE>
- --------
(/1/) None of the executive officers has received perquisites the value of which
exceeded the lesser of $50,000 or 10% of the salary and bonus of such
executive officer.
(/2/) For 1997, all other compensation included the following amounts: Mr.
Goldfarb, $6,000 of Company contributions into the Company's 401(k) plan,
$1,677 for automobile allowance and $17,642 for allocated life insurance;
Mr. Bateman, $6,000 for Company contributions into the Company's 401(k)
plan, $12,088 for automobile allowance and $2,020 for allocated life
insurance; Mr. Ferraid, $6,000 for Company contributions into the
Company's 401(k) plan, $7,200 for automobile allowance and $408 for
allocated life insurance.
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<PAGE>
GRANTS OF STOCK OPTIONS
The following table sets forth information concerning the award of stock
options to the Named Executive Officers during the fiscal year ended March 29,
1997 pursuant to the Company's 1997 Stock Option Plan ("Option Plan").
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------
INDIVIDUAL GRANTS
------------------------------------------------------------------
NUMBER OF GRANT
SECURITIES % OF TOTAL OPTIONS DATE
UNDERLYING GRANTED TO PRESENT
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION VALUE
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($)
- ---- ----------- ------------------ -------------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Christopher Bateman..... 1,220(/1/) 7.2 370.49(/2/) February 13, 2007 120,780(/3/)
1,185(/4/) 7.0 370.49(/2/) February 13, 2007 117,315(/3/)
790(/5/) 4.6 370.49(/2/) February 13, 2007 78,210(/3/)
Richard Ferraid......... 1,220(/1/) 7.2 370.49(/2/) February 13, 2007 120,780(/3/)
1,185(/4/) 7.0 370.49(/2/) February 13, 2007 117,315(/3/)
1,185(/5/) 7.0 370.49(/2/) February 13, 2007 117,315(/3/)
</TABLE>
- --------
(/1/) These options are subject to a vesting schedule that generally provides
for each option to vest 20% per year over five years commencing on the
first anniversary of the date of grant if the Company attains specified
annual or cumulative earnings targets set forth in the Option Plan. All
options automatically vest on the seventh anniversary of the date of grant
regardless of whether the performance criteria are achieved.
(/2/) All options have an exercise price equal to the fair value of common stock
at the date of grant ($370.49 per share).
(/3/) The grant date value of each option granted was estimated to be $99 using
the minimum value method with the following assumptions (i) risk-free
interest rate of 6.25%, (ii) expected option life of five years, (iii)
forfeiture rate of 0 and (iv) no expected dividends.
(/4/) These options are subject to a vesting schedule based on a change in
control in which the Windward Group realizes a 30% compounded annual rate
of return on its equity investment in the Company, as defined in the
Option Plan. All options will automatically vest on the seventh
anniversary of the date of grant regardless of whether the performance
criteria are achieved.
(/5/) These options are subject to a vesting schedule based on a change in
control in which the Windward Group realizes a 40% compounded annual rate
of return on its equity investment in the Company, as defined in the
Option Plan. All options will automatically vest on the seventh
anniversary of the date of grant regardless of whether the performance
criteria are achieved.
The following table sets forth information concerning the fiscal year-end
value of unexercised options held by the Named Executive Officers. The Named
Executive Officers did not exercise any options during the fiscal year ended
March 29, 1997.
<TABLE>
<CAPTION>
FY-END OPTION VALUE
--------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---- ---------------------- ---------------------
<S> <C> <C>
Christopher Bateman................ 0/3,195 0/0(/1/)
Richard Ferraid.................... 0/3,590 0/0(/1/)
</TABLE>
- --------
(/1/As)of March 29, 1997, the fair market value of a share of Common Stock did
not exceed the exercise price per share of the options held by the Named
Executive Officers.
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<PAGE>
LONG-TERM INCENTIVE PLAN COMPENSATION
The following table sets forth information concerning awards during the
fiscal year ended March 29, 1997 to each of the Named Executive Officers under
the Company's Contingent Bonus Plan ("Bonus Plan").
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
------------------------------------------------------
ESTIMATED FUTURE
PAYOUTS UNDER
NON-STOCK-
PRICE-BASED PLANS
-----------------
PERFORMANCE OR
NUMBER OF SHARES, OTHER PERIOD
UNITS OR OTHER UNTIL MATURATION TARGET
NAME RIGHTS (#)(/1/) OR PAYOUT ($)
- ---- ----------------- ------------------ -----------------
<S> <C> <C> <C>
Christopher Bateman...... 6.25 June 30, 1999 $375,000
6.25 September 30, 2000 $375,000
Richard Ferraid.......... 7.5 June 30, 1999 $450,000
7.5 September 30, 2000 $450,000
</TABLE>
- --------
(/1/) Each Bonus Unit represents an interest in the bonus pool of $6.0 million.
Half of the contingent bonuses vest upon the Company obtaining $22.0
million of Operating EBITDA (as defined in the Bonus Plan) on a latest
twelve month basis within 15 months beginning on the first day of the
Company's 1998 fiscal year and the remaining half vest upon the Company
obtaining $28.0 million of Operating EBITDA on a latest twelve month
basis within 30 months beginning on the first day of the Company's 1998
fiscal year. In addition, if the Company completes an initial public
offering (an "IPO") or sale resulting in a Change in Control (as defined
in the Bonus Plan) (a "Sale Event") within 30 months of March 31, 1997
any unvested contingent bonuses will vest in their entirety and become
redeemable at par if (a) the equity market capitalization of the Company
is greater than $175 million for 20 consecutive trading days subsequent
to the IPO (but prior to 30 months from March 31, 1997) or if the equity
valuation in the sale (after certain specified adjustments) is greater
than $175 million. Vested contingent bonuses become due and payable on
the third anniversary of the applicable vesting date and will bear
interest at 10% per annum (payable semi-annually in arrears) from each
applicable vesting date until paid in full. Pursuant to the Bonus Plan,
all of an employee's Bonus Units terminate immediately when such employee
ceases to be employed by the Company, unless such employment ceases due
to such employee's death or disability, in which case such employee will
be vested in a portion of such employee's Bonus Units.
EMPLOYMENT AGREEMENTS
In February, 1997, Andrew Goldfarb, Christopher Bateman and Richard Ferraid
each entered into an employment agreement with HCC (the "Employment
Agreements"). Pursuant to the Employment Agreements, such executives will be
employed by HCC until April 1, 1999 (April 2000 in the case of Mr. Goldfarb)
provided that HCC may terminate such executive by reason of disability, death
or for good cause (as defined in the Employment Agreements). Upon termination
by the Company for reasons other than death, disability or good cause, the
Executive will be entitled to receive salary, bonus and benefits for the
remainder of the term. Following the date of any termination (other than by
death) HCC has sole discretion to retain such executive as an exclusive
consultant for a term of two (three in the case of Mr. Goldfarb) years (the
"Consulting Period") in exchange for a consulting fee equal to 50% of base
salary. The agreement provides for a base salary to be determined in
accordance with HCC's policies and an annual bonus contingent on certain
performance-based criteria. Pursuant to the terms of the agreement, such
executive, during the term of the Employment Agreement and the Consulting
Period may not solicit customers of the Company, engage in business with any
competing entity or induce any other employee of the Company to leave his or
her employment with the Company.
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<PAGE>
OPTION PLAN
In connection with the Recapitalization, HCC adopted the Option Plan which
provides for the grant to employees from time to time of non-qualified stock
options to purchase up to an aggregate of 22,887 shares of Common Stock at
exercise prices to be determined by the Board of Directors. The Option Plan
provides for the grant of management options to purchase 6,393 shares of
Common Stock (the "Management Options"), management performance options to
purchase 14,206 shares of Common Stock (the "Management Performance Options"),
director options to non-affiliates of Windward to purchase 710 shares of
Common Stock (the "Director Options"), and director performance options to
non-affiliates of Windward to purchase 1,578 shares of Common Stock (the
"Director Performance Options"). The Management Options and Director Options
were granted subject to an EBITDA (as defined in the Option Plan) vesting
schedule that provides for 20% of each series of options to vest in each of
fiscal year 1998 through fiscal year 2002 if the Company attains a specified
target for each such year ($21.8 million EBITDA in fiscal 1998, $28.5 million
EBITDA in fiscal 1999, $32.6 million EBITDA in fiscal 2000, $35.3 million
EBITDA in fiscal 2001 and $37.6 million EBITDA in fiscal 2002). The Options
will also vest if certain cumulative EBITDA targets are achieved after certain
multiple year periods or, so long as the Windward Group realizes specified
rates of return on its aggregate equity investment, upon a Change of Control
(as defined in the Option Plan). In addition, regardless of whether the
performance criteria are achieved, all Options including, the performance-
based Options, will vest automatically on the seventh anniversary of the date
of grant.
The Management Performance Options and Director Performance Options were
granted subject to a vesting schedule providing for 50% of each series of
options to vest upon a Change of Control in which the Windward Group realizes
a 30% compounded annual rate of return on its aggregate equity investment in
the Company and the remaining 50% of each series of options vesting upon a
Change of Control in which the Windward Group realizes a 40% compounded annual
rate of return on its aggregate equity investment in the Company. As of March
29, 1997, 18,160 options have been granted under the Option Plan which entitle
the holders to purchase upon vesting 18,160 shares of Common Stock at an
exercise price of $370.49 per share. An additional 4,727 options may be
granted under the Option Plan.
CONTINGENT BONUS PLAN
In connection with the Recapitalization, HCC adopted the Bonus Plan,
pursuant to which the Company will grant Bonus Units (each representing an
interest in the bonus pool of $6 million) to certain key employees (the
"Participants"). The Bonus Units will be awarded by a committee of the Board
of Directors of HCC formed to administer the Bonus Plan. Half of the
contingent bonuses vest upon the Company obtaining $22 million of Operating
EBITDA (as defined in the Bonus Plan) on a latest twelve month basis within 15
months beginning on the first day of the Company's 1998 fiscal year and the
remaining half vest upon the Company obtaining $28 million of Operating EBITDA
on a latest twelve month basis within 30 months beginning on the first day of
the Company's 1998 fiscal year. In addition, if the Company completes an IPO
or a Sale Event within 30 months of March 31, 1997 any unvested contingent
bonuses will vest in their entirety and become redeemable at par if (a) the
equity market capitalization of the Company is greater than $175 million for
20 consecutive trading days subsequent to the IPO (but prior to 30 months from
March 31, 1997) or if the equity valuation in the sale (after certain
specified adjustments) is greater than $175 million. Vested contingent bonuses
become due and payable on the third anniversary of the applicable vesting date
and will bear interest at 10% per annum (payable semi-annually in arrears)
from each applicable vesting date until paid in full.
Pursuant to the Bonus Plan, all of an employee's Bonus Units terminate
immediately when such employee ceases to be employed by the Company, unless
such employment ceases due to such employee's death or disability, in which
case such employee will be vested in a portion of such employee's Bonus Units.
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<PAGE>
DIRECTOR COMPENSATION
Each of Messrs. Barton and Leonis receive an annual fee of $20,000. In
addition, in 1997 Messrs. Barton and Leonis received 695 and 470 stock options
respectively, of which 215 and 150, respectively, are subject to a vesting
schedule that generally provides for each option to vest 20% per year over
five years commencing on the first anniversary of the date of grant if the
Company attains specified annual or cumulative earnings targets set forth in
the Option Plan and the remaining options vest upon a change in control in
which the Windward Group realized specified annual rates of return on its
equity investment in the Company as defined in the Option Plan. All options
automatically vest on the seventh anniversary of the date of grant regardless
of whether the performance criteria are achieved. All options have an exercise
price equal to the fair value of the common stock at the date of grant ($370
per share).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1997, the Company had no compensation committee and compensation
matters were handled exclusively by Mr. Goldfarb, Chief Executive Officer and
Chairman of the Board of Directors of HCC.
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<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists all shares of HCC's Common Stock as of August 23,
1997, beneficially owned by each director of HCC, each executive officer of
HCC and each person known by the Company to beneficially own more than 5% of
such outstanding shares of Common Stock at such date. The table also reflects
the percentage of the shares owned beneficially by all executive officers and
directors of HCC as a group. Share numbers and percentages in the table are
rounded to the nearest whole share. As of August 23, 1997 there were 134,955
shares of Common Stock of HCC outstanding.
<TABLE>
<CAPTION>
Number of
Name and Address Shares of
of Beneficial Owners Common Stock* Percent of Class
- -------------------- ------------- ----------------
<S> <C> <C>
Windward/Park HCC, L.L.C.(a)(b)................. 53,836 39.9%
Windward/Merban, L.P.(a)(b)..................... 10,767 8.0%
Windward/Merchant, L.P.(a)(b)................... 21,535 16.0%
Windward Capital Associates, L.P.(a)(b)(c)...... 87,721 65.0%
Windward Capital Associates, Inc.(b)(c)......... 87,721 65.0%
Gary Swenson(b)(d)(e)........................... 87,721 65.0%
Thomas J. Sikorski(b)(e)........................ -- **
Noel E. Urben(b)(e)............................. -- **
Robert Barton................................... -- **
John M. Leonis.................................. -- **
Andrew Goldfarb(f)(h)........................... 30,453 22.6%
Christopher Bateman(f)(g)....................... 9,173 6.8%
Richard Ferraid(f)(g)........................... 3,558 2.6%
All directors and executive officers of the Com-
pany as a group
(7 persons)(g)(i).............................. 43,184 32.0%
</TABLE>
- --------
* HCC's common equity is divided into four separate classes of Common stock,
par value $.10 per share: (i) Class A Common Stock with one vote per share,
(ii) Class B Common Stock with one vote per share, (iii) Class C Common
Stock with no voting rights, except as required by applicable state law and
(iv) Class D Common Stock with 10 votes per share. Except for voting rights,
all the common equity of the Company have identical economic terms. Other
than Windward/Merban, L.P. and Windward/Merchant, L.P., all other
stockholders of HCC own Class A Common Stock. See note (a) below.
** Less than 1.0%.
(a) Windward/Park HCC, L.L.C. owns 53,836 shares of Class A Common Stock,
Windward/Merban L.P. owns 6,451 shares of Class B Common Stock and 4,316
shares of Class C Common Stock, Windward/Merchant, L.P. owns 21,055 shares
of Class B Common Stock and 480 shares of Class D Common Stock and
Windward Capital Associates, L.P. owns 1,583 shares of Class A Common
Stock. The Windward Group due to their common control may be deemed to
beneficially own each others shares, but each disclaims such beneficial
ownership. The Windward Group consists of Windward, Windward/Merchant,
L.P., the partners of which are Windward and an affiliate of Credit Suisse
First Boston Corporation, Windward/Merban, L.P., the partners of which are
Windward and an affiliate of Credit Suisse First Boston Corporation and
Windward/Park HCC, LLC, the members of which are Windward and MetLife.
Pursuant to a set of program agreements, the Windward Group, along with
certain other entities, invests in merchant banking investments organized
and managed by Windward and its affiliates. The program agreements govern
the relationship among the Windward Group and provide for, among other
things, procedures for investments, allocations of income and
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<PAGE>
loss, distributions of funds, transfers of interests between and among the
partners or members or third parties, provisions relating to the activities
of the general partner or manager, including in respect of fees, powers and
limitations and removal by the other partners or members, and procedures for
the limited partners or non-managing members to exercise voting and
management control of the investments. Windward and the other members of the
Windward Group have reached agreement concerning an early termination of the
period during which they may make future investments under their program
agreements. Windward and the other members have informed the Company that
such termination will not have any effect on their investment in, or the
management or control of, the Company.
(b) The business address for such person(s) is c/o Windward Capital Partners,
L.P., 1177 Avenue of the Americas, 42nd Floor, New York, New York 10036.
(c) Windward Capital Associates, L.P. may be deemed to share beneficial
ownership of the Common Stock owned of record by the Windward Group, by
virtue of its status as the general partner of Windward/Merchant, L.P.,
Windward Merban, L.P. and the Managing Member of Windward/Park HCC,
L.L.C., but disclaims such beneficial ownership. Windward Capital
Associates, Inc. may be deemed to share beneficial ownership of shares of
Common Stock owned of record by the Windward Group by virtue of its status
as the general partner of Windward Capital Associates, L.P., but disclaims
such beneficial ownership.
(d) Mr. Swenson may be deemed to share beneficial ownership of the shares of
Common Stock owned of record by the Windward Group, by virtue of his
status as the sole stockholder of Windward Capital Associates, Inc., the
general partner of Windward Capital Associates, L.P. Mr. Swenson disclaims
such beneficial ownership. Windward Capital Associates, L.P. is the
general partner of Windward/Merchant, L.P., Windward Merban, L.P. and the
Managing Member of Windward/Park HCC, L.L.C.
(e) Messrs. Swenson, Sikorski and Urben are limited partners of Windward
Capital Associates, L.P. None of Messrs. Swenson, Sikorski and Urben, in
their capacities as limited partners of Windward Capital Associates, L.P.,
has or shares voting or investment power with Windward Capital Associates,
L.P. with respect to the Common Stock owned by Windward Capital
Associates, L.P.
(f) The business address of such person(s) is c/o HCC Industries Inc., 4232
Temple City Blvd., P.O. Box 739, Rosemead, CA 91770-1592.
(g) Excludes outstanding options to purchase the shares of Common Stock which
are not exercisable within sixty days. See "Management--Grants of Stock
Options"
(h) Includes 27,753 shares of Common Stock owned by the Andrew and Denise
Goldfarb Revocable Trust of 1995. Also includes 1,350 shares of Common
Stock owned by The Jessica Anne Goldfarb Irrevocable Trust and 1,350
shares of Common Stock owned by The Rebecca Goldfarb Irrevocable Trust of
which Mr. Goldfarb's brother is the trustee. Mr. Goldfarb disclaims
beneficial ownership of the shares of Common Stock owned by such trusts.
(i) Excludes shares of Common Stock referred to in notes (d) and (e) above.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of certain agreements and arrangements, as well
as other transactions between the Company and related parties which have taken
place during the Company's most recently completed three fiscal years. See
"The Recapitalization."
INVESTOR RELATIONSHIPS
The Windward Group, after giving effect to the redemption of the Mezzanine
Units, beneficially owns 65% of the common equity of HCC as described under
"Securities Ownership of Certain Beneficial Owners and Management". In
connection with the Recapitalization, HCC, under the terms of a Financial
Advisory Services Agreement dated as of February 14, 1997, agreed to pay
Windward Capital Partners, L.P., an affiliate of Windward (the "Management
Company") an annual management fee of $125,000 and to reimburse it for
expenses reasonably incurred by it in connection with the provision of such
services each year for a term of three years commencing on February 14, 1997,
and thereafter for successive one-year periods until the board of directors of
HCC gives written notice to end such one-year terms. In addition, HCC has
agreed to indemnify the Management Company to the fullest extent permitted by
law against certain claims, losses, damages, liabilities and expenses which
may arise in connection with the rendering of such services. HCC has also
reimbursed the Management Company for its out-of-pocket, legal and consulting
expenses of $685,000 in connection with its services rendered in the
Recapitalization. The Company, Windward and the members of the Windward Group
have been engaged in discussions regarding the payment of a financing fee to
members of the Windward Group in connection with the Recapitalization. On
October 28, 1997, the disinterested members of the board of directors of HCC
voted unanimously to pay Windward a $1.25 million financing fee in connection
with the Recapitalization. Such payment shall be made only in compliance with
the applicable provisions of the Indenture. See "The Recapitalization" and
"Description of the Notes." Credit Suisse Group, the ultimate parent of Credit
Suisse First Boston Corporation, holds significant economic interests in
Windward/Merban, L.P. and Windward/Merchant, L.P. which own in the aggregate
32,302 shares of Common Stock of HCC, and Credit Suisse First Boston
Corporation acted as one of the Initial Purchasers in, and received
compensation in connection with the Offering. In addition, Windward/Park HCC,
L.L.C., Windward/Merban, L.P. and Windward/Merchant, L.P. owned 91%, 7% and
2%, respectively, of the Mezzanine Units which were repurchased by HCC from
the proceeds of the Offering. See "The Recapitalization" and "Use of
Proceeds."
STOCKHOLDERS AGREEMENT
The Stockholders Agreement dated as of February 14, 1997 by and among the
Windward Group, HCC, and the stockholders listed on the signature pages
thereto (the "Management Stockholders") (the "Stockholders Agreement")
provides, among other things, that HCC's Board of Directors will consist of
nine (9) members, including three (3) members designated by the Management
Stockholders, three (3) outside directors (non-employees of Windward)
designated by Windward and two (2) members designated by Windward (the
"Windward Nominees") and one (1) director (and one non-voting observer)
designated by MetLife (holder of the majority of the percentage interests in
Windward/Park HCC, L.L.C.) (the "Windward/Park Nominee"). The Management
Stockholders may recommend two (2) of the three (3) outside directors for
consideration by Windward. Further, all board action requires the affirmative
vote of a majority of the Windward Nominees. Directors may be removed only for
cause, defined as the commission of a fraudulent act or an act of embezzlement
against the Company or any conviction or guilty plea for a felony except a
director may be removed (with or without cause) by the party who designated
such director.
The Stockholders Agreement provides for certain limitations on transfers of
Common Stock by stockholders, as well as rights of first refusal to purchase
stock from another stockholder of HCC and for
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<PAGE>
certain preemptive rights. Further, the Stockholders Agreement provides for
tag-along rights whereby any stockholder has certain rights to include a
portion of his shares for sale in connection with a sale by another selling
stockholder. The Windward Group has, under the terms of the Stockholders
Agreement and subject to the satisfaction of certain conditions, (i) the right
to cause a sale of the Company, (ii) the right to cause the Company to effect
an initial public offering and (iii) certain demand and piggyback registration
rights in favor of Windward and the Management Stockholders. The Stockholders
Agreement also contains certain rights and obligations of HCC to purchase
stock held by members of management upon termination of employment at
specified prices. The Stockholders Agreement terminates upon the earlier of
(i) February 14, 2007, (ii) an initial public offering event (in which case
certain provisions of the Stockholders Agreement, including those dealing with
registration rights, shall survive until one of the other events causing
termination occurs), (iii) a sale of all or substantially all of the Company's
assets or equity interests to a third party, (iv) approval of the Windward
Group and a majority of the stock held by the Management Stockholders, or (v)
subject to certain circumstances, when the Windward Group ceases to own at
least 5% of the total outstanding number of shares of Common Stock.
OTHER
In connection with the Recapitalization, Richard Ferraid, a director of HCC
and President of Glasseal, paid in full the $150,000 owed to the Company
pursuant to a Promissory Note, bearing interest of 7% per annum, dated
September 30, 1995. Such promissory note was made in connection with a
purchase of stock from the Company.
In June 1996, HCC exercised an option with a former stockholder to acquire
all of such stockholder's shares of common stock in HCC Merger Corp. See
Note 1 to the Notes to Consolidated Financial Statements.
Steven Goldfarb, Andrew Goldfarb's brother and a director of HCC until his
resignation in connection with the Recapitalization in February 1997, served
as counsel to the Company. In fiscal year 1996, the Company paid Steven
Goldfarb $329,000 for legal services.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE CREDIT FACILITIES
In connection with the Recapitalization, the Company entered into a Credit
Agreement, dated as of February 14, 1997 (the "Old Credit Agreement"), with
Fleet Capital Corporation as agent (the "Agent") and the Lenders party thereto
which provided for, among other things, a $10.0 million five-year revolving
credit facility. In connection with the Offering, the Company, the Agent and
the Lenders entered into an amendment, dated as of May 6, 1997, to increase
the amount available under the revolving credit facility to $20.0 million (the
Old Credit Agreement, as so amended and in effect on the date hereof, the
"Amended Credit Agreement"). The following summary describes all material
provisions of the Amended Credit Agreement. The following summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the form of the Amended Credit Agreement.
General. The Revolving Credit Facility includes a letter of credit
subfacility in an amount not to exceed $5.0 million. Additionally, up to $2.0
million of the Revolving Credit Facility may be borrowed from Fleet Capital
Corporation in its individual capacity as swingline loans ("Swingline Loans").
Interest Rates; Fees. Loans outstanding under the Revolving Credit Facility
(other than the Swingline Loans) may be maintained from time to time, at the
Company's option, as (i) Base Rate Loans which bear interest at the Base Rate
(defined in the Amended Credit Agreement as the higher of (x) 1/2 of 1% in
excess of the Federal Reserve reported rate on overnight transactions and (y)
the Agent's announced prime lending rate, each as in effect from time to time)
or (ii) Eurodollar Loans which bear interest at LIBOR (adjusted for maximum
reserves) as determined by the Agent for the applicable interest period plus
1.50%. LIBOR is fixed for interest periods of 1, 2, 3 or 6 months, at the
option of the Company. Swingline Loans must be maintained as Base Rate Loans
and bear interest at the Base Rate.
The Company must pay a commitment fee calculated at a rate of 1/4 of 1% per
annum of the unutilized commitments of each lender under the Revolving Credit
Facility; provided, however, that (i) outstanding Swingline Loans do not
constitute usage of the Revolving Credit Facility for purposes of calculating
the commitment fee and (ii) until the amounts outstanding under the Revolving
Credit Facility, including the stated amount of any outstanding letters of
credit, exceeds $15.0 million (but not thereafter) commitment fees shall be
calculated based on a total commitment of $15.0 million. The Company must also
pay a utilization fee of 1/4% per annum on the amount, if any, by which the
aggregate amount outstanding under the Revolving Credit Facility, including
the stated amount of any outstanding letters of credit, exceeds $10.0 million.
The Company must pay a letter of credit fee equal to 1.50% plus any
utilization fee then applicable, and a facing fee of 1/4 of 1% per annum, in
each case, based on the aggregate stated amount of each letter of credit for
its stated duration.
Security. The obligations of the Company under the Revolving Credit Facility
are secured by a first priority security interest on substantially all present
and future assets of the Company, including all of the Company's stock in each
of its domestic subsidiaries and 65% of the stock of the Company's foreign
subsidiaries.
Guaranties. The obligations of the Company under the Revolving Credit
Facility are guarantied by each of the Company's domestic subsidiaries (each,
a "Guarantor"). The guaranties are secured by a first priority security
interest on substantially all present and future assets of each Guarantor,
including all of each Guarantor's stock in each of its domestic subsidiaries
and 65% of the stock of each of its foreign subsidiaries.
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<PAGE>
Covenants. The Amended Credit Agreement contains customary restrictive
covenants, including without limitation restrictions on changes in character
of business, mergers, sales or transfers of assets, acquisitions of assets,
liens, indebtedness, restricted payments, prepayments or repurchases of other
indebtedness, dividends and transactions with affiliates, as well as a
covenant relating to minimum debt payment coverage.
Mandatory Prepayments. The Company is required to make mandatory prepayments
of loans outstanding under the Revolving Credit Facility with the proceeds of
certain asset sales which proceeds have not been reinvested so as to ensure
that the Company does not have any obligation under the Indenture to make an
offer to repurchase the Notes with such proceeds.
Events of Default. The Amended Credit Agreement contains customary events of
default including without limitation failure to pay principal, interest or
fees owed under such agreement when due, any representation or warranty being
materially incorrect when made, the failure to perform or timely observe
covenants set forth therein, cross-defaults to other indebtedness, bankruptcy,
judgments in excess of specified amounts, invalidity of guaranties, impairment
of security interests in collateral and certain changes of control. Upon the
occurrence and during the continuance of an event of default under the Amended
Credit Agreement, the Lenders may terminate their commitments to make new
loans, declare the then outstanding loans due and payable and foreclose on
collateral securing the Company's obligations thereunder.
CONTINGENT NOTES
In connection with the Recapitalization, the Company issued the Contingent
Notes to the Selling Group which bear interest at 12% per annum (payable semi-
annually in arrears) from the applicable vesting date until paid in full. Half
of the Contingent Notes vest upon the Company obtaining $22.0 million of
Operating EBITDA (as defined in the Contingent Notes) on a latest twelve month
basis within 15 months beginning on the first day of the Company's 1998 fiscal
year and the remaining half vest upon the Company obtaining $28.0 million of
Operating EBITDA on a latest twelve month basis within 30 months beginning on
the first day of the Company's 1998 fiscal year. In addition, if the Company
completes an initial public offering (an "IPO") or a sale resulting in a
Change of Control (as defined in the Contingent Note) (a "Sale Event") within
30 months of March 31, 1997 any unvested principal amounts of Contingent Notes
will vest in their entirety and become redeemable at par if (a) the equity
market capitalization of the Company is greater than $175.0 million for 20
consecutive trading days subsequent to the IPO (but prior to 30 months from
March 31, 1997) or if the equity valuation in the sale (after certain
specified adjustments) is greater than $175.0 million. Vested principal
amounts of the Contingent Notes become due and payable on the third
anniversary of the applicable vesting date (or earlier, at the option of the
Company, subject to any applicable restrictions contained in the Indenture or
in any other debt of the Company) or upon consummation of an IPO or a Sale
Event. The Contingent Notes rank pari passu with the Mezzanine Notes and the
indebtedness evidenced by such Contingent Notes are subordinate to Senior
Indebtedness and the Notes. See "Description of The Notes."
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<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of May 6, 1997,
as supplemented by a supplemental indenture, dated as of October 24, 1997 (the
"Indenture"), among the Company, the Subsidiary Guarantors and IBJ Schroder
Bank & Trust Company, as Trustee (the "Trustee"). The New Notes are identical
in all material respects to the terms of the Old Notes except that additional
interest will accrue on the Old Notes from and including November 3, 1997 until
but excluding the date of consummation of the Exchange Offer at a rate of .50%
per annum (increasing at .50% per annum at the end of each 90-day period
following November 3, 1997, but in no event will the additional interest exceed
2%).
The following is a summary of all material provisions of the Indenture and
the Notes, a copy of which Indenture and the form of Notes is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Indenture and the Notes does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture and the Notes, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act. As used in this "Description of the Notes" section,
references to the "Company" include only HCC Industries Inc. and not its
Subsidiaries.
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially
shall be the corporate trust office of the Trustee, at IBJ Schroder Bank &
Trust Company, One State Street, New York, New York 10004), except that, at the
option of the Company, payment of interest may be made by check mailed to the
address of the Holders as such address appears in the Note register.
The New Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. See "--Book
Entry, Delivery and Form." No service charge shall be made for any registration
or exchange of Notes, but the Company may require payment of a sum sufficient
to cover any transfer tax or other similar governmental charge payable in
connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $90.0 million aggregate principal amount, and will mature on May 15,
2007. The Notes are subordinate in right of payment to certain other debt
obligations of the Company. The New Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid on the Old Notes, from May 6, 1997. Accordingly, if the relevant
record date for interest payment occurs after the consummation of the Exchange
Offer registered holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from May 6, 1997. If, however, the relevant record date
for interest payment occurs prior to the consummation of the Exchange Offer
registered holders of Old Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from May 6, 1997. Old Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the
Exchange Offer, except as set forth in the immediately preceding sentence.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after consummation
of the Exchange Offer. The Company will pay interest on overdue principal at 1%
per annum in excess of such rate, and it will pay interest on overdue
installments of interest at such higher rate to the extent lawful. Interest on
the Notes will be computed on the basis of a 360-day year of twelve 30-day
months.
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The interest rate on the Old Notes is subject to increase in certain
circumstances if the Registration Statement of which this Prospectus is a part
relating to the Registered Exchange Offer is not declared effective on a
timely basis or if certain other conditions are not satisfied, all as further
described under "--Registered Exchange Offer; Registration Rights."
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Old Notes and New Notes will be treated as a single class of
securities under the Indenture.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to May 15, 2002. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date (subject to the right of Holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
May 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002.......................................... 105.375%
2003.......................................... 103.583%
2004.......................................... 101.792%
2005 and thereafter........................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 15, 2000, the
Company may redeem in the aggregate up to $20.0 million of the original
principal amount of the Notes with the proceeds of one or more Public Equity
Offerings following which there is a Public Market, at a redemption price
(expressed as a percentage of principal amount) of 110.75% plus accrued
interest to the redemption date (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date); provided, however, that at least $70.0 million aggregate
principal amount of the Notes must remain outstanding after each such
redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
The Notes will not have the benefit of a sinking fund.
SUBSIDIARY GUARANTEES
The obligations of the Company pursuant to the Notes, including the
repurchase obligation resulting from a Change of Control, are fully and
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis, by each of the Subsidiary Guarantors. Each Subsidiary Guarantee is
limited in amount to an amount not to exceed the maximum amount that can be
guaranteed by the applicable Subsidiary Guarantor without rendering the
Subsidiary Guarantee, as it relates to such Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer
or similar laws affecting the rights of creditors generally. If a Subsidiary
Guarantee were to be rendered voidable, a court could deem
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<PAGE>
it unenforceable or subordinate it to all other indebtedness (including
guarantees and other contingent liabilities) of the applicable Subsidiary
Guarantor, and, depending on the amount of such indebtedness, a Subsidiary
Guarantor's liability on its Subsidiary Guarantee could be reduced to zero.
See "Risk Factors--Subordination of the Notes and Subsidiary Guarantees."
Pursuant to the Indenture, a Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any
other Person to the extent described below under "--Certain Covenants--Merger
and Consolidation"; provided, however, that if such other Person is not the
Company, such Subsidiary Guarantor's obligations under its Subsidiary
Guarantee must be expressly assumed by such other Person. However, upon the
sale or other disposition (including by way of consolidation or merger) of a
Subsidiary Guarantor or the sale or disposition of all or substantially all
the assets of a Subsidiary Guarantor (in each case other than to the Company
or an Affiliate of the Company) permitted by the Indenture, such Subsidiary
Guarantor will be released and relieved from all its obligations under its
Subsidiary Guarantee.
RANKING
The indebtedness evidenced by the Notes and Subsidiary Guarantees are senior
subordinated unsecured obligations of the Company and the Subsidiary
Guarantors, as the case may be. The payment of the principal of, premium (if
any) and interest on the Notes and the payment of any Subsidiary Guarantee is
subordinate in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness of the Company or the relevant
Subsidiary Guarantor, as the case may be, whether outstanding on the Issue
Date or thereafter Incurred, including the obligations under the Revolving
Credit Facility.
As of August 23, 1997, the Company and Subsidiary Guarantors' Senior
Indebtedness was approximately $2.2 million (all of which is Secured
Indebtedness). Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company and the Restricted Subsidiaries may
Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness.
See "--Certain Covenants--Limitation on Indebtedness" and "--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries."
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness ranks senior to the Notes and the Subsidiary Guarantees in
accordance with the provisions of the Indenture. The Notes and each Subsidiary
Guarantee in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively. The Company and each Subsidiary Guarantor has agreed in the
Indenture that it will not Incur, directly or indirectly, any Indebtedness
that is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or
is expressly subordinated in right of payment to Senior Subordinated
Indebtedness. Unsecured Indebtedness is not deemed to be subordinated or
junior to secured Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or interest on the
Notes or make any deposit pursuant to the provisions described under "--
Defeasance" below and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Designated Senior Indebtedness is
not paid when due or (ii) any other default on Designated Senior Indebtedness
occurs and the maturity of such Designated Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been
cured or waived and any such acceleration has been rescinded or such
Designated Senior Indebtedness has been paid in full. However, the Company may
pay the Notes without regard to the foregoing if the Company and the Trustee
receive written notice approving such payment from the Representative of the
Designated Senior Indebtedness with respect to which either of the events set
forth
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in clause (i) or (ii) of the immediately preceding sentence has occurred and
is continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof
may be accelerated immediately without further notice (except such notice as
may be required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Trustee (with a
copy to the Company) of written notice (a "Blockage Notice") of such default
from the Representative of the holders of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (A) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (B) because the default giving rise to such
Blockage Notice is no longer continuing or (C) because such Designated Senior
Indebtedness has been repaid in full). Notwithstanding the provisions
described in the immediately preceding sentence (but subject to the provisions
contained in the first sentence of this paragraph), unless the holders of such
Designated Senior Indebtedness or the Representative of such holders has
accelerated the maturity of such Designated Senior Indebtedness, the Company
may resume payments on the Notes after the end of such Payment Blockage
Period. The Notes shall not be subject to more than one Payment Blockage
Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of all Senior
Indebtedness of the Company will be entitled to receive payment in full of
such Senior Indebtedness before the Noteholders are entitled to receive any
payment, and until all Senior Indebtedness of the Company is paid in full, any
payment or distribution to which Noteholders would be entitled but for the
subordination provisions of the Indenture will be made to holders of such
Senior Indebtedness as their interests may appear. If a distribution is made
to Noteholders that, due to the subordination provisions, should not have been
made to them, such Noteholders are required to hold it in trust for the
holders of Senior Indebtedness of the Company and pay it over to them as their
interest may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
The obligations of a Subsidiary Guarantor under its Subsidiary Guarantee are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to a Subsidiary Guarantee will be
subordinated in right of payment to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor. The terms of the subordinated
provisions described above with respect to the Company's obligations under the
Notes apply equally to a Subsidiary Guarantor and the obligations of such
Subsidiary Guarantor under a Subsidiary Guarantee.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company or a Subsidiary Guarantor who
are holders of Senior Indebtedness of the Company or a Subsidiary Guarantor,
as the case may be, may recover more, ratably, than the Noteholders, and
creditors of the Company or a Subsidiary Guarantor, as the case may be, who
are not holders of Senior Indebtedness of the Company or any Subsidiary
Guarantor, as the case may be, may recover less, ratably, than holders of
Senior Indebtedness of the Company and may recover more, ratably, than the
Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in
trust by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance."
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of a registered Note in global form without coupons (the "Global Note").
The Global Note will be deposited with, or on behalf of, DTC and registered in
the name of Cede & Co., as nominee of DTC, or will remain in the custody of
the Trustee pursuant to the FAST Balance Certificate Agreement between DTC and
the Trustee.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the 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. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the New
Notes represented by such Global Note to the accounts of participants.
Ownership of beneficial interests in such Global Note will be limited to
participants or Persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related New Notes
for all purposes of such New Notes and the Indenture. Except as set forth
below, owners of beneficial interests in the Global Note will not be entitled
to have the New Notes represented by the Global Note registered in their
names, will not receive or be entitled to receive physical delivery of
certificated New Notes in definitive form and will not be considered to be the
owners or holders of any New Notes under the Global Note. The Company
understands that under existing industry practice, if an owner of a beneficial
interest in the Global Note desires to take any action that the Depository, as
the holder of the Global Note, is entitled to take, the Depository would
authorize the participants to take such action, and that the participants
would authorize beneficial owners owning through such participants to take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
Payment of principal of and interest on New Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will
be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Company will not have any responsibility or liability for
any aspect of the records relating to, or payments made on
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account of, beneficial ownership interests in the Global Note for any New Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship
between the Depository and its participants or the relationship between such
participants and the owners of beneficial interests in the Global Note owning
through such participants.
Unless and until it is exchanged in whole or in part for certificated New
Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of
such Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by
the Depository or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
The New Notes represented by the Global Note are exchangeable for
certificated New Notes in definitive form of like tenor as such New Notes in
denominations of $1,000 and integral multiples thereof if (i) the Depository
notifies the Company that it is unwilling or unable to continue as Depository
for the Global Note or if at any time the Depository ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion
at any time determines not to have all of the New Notes represented by the
Global Note or (iii) a default entitling the holders of the New Notes to
accelerate the maturity thereof has occurred and is continuing. Any New Note
that is exchangeable pursuant to the preceding sentence is exchangeable for
certificated New Notes issuable in authorized denominations and registered in
such names as the Depository shall direct. Subject to the foregoing, the
Global Note is not exchangeable, except for a Global Note of the same
aggregate denomination to be registered in the name of the Depository or its
nominee.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the initial issuance and sale of the Old Notes, the
Initial Purchasers are entitled to the benefits of a registration rights
agreement (the "Registration Rights Agreement") for the benefit of the Holders
of the Old Notes, that the Company will, at its cost, (i) not later than
August 4, 1997, file the Registration Statement of which this Prospectus forms
a part with the SEC with respect to the Exchange Offer to exchange the Old
Notes for a like aggregate principal amount of New Notes having terms
substantially identical in all material respects to the Old Notes (except that
the New Notes will not contain terms with respect to transfer restrictions)
and (ii) use all reasonable efforts to cause the Registration Statement to be
declared effective under the Securities Act by November 3, 1997. Upon the
effectiveness of the Registration Statement, the Company will offer the New
Notes in exchange for surrender of the Old Notes. The Company will keep the
Exchange Offer open for not less than 20 Business Days (or longer if required
by applicable law) after the date notice of the Exchange Offer is mailed to
the Holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the Holder of such Old Note will receive a New
Note having a principal amount equal to that of the surrendered Old Note.
Interest on each New Note will accrue from the last interest payment date on
which interest was paid on the Old Note surrendered in exchange therefor or,
if no interest has been paid on such Old Note, from May 6, 1997. Under
existing SEC interpretations, the New Notes would be freely transferable by
Holders other than Affiliates of the Company after the Exchange Offer without
further registration under the Securities Act if the Holder of the New Notes
represents that it is acquiring the New Notes in general in the ordinary
course of its business, that it has no arrangement or understanding with any
Person to participate in the distribution of the New Notes and that it is not
an affiliate of the Company, as such terms are interpreted by the SEC;
provided, however, that broker-dealers ("Participating Broker-Dealers")
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receiving New Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such New Notes. Under similar SEC
interpretations, Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to New Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with this Prospectus
contained in the Registration Statement. Under the Registration Rights
Agreement the Company is required to allow Participating Broker-Dealers and
other Persons, if any, with similar prospectus delivery requirements to use
this Prospectus contained in the Registration Statement in connection with the
resale of such New Notes.
A Holder of Old Notes (other than certain specified holders) who wishes to
exchange such Old Notes for New Notes in the Exchange Offer will be required
to represent, among other things, that any New Notes to be received by it will
be acquired in the ordinary course of its business, that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any Person to participate in the distribution (within the meaning of the
Securities Act) of the New Notes and that it is not an "affiliate" of the
Company, as defined in Rule 405 under the Securities Act, or if its is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
In the event that applicable interpretations of the staff of the SEC do not
permit the Company to effect the Exchange Offer, or if for any other reason
the Exchange Offer is not consummated by November 3, 1997, or if any Initial
Purchaser so requests with respect to the Old Notes not eligible to be
exchanged for New Notes in the Exchange Offer and held by it following the
consummation of the Exchange Offer, or if any Holder of Old Notes (other than
an exchanging dealer) is not eligible to participate in the Exchange Offer or
does not receive freely tradeable New Notes in the Exchange Offer, the Company
will, at its cost, (A) as promptly as practicable, file a registration
statement (the "Shelf Registration Statement") covering resales of the Old
Notes or the New Notes, as the case may be, (B) use all reasonable efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (C) keep the Shelf Registration Statement effective until
May 6, 1999 . The Company will, in the event a Shelf Registration Statement is
filed, among other things, provide to each Holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Notes or the New Notes,
as the case may be. A Holder selling such Old Notes or New Notes pursuant to
the Shelf Registration Statement generally would be required to be named as a
selling security Holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreement which are applicable to
such Holder (including certain indemnification obligations). In addition, each
Holder of the Old Notes or New Notes to be registered under the Shelf
Registration Statement will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time period set forth in the
Registration Rights Agreement in order to have such Holder's Old Notes or New
Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding additional interest set forth in the following paragraph.
The Registration Rights Agreement provides that if by (i) August 4, 1997,
neither the Registration Statement nor the Shelf Registration Statement has
been filed with the SEC; (ii) by November 3, 1997, neither the Exchange Offer
is consummated nor the Shelf Registration Statement is declared effective; or
(iii) after either the Registration Statement or the Shelf Registration
Statement is declared effective, such Registration Statement thereafter ceases
to be effective or usable (subject to certain exceptions) in connection with
resales of Old Notes or New Notes in accordance with and during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (i) through (iii), a "Registration Default"), additional interest will
accrue on the Old Notes and the New Notes at the rate of 0.50% per annum
(increasing by 0.50% per annum at the end of each 90-day period thereafter)
from and including
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the date on which any such Registration Default shall occur to but excluding
the date on which all Registration Defaults have been cured; provided,
however, that in no event shall such additional interest exceed 2% per annum.
Such interest is payable in addition to any other interest payable from time
to time with respect to the Old Notes and the New Notes.
If the Company effects the Exchange Offer, it will be entitled to close the
Exchange Offer 20 Business Days after the commencement thereof provided that
it has accepted all Old Notes theretofore validly tendered in accordance with
the terms of the Exchange Offer.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that the Company repurchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).
Within 30 days following any Change of Control, the Company shall mail a
notice to the Trustee and to each Holder stating: (i) that a Change of Control
has occurred and that such Holder has the right to require the Company to
purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (iv) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings. Restrictions on the ability of the Company to Incur additional
Indebtedness are contained in the covenants described under "--Certain
Covenants--Limitation on Indebtedness" and "--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries." Such restrictions can only be
waived with the consent of the Holders of a majority in principal amount of
the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford Holders protection in the event of a highly leveraged
transaction.
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If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be delivered by Holders seeking to accept the Change
of Control offer. The failure of the Company to make or consummate the Change
of Control offer or pay the purchase price when due will give the Trustee and
the Holders the rights described under "--Events of Default." The phrase "all
or substantially all" of the assets of the Company will likely be interpreted
under applicable state law and will be dependent upon particular facts and
circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of the Company has occurred.
The existence of a Holder's right to require the Company to offer to
repurchase such Holder's Notes upon a Change of Control may deter a third
party from acquiring the Company in a transaction which constitutes a Change
of Control.
The Revolving Credit Facility, under certain circumstances, prohibits the
Company from purchasing any Notes prior to its expiration, and will also
provide that the occurrence of certain change of control events with respect
to the Company would constitute a default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Notes,
the Company could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or repay such borrowings, the
Company will remain prohibited from purchasing Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture which would, in turn, constitute a default under
the Revolving Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
Notes.
Future Indebtedness of the Company may contain 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 their right to require the
Company to repurchase the Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the Holders following the occurrence of a Change of Control may be limited by
the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Indenture relating to the Company's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the Holders of a
majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness.
(a) The Company shall not Incur, directly or indirectly, any Indebtedness
unless, on the date of such Incurrence, after giving pro forma effect thereto,
the Consolidated EBITDA Coverage Ratio at the date of such issuance exceeds
2.0 to 1.0 if such Indebtedness is Incurred prior to May 15, 1999 and 2.25 to
1 if such Indebtedness is Incurred thereafter.
(b) Notwithstanding clause (a), the Company may Incur the following
Indebtedness: (i) Indebtedness Incurred pursuant to the Revolving Credit
Facility; provided, however, that after giving pro forma effect to such
Incurrence and the application of the net proceeds therefrom the aggregate
amount of such Indebtedness outstanding at such time, together with the
aggregate amount of all Indebtedness then outstanding and Incurred pursuant to
clause (i) of "Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries" below, shall not exceed the greater of (x) $25.0 million and (y)
the sum of (A) 50% of the gross book value of the inventory of the Company and
its Restricted Subsidiaries and (B) 85% of
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the gross book value of the accounts receivable of the Company and its
Restricted Subsidiaries; (ii) Indebtedness owed to and held by a Wholly Owned
or Foreign Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock that results in such Subsidiary ceasing to be a
Wholly Owned or Foreign Subsidiary or any transfer of such Indebtedness (other
than to a Wholly Owned or Foreign Subsidiary) shall be deemed, in each case,
to constitute the issuance of such Indebtedness by the Company; (iii) the
Notes and the Exchange Notes; (iv) Indebtedness (other than Indebtedness
described in clause (i), (ii), or (iii) above) outstanding on Issue Date; (v)
any Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) or pursuant to clause (iii), (iv) or (viii) or this clause (v)
or pursuant to clause (v) of the covenant described under "--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries" below; (vi)
obligations of the Company pursuant to (A) interest rate swap or similar
agreements designed to protect the Company against fluctuations in interest
rates in respect of Indebtedness of the Company to the extent the notional
principal amount of such obligation does not exceed the aggregate principal
amount of the Indebtedness to which such interest rate contracts relate and
(B) foreign exchange or commodity hedge, exchange or similar agreements
designed to protect the Company against fluctuations in foreign currency
exchange rates or commodity prices in respect of foreign exchange or commodity
exposures Incurred by the Company in the ordinary course of its business;
(vii) Indebtedness of the Company consisting of obligations in respect of
purchase price adjustments in connection with the acquisition or disposition
of assets by the Company or any Restricted Subsidiary permitted under the
Indenture; (viii) Capital Lease Obligations, Purchase Money Indebtedness and
Acquired Indebtedness in an aggregate principal amount, together with the
principal amount of Indebtedness Incurred pursuant to clause (x) of
"Limitation of Indebtedness and Preferred Stock of Restricted Subsidiaries,"
not exceeding $15.0 million at any one given time outstanding; and (ix)
Indebtedness in an aggregate principal amount which, together with all other
Indebtedness of the Company then outstanding (other than Indebtedness
permitted by clauses (i) through (viii) of this Section or clause (a)) does
not exceed $10.0 million (less the amount of any Subsidiary Indebtedness and
Preferred Stock then outstanding and Incurred pursuant to clause (x) of
"Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries").
(c) Notwithstanding Sections (a) and (b) above, and the provisions of
"Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries,"
the Company shall not, and shall not permit any Restricted Subsidiary to issue
any Indebtedness if the proceeds thereof are used, directly or indirectly, to
repay, prepay, redeem, defease, retire, refund or refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Notes or the
relevant Subsidiary Guarantee, as applicable, to at least the same extent as
such Subordinated Obligations.
(d) For purposes of determining compliance with the covenant entitled "--
Limitation on Indebtedness," (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described
above, the Company, in its sole discretion, will classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness may
be divided and classified in more than one of the types of Indebtedness
described above.
(e) For purposes of determining amounts of Indebtedness under this covenant,
Indebtedness resulting from security interests granted with respect to
Indebtedness otherwise included in the determination of Indebtedness, and
Guarantees (and security interests with respect thereof) of, or obligations
with respect to letters of credit supporting, Indebtedness otherwise included
in the determination of Indebtedness shall not be included in the
determination of Indebtedness.
Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Indebtedness or Preferred Stock except: (i)
Indebtedness Incurred pursuant to the Revolving Credit Facility or any other
revolving credit arrangement; provided, however, that, after giving pro forma
effect to such Incurrence and the application of the proceeds therefrom, the
aggregate amount of such Indebtedness outstanding at such time, together
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with the aggregate amount of all Indebtedness then outstanding and issued
pursuant to clause (b)(i) of "Limitation on Indebtedness" above, shall not
exceed the greater of (x) $25.0 million and (y) the sum of (A) 50% of the
gross book value of the inventory of the Company and its Restricted
Subsidiaries and (B) 85% of the gross book value of the accounts receivable of
the Company and its Restricted Subsidiaries; (ii) Indebtedness or Preferred
Stock issued to and held by the Company or a Wholly Owned or Foreign
Subsidiary; provided, however, that (A) any subsequent issuance or transfer of
any Capital Stock that results in any such Subsidiary ceasing to be a Wholly
Owned or Foreign Subsidiary or (B) any subsequent transfer of such
Indebtedness or Preferred Stock (other than to the Company or a Wholly Owned
or Foreign Subsidiary) shall be deemed, in each case, to constitute the
issuance of such Indebtedness or Preferred Stock by the issuer thereof; (iii)
Acquired Indebtedness of such Restricted Subsidiary; provided that after
giving effect to the Incurrence of such Acquired Indebtedness, the Company
could incur $1.00 of Indebtedness pursuant to clause (a) under "Limitation on
Indebtedness"; (iv) Indebtedness or Preferred Stock (other than any described
in clause (i), (ii) or (iii)) outstanding on the Issue Date; (v) Refinancing
Indebtedness Incurred in respect of Indebtedness or Preferred Stock referred
to in clause (iii), (iv) or (x) or this clause (v); provided, however, that to
the extent such Refinancing Indebtedness Refinances Acquired Indebtedness or
Preferred Stock of a Restricted Subsidiary that is not a Wholly Owned
Subsidiary, such Refinancing Indebtedness shall be Incurred only by such
Restricted Subsidiary; (vi) Obligations of a Restricted Subsidiary pursuant to
(A) interest rate swap or similar agreements designed to protect such
Restricted Subsidiary against fluctuations in interest rates in respect of the
Indebtedness of such Restricted Subsidiary to the extent the notional
principal amount of such obligation does not exceed the aggregate principal
amount of the Indebtedness to which such interest rate contracts relate and
(B) foreign exchange or commodity hedge, exchange or similar agreements
designed to protect such Restricted Subsidiary against fluctuations in foreign
currency exchange rates or commodity prices in respect of foreign exchange or
commodity exposures Incurred by such Restricted Subsidiary in the ordinary
course of its business; (vii) Indebtedness consisting of the Subsidiary
Guarantees; (viii) Indebtedness of any Restricted Subsidiary consisting of
Obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets by any Restricted Subsidiary permitted
under the Indenture; (ix) Capital Lease Obligations, Purchase Money
Indebtedness and Acquired Indebtedness in an aggregate principal amount not
exceeding, together with the principal amount of Indebtedness Incurred
pursuant to clause (viii) of "Limitation on Indebtedness," $15.0 million at
any one given time outstanding; and (x) Indebtedness and Preferred Stock in an
aggregate principal amount which, together with any other Indebtedness or
Preferred Stock of Restricted Subsidiaries then outstanding (other than
Indebtedness or Preferred Stock permitted by clauses (i) through (ix) of this
Section) does not exceed $10.0 million (less the amount of any Indebtedness
then outstanding and Incurred pursuant to clause (b)(ix) of "Limitation on
Indebtedness").
Limitation on Liens Securing Subordinated Indebtedness. The Company will
not, and will not permit any Restricted Subsidiary to, create, Incur, assume
or suffer to exist any Liens of any kind (other than Permitted Liens) upon any
of their respective assets or properties now owned or acquired after the date
of the Indenture or any income or profits therefrom securing (i) any
Indebtedness of the Company or a Restricted Subsidiary which is expressly by
its terms subordinate or junior in right of payment to any other Indebtedness
of the Company or such Restricted Subsidiary, as the case may be, unless the
Notes or the relevant Subsidiary Guarantee, as the case may be, are equally
and ratably secured for so long as such Indebtedness is so secured; provided
that, if such Indebtedness which is expressly by its terms subordinate or
junior in right of payment to any other Indebtedness of the Company or a
Restricted Subsidiary is expressly subordinate or junior to the Notes or the
relevant Subsidiary Guarantee, as the case may be, then the Lien securing such
subordinated or junior Indebtedness shall be subordinate and junior to the
Lien securing the Notes or the relevant Subsidiary Guarantee, as the case may
be, with the same relative priority as such subordinated or junior
Indebtedness shall have with respect to the Notes or the relevant Subsidiary
Guarantee, as the case may be; provided, further, that this clause (i) shall
not be applicable to any Liens securing any such Indebtedness which became
Indebtedness of the Company or a Restricted Subsidiary pursuant to a
transaction permitted under "--Merger and Consolidation" or Liens
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securing Acquired Indebtedness and, in each case, which Liens were in
existence at the time of such transaction or Incurrence of such Acquired
Indebtedness (unless such Indebtedness was Incurred in connection with, or in
contemplation of, such transaction or Incurrence) so long as such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets such Liens covered before the
consummation of such transaction or Incurrence of such Acquired Indebtedness,
(ii) any assumption, guarantee or other liability of the Company or any
Restricted Subsidiary in respect of any Indebtedness of the Company or a
Restricted Subsidiary which is expressly by its terms subordinate or junior in
right of payment to any other Indebtedness of the Company or such Restricted
Subsidiary, unless the Notes or the relevant Subsidiary Guarantee, as the case
may be, is equally and ratably secured for so long as such assumption,
guaranty or other liability is so secured; provided that, if such subordinated
Indebtedness which is expressly by its terms subordinate or junior in right of
payment to any other Indebtedness of the Company or a Restricted Subsidiary is
expressly by its terms subordinate or junior to the Notes or the relevant
Subsidiary Guarantee, as the case may be, then the Lien securing the
assumption, guarantee or other liability of such Subsidiary shall be
subordinate and junior to the Lien securing the Notes or the relevant
Subsidiary Guarantee, as the case may be, with the same relative priority as
such subordinated or junior Indebtedness shall have with respect to the Notes
or the relevant Subsidiary Guarantee, as the case may be; provided, further,
that this clause (ii) shall not be applicable to Liens securing any such
assumption, guarantee or other liability which existed at the time such
Subsidiary became a Subsidiary or acquired the assets subject to such Lien and
which Liens were in existence at the time of such transaction (unless such
assumption, guarantee or other liability was Incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary or in contemplation of
the acquisition of such Assets), so long as such Liens do not extend to or
cover any property or assets of the Company or any Subsidiary other than the
property or assets of such Person or other than the property or assets so
acquired, as the case may be.
Limitation on Other Senior Subordinated Indebtedness. The Company will not,
and will not permit any Restricted Subsidiary to, create, Incur, assume,
guarantee or in any other manner become liable with respect to any
Indebtedness, other than the Notes, that is subordinate in right of payment to
any Senior Indebtedness of the Company or any such Restricted Subsidiary,
unless such Indebtedness is also pari passu with, or subordinate in right of
payment to, the Notes, or the relevant Subsidiary Guarantee, as the case may
be.
Limitation on Restricted Payments.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, (i) declare or pay any dividend or make any
distribution on or in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of its Capital Stock in their capacities as such
(except dividends or distributions payable solely in Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase its
Capital Stock (other than Disqualified Stock and except dividends or
distributions payable to the Company or a Restricted Subsidiary and, if a
Restricted Subsidiary is not wholly owned, to all stockholders on a pro rata
basis), (ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or of any direct or indirect parent of the
Company, (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition and other than any required or mandatory payments, purchases or
acquisitions triggered by events which would trigger the prepayments of the
Notes described under "Change of Control" and "Limitation on Sales of Assets
and Subsidiary Stock;" provided that such required or mandatory payments,
purchases or acquisitions (x) are otherwise in accordance with the terms of
the Indenture, (y) are made in accordance with the subordination provisions
governing such Subordinated Obligations and (z) an offer is made to prepay the
Notes in
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accordance with the terms of the Indenture, and if such offer is accepted,
payments shall be made with respect to the Notes being repurchased prior to
any payment with respect to such Subordinated Obligations) or (iv) make any
Investment in any Affiliate of the Company other than a Restricted Subsidiary
or a Person which will become a Restricted Subsidiary as a result of any such
Investment (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred
to as a "Restricted Payment") if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (1) a Default shall have occurred
and be continuing (or would result therefrom); or (2) the Company would not be
permitted to issue an additional $1.00 of Indebtedness pursuant to clause (a)
under "Limitation on Indebtedness" after giving pro forma effect to such
Restricted Payment; or (3) the aggregate amount of such Restricted Payment and
all other Restricted Payments since the date on which the Notes were
originally issued would exceed the sum of: (A) 50% of the Consolidated Net
Income accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter during which the Notes were originally issued
to the end of the most recent fiscal quarter for which financial statements
are available (or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by
the Company from the issue or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the date on which the Notes were originally
issued (other than an issuance or sale to a Subsidiary or an employee stock
ownership plan or similar trust in the benefit of employees); (C) the
aggregate Net Cash Proceeds received by the Company from the issue or sale of
its Capital Stock (other than Disqualified Stock) to an employee stock
ownership plan subsequent to the date on which the Notes were originally
issued; provided, however, that if such employee stock ownership plan issues
any Indebtedness, such aggregate amount shall be limited to an amount equal to
any increase in the Consolidated Net Worth of the Company resulting from
principal repayments made by such employee stock ownership plan with respect
to Indebtedness issued by it to finance the purchase of such Capital Stock;
(D) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary) subsequent to the date on which the Notes were originally issued
of any Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash, or other property, distributed by the Company upon such conversion or
exchange); and (E) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends, interest,
repayments of loans or advances or Indebtedness or other transfers of assets,
in each case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated
a Restricted Subsidiary (provided such Unrestricted Subsidiary is otherwise
eligible to become a Restricted Subsidiary); provided, however, that the
foregoing sum in clause (E) shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated as a
Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary.
(b) The provisions of Section (a) shall not prohibit: (1) any payments made
in accordance with the "Use of Proceeds"; (2) any purchase or redemption of
Capital Stock or Subordinated Obligations of the Company made by exchange for,
or out of the proceeds of the substantially concurrent sale of, Capital Stock
of the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan); provided,
however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds
from such sale shall be excluded from clauses (3)(B) or (3)(C) of Section (a);
(3) any purchase or redemption of Subordinated Obligations of the Company made
by exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be issued pursuant to
the provisions of "Limitation on Indebtedness" above; provided, however, that
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments; (4) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "Limitation
on Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (5) dividends paid
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within 60 days after the date of declaration if at such date of declaration
such dividend would have complied with this provision; provided, however, that
at the time of payment of such dividend, no other Default shall have occurred
and be continuing (or would result therefrom); provided further, however, that
such dividend shall be included in the calculation of the amount of Restricted
Payments; (6) the repurchase of shares of, or options to purchase shares of,
Capital Stock of the Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved by
the Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock; provided,
however, that the aggregate amount of such repurchases shall not exceed the
sum of $1.0 million (unless, with respect to a deceased Person, to the extent
such repurchases are funded out of the proceeds of such Person's life
insurance policy of which the Company or a Restricted Subsidiary is a
beneficiary) and the Net Cash Proceeds from the sale of Capital Stock to
members of management or directors of the Company and its Subsidiaries that
occurs after the Issue Date (to the extent the Net Cash Proceeds from the sale
of such Capital Stock have not otherwise been applied to the payment of
Restricted Payments by virtue of clause (3)(C) of paragraph (a) above);
provided further, however, that (A) such repurchases shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds
from such sale shall be excluded from the calculation of amounts under clause
(3)(C) of paragraph (a) above; and (7) dividend, distribution or other payment
on or with respect to Capital Stock to the extent payable in shares of Capital
Stock of such Person (other than Disqualified Stock).
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness or other obligation
owed to the Company or a Restricted Subsidiary, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (1) any encumbrance or restriction pursuant to an agreement
in effect at or entered into on the Issue Date; (2) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness or Preferred Stock issued by such Restricted
Subsidiary or predecessor thereto on or prior to the date on which such
Restricted Subsidiary or predecessor thereto (or assets thereof) was acquired
by the Company (other than Indebtedness or Preferred Stock issued as
consideration in, or to provide all or any portion of the funds utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary (or predecessor (or assets thereof)) became a
Restricted Subsidiary or was acquired by the Company) and outstanding on such
date; (3) any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness issued pursuant to an agreement referred to in
clause (1) or (2) or contained in any amendment to an agreement referred to in
clause (1) or (2); provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any of such
refinancing agreement or amendment, taken as a whole, are no less favorable to
the Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such agreements as determined in good faith
by the Board of Director of the Company; (4) any such encumbrance or
restriction consisting of customary nonassignment provisions in leases
governing leasehold interests or capital leases to the extent such provisions
restrict the transfer of the lease; and (5) in the case of clause (iii) above,
restrictions contained in security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements; (6) encumbrances or
restrictions imposed by operation of applicable law; (7) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of such sale or
disposition; (8) encumbrances or restrictions imposed upon the transfer,
assignment or licensing or sublicensing of intellectual property including,
copyrighted and patent material; and (9) encumbrances or restrictions imposed
pursuant to Purchase Money Indebtedness and
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Capital Lease Obligations Incurred pursuant to the terms of the Indenture for
property acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so acquired.
Notwithstanding the foregoing, neither (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with past practice, nor (b) Liens permitted under the
Indenture, shall in and of themselves be considered a restriction on the
ability of the applicable Restricted Subsidiary to transfer such agreements or
assets, as the case may be.
Limitation on Sales of Assets and Subsidiary Stock.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, make any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at
least equal to the fair market value, as determined in good faith by the Board
of Directors (including as to the value of all non-cash consideration), of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary,
as the case may be, is in the form of cash or cash equivalents, and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any
Senior Indebtedness), to prepay, repay or purchase Senior Indebtedness or
Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary
or such Restricted Subsidiary (in each case other than Indebtedness owed to
the Company or a Subsidiary) within 60 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) second, to
the extent of the balance of such Net Available Cash after application in
accordance with clause (A), at the Company's election to the investment by the
Company or any Wholly Owned Subsidiary or such Restricted Subsidiary in assets
to replace the assets that were the subject of such Asset Disposition or an
asset that (as determined in good faith by the Board of Directors) will be
used in the business of the Company and the Wholly Owned Subsidiaries existing
on the Issue Date or in businesses reasonably related thereto, in each case
within the later of 270 days from the date of such Asset Disposition or the
receipt of such Net Available Cash; (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B), to make an offer to purchase Notes at par (and any other Senior
Subordinated Indebtedness designated by the Company, at a price no greater
than par) plus accrued and unpaid interest and (D) fourth, to the extent of
the balance of such Net Available Cash after application in accordance with
clauses (A), (B) and (C), to (x) the acquisition by the Company or any Wholly
Owned Subsidiary or such Restricted Subsidiary of Tangible Property to be used
in the business of the Company and the Wholly Owned Subsidiaries existing on
the Issue Date or such Restricted Subsidiary or in businesses reasonably
related thereto or (y) the prepayment, repayment or purchase of Indebtedness
(other than any Disqualified Stock) of the Company (other than Indebtedness
owed to a Subsidiary of the Company) or Indebtedness of any Subsidiary (other
than Indebtedness owed to the Company or a Subsidiary of the Company), in each
case within 270 days from the later of the receipt of such Net Available Cash
and the date the offer is consummated; provided, however, that in connection
with any prepayment, repayment or purchase of Indebtedness pursuant to clause
(A), (C) or (D) above, the Company or such Subsidiary shall retire such
Indebtedness and cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased. Notwithstanding the foregoing provisions of this Section, the
Company and its Restricted Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this Section except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which are not applied
in accordance with this Section exceeds $2.5 million. Pending application of
Net Available Cash pursuant to this Section, such Net Available Cash shall be
invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Indebtedness of the Company or
any Restricted Subsidiary and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash within 120 days of closing the
transaction.
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(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause
(a)(ii)(C) above, the Company will be required to purchase Notes tendered
pursuant to an offer by the Company for the Notes (and other Senior
Subordinated Indebtedness) at a purchase price of 100% of their principal
amount (without premium) plus accrued but unpaid interest (or, in respect of
such other Senior Subordinated Indebtedness, such lesser price, if any, as may
be provided for by the terms of such Senior Subordinated Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture which shall include, among other
things, that the offer shall remain open for 20 Business Days following
commencement. If the aggregate purchase price of Notes (and any other Senior
Subordinated Indebtedness) tendered pursuant to such offer is less than the
Net Available Cash allotted to the purchase thereof, the Company will be
required to apply the remaining Net Available Cash in accordance with clause
(a)(ii)(D) above. The Company shall not be required to make such an offer to
purchase Notes (and other Senior Subordinated Indebtedness) pursuant to this
covenant if the Net Available Cash available therefor is less than $2.5
million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to any subsequent
Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions.
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, conduct any business or enter into any transaction or series of similar
transactions (including the purchase, sale, lease or exchange of any property
or the rendering of any service) with any Affiliate of the Company or any
legal or beneficial owner of 5% or more of any class of Capital Stock of the
Company or with an Affiliate of any such owner (other than a Restricted
Subsidiary of the Company or any employee stock ownership plan for the benefit
of the Company's or a Restricted Subsidiary's employees) unless the terms of
such business, transaction or series of transactions are (i) set forth in
writing, (ii) as favorable to the Company or such Restricted Subsidiary as
terms that would be obtainable at the time for a comparable transaction or
series of similar transactions in arms-length dealings with an unrelated third
Person and (iii) the disinterested members, if any, of the Board of Directors
has, by resolution, determined in good faith that such business or transaction
or series of transactions meets the criteria set forth in (ii) above;
provided, however, that if such transaction involves an amount in excess of
$2.5 million, the Company shall also obtain from a nationally recognized
expert with experience in appraising the terms and conditions of the type of
business or transactions an opinion that such transaction is fair from a
financial point of view to the Company or its Restricted Subsidiary, as the
case may be.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be made pursuant to the covenant described
under "--Limitation on Restricted Payments," or any payment or transaction
specifically excepted from the definition of Restricted Payment, (ii) any
issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors or the board of directors of the relevant Restricted Subsidiary,
(iii) the grant of stock options or similar rights to employees and directors
pursuant to plans approved by the Board of Directors or the board of directors
of the relevant Restricted Subsidiary, (iv) loans or advances to officers,
directors or employees in the ordinary course of business, (v) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries
who are not employees of the Company or its Restricted Subsidiaries, (vi) any
Affiliate transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries, (vii) indemnification or insurance provided
to officers or directors of the Company
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or any Subsidiary approved in good faith by the Board of Directors; (viii)
payment of compensation and benefits to directors, officers and employees of
the Company and its Subsidiaries approved in good faith by the Board of
Directors; (ix) sales of Capital Stock of the Company to Affiliates; (x) fees
or expense reimbursements paid to Windward and its Affiliates in accordance
with the provisions of that certain Financial Services Advisory Agreement
between the Company and Windward or that certain Fee Letter between the
Company and Windward both dated as of February 14, 1997, in each case, as in
effect on such date, without amendment; (xi) the purchase of or the payment of
Indebtedness of or monies owed by the Company or any of its Restricted
Subsidiaries for goods or materials purchased, or services received, in the
ordinary course of business or (xii) customary investment banking fees to
Credit Suisse First Boston.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, such Restricted
Subsidiary (x) would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect thereto would have
been permitted to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale or other
disposition or (y) would remain a Restricted Subsidiary or (v) directors'
qualifying shares.
Merger and Consolidation. The Company shall not, in a single transaction or
a series of related transactions, consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets (computed on a
consolidated basis) to, any Person, unless: (i) the resulting, surviving or
transferee Person (if not the Company) shall be a Person organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and such Person shall expressly assume, by an
indenture supplemental to the Indenture, executed and delivered to the
Trustee, all the obligations of the Company under the Notes and this
Indenture; (ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the resulting, surviving or transferee Person or any
Subsidiary as a result of such transaction as having been Incurred by such
Person or such Subsidiary at the time of such transaction), no Default shall
have occurred and be continuing; (iii) immediately after giving effect to such
transaction, the resulting, surviving or transferee Person would be able to
Incur at least $1.00 of Indebtedness pursuant to Section (a) of the
"Limitation on Indebtedness"; (iv) immediately after giving effect to such
transaction, the resulting, surviving or transferee Person shall have
Consolidated Net Worth in an amount which is not less than the Consolidated
Net Worth of the Company prior to such transaction; and (v) the Company shall
have delivered to the Trustee an Officers' Certificate and if a supplemental
indenture is required, an Opinion of Counsel (in no event, however, shall such
Opinion of Counsel cover financial ratios, the solvency of any Person or any
other financial or statistical data or information), each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor company, in the case of a
conveyance, transfer or lease, shall be released from the obligation to pay
the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a
series of transactions, all or substantially all of its assets to any Person
unless: (i) the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by executing a Subsidiary
Guarantee, all the
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obligations of such Subsidiary, if any, under its Subsidiary Guarantee; (ii)
immediately after giving effect to such transaction or transactions on a pro
forma basis (and treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee Person as a result of such transaction as
having been issued by such Person at the time of such transaction), no Default
shall have occurred and be continuing; (iii) immediately after giving effect
to such transaction, the Company would be able to Incur at least $1.00 of
Indebtedness pursuant to the "Limitation on Indebtedness"; and (iv) the
Company delivers to the Trustee an Officers' Certificate and an Opinion of
Counsel (in no event, however, shall such Opinion of Counsel cover financial
ratios, the solvency of any Person or any other financial or statistical data
or information), each stating that such consolidation, merger or transfer and,
such Subsidiary Guarantee, if any, complies with the Indenture. The provisions
of clauses (i), (ii) and (iii) above shall not apply to any one or more
transactions which constitute an Asset Disposition if the Company has complied
with the applicable provisions of the covenant described under "--Limitation
on Sales of Assets and Subsidiary Stock" above.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred.
Future Guarantors. In the event that, after the Issue Date, any Restricted
Subsidiary Incurs any Indebtedness pursuant to clause (i) of the covenant
described under "--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries" above, the Company shall cause such Restricted
Subsidiary to Guarantee the Notes pursuant to a Subsidiary Guarantee on the
terms and conditions set forth in the Indenture and shall cause all
Indebtedness of such Restricted Subsidiary owing to the Company or any other
Subsidiary of the Company and not previously discharged (and not pledged under
the Revolving Credit Facility) to be converted into Capital Stock of such
Restricted Subsidiary (other than Disqualified Stock).
Limitation on Designations of Unrestricted Subsidiaries. The Indenture will
provide that the Company may designate any Subsidiary of the Company (other
than a Subsidiary Guarantor) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(ii) either (x) the assets of such Subsidiary do not exceed $1,000 or (y)
the Company 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 fair market value of the
Capital Stock of such Subsidiary as determined in good faith by the Board
of Directors on such date; and
(iii) the Company would be permitted under the Indenture to Incur $1.00
of additional Indebtedness pursuant to the first paragraph of the covenant
described under "--Limitation on Restricted Payments" at the time of
Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that
the Company shall not and shall not permit any Restricted Subsidiary to, at
any time (a) provide credit support for, or a guarantee of, any Indebtedness
of any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness), (b) 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
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(including any right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (a) or (b) to the extent permitted
under the covenant described under "--Limitation on Restricted Payments".
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indenture and for all purposes of the Indenture shall be deemed to have
been Incurred at such time:
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors delivered to the Trustee certifying compliance with the
foregoing provisions.
Notwithstanding the foregoing, no Subsidiary that is a Subsidiary Guarantor
as of the Issue Date shall be permitted to become an Unrestricted Subsidiary.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide within 15 days to the
Trustee and Noteholders such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange
Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports
under such Sections; provided that prior to the consummation of the Exchange
Offer and the issuance of the Exchange Notes, the Company will mail to the
Trustee and the Noteholders substantially the same information that would have
been required by such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "--Certain Covenants--Merger and Consolidation" above, (iv) the failure
by the Company to comply for 30 days after notice with any of its obligations
in the covenants described above under "Change of Control" (other than a
failure to purchase Notes) or under "--Certain Covenants--Limitation on
Indebtedness," "--Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries," "--Limitation on Liens Securing Subordinated Indebtedness," "--
Limitation on other Senior Subordinated Indebtedness," "--Limitation on
Restricted Payments," "--Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "--Limitation on Sales of Assets and Subsidiary
Stock (other than a failure to purchase the Notes)," "--Limitation on
Affiliate Transactions," "--Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries," "--Future Guarantors," "--Limitation on
Designations of Unrestricted Subsidiaries," or "--SEC Reports," (v) the
failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of the Company or any
Significant Subsidiary is not paid within any applicable grace period after
final maturity or is accelerated by the Holders thereof because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $5
million (the "cross acceleration provision"), (vii) certain events of
bankruptcy, insolvency or reorganization of the Company or any Significant
Subsidiary (the "bankruptcy provisions"), (viii) any judgment or decree for
the payment of money in excess of $5 million is rendered against the Company
or any Significant Subsidiary and is not discharged and either (A) an
enforcement proceeding has been commenced by any creditor upon such
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judgment or decree or (B) there is a period of 60 days following such judgment
during which such judgment or decree is not discharged, waived or the
execution thereof stayed, or (ix) any Subsidiary Guarantee by a Significant
Subsidiary ceases to be in full force and effect (other than in accordance
with the terms of the Subsidiary Guarantee) or any Subsidiary Guarantor that
is a Significant Subsidiary denies or disaffirms its obligations under its
Subsidiary Guarantee.
However, a default under clause (iv), (v) or (viii) will not constitute an
Event of Default until the Trustee or the Holders of 25% in principal amount
of the outstanding Notes notify the Company of the default and the Company
does not cure such default within the time specified after receipt of such
notice.
If an Event of Default (other than the bankruptcy provisions relating to the
Company) occurs and is continuing, the Trustee or the Holders of at least 25%
in principal amount of the outstanding Notes may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such
a declaration, such principal and interest shall be due and payable
immediately. If an Event of Default relating to the bankruptcy provisions
relating to the Company occurs and is continuing, the principal of and
interest on all the Notes will ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no Holder of a Note may
pursue any remedy with respect to the Indenture or the Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
Holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such
request within 60 days after the receipt thereof and the offer of security or
indemnity and (v) the Holders of a majority in principal amount of the
outstanding Notes have not given the Trustee a direction inconsistent with
such request within such 60-day period. Subject to certain restrictions, the
Holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that
would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as the board of directors, the executive committee or a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the Holders. In addition, the Company is required
to deliver to the Trustee, within 120 days after the end of each fiscal year,
a certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what
action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with
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a tender offer or exchange for the Notes) and any past default or compliance
with any provisions may also be waived with the consent of the Holders of a
majority in principal amount of the Notes then outstanding.
Without the consent of each Holder of an outstanding Note affected thereby,
no amendment may (i) reduce the amount of Notes whose Holders must consent to
an amendment, (ii) reduce the rate of or extend the time for payment of
interest on any Note, (iii) reduce the principal of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption of
any Note or change the time at which any Note may be redeemed as described
under "--Optional Redemption" above, (v) make any Note payable in money other
than that stated in the Note, (vi) impair the right of any Holder to receive
payment of principal of and interest on such Holder's Notes on or after the
due dates therefor or to institute suit for the enforcement of any payment on
or with respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions,
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Holders, or (ix) make any change in any Subsidiary
Guarantee that would adversely affect the Holders.
Without the consent of any Holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add guarantees with respect to the Notes, to
secure the Notes, to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power conferred upon the Company, to
make any change that does not adversely affect the rights of any Holder or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the Trust Indenture Act. However, no amendment may be made
to the subordination provisions of the Indenture that adversely affects the
rights of any Holder of Senior Indebtedness of the Company or any Restricted
Subsidiary then outstanding unless the Holders of such Senior Indebtedness (or
their Representative) consent to such change.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment.
However, the failure to give such notice to all Holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
The Company at its option at any time may terminate all of its obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations
to register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain a registrar and paying agent
in respect of the Notes. In addition, the Company at its option at any time
may terminate its obligations under "Change of Control" and under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation") (and any omission to comply with
such obligations shall not constitute a Default or Event of Default with
respect to the Notes), the operation of the cross acceleration provision, the
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bankruptcy provisions with respect to Significant Subsidiaries and the
judgment default provision described under "--Defaults" above and the
limitations contained in clauses (iii) and (iv) of the first paragraph under
"--Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (vi), (vii) (with
respect only to Significant Subsidiaries) or (viii) under "--Defaults" above
or because of the failure of the Company to comply with clause (iii) or (iv)
of the first paragraph under "--Certain Covenants--Merger and Consolidation"
above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and
will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service
or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with
regard to the Notes. Such bank may also act as a depository of funds for, or
make loans to and perform other services for, the Company or its Affiliates in
the ordinary course of business in the future.
The Holders of a majority in principal amount of the outstanding Notes have
the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture. The Trustee may resign at any
time or may be removed by the Company. If the Trustee resigns, is removed or
becomes incapable of acting as Trustee or if a vacancy occurs in the office of
the Trustee for any cause, a successor Trustee shall be appointed in
accordance with the provisions of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject
to the provisions of, the Trust Indenture Act and the Indenture. The Indenture
also contains certain limitations on the right of the Trustee, as a creditor
of the Company, to obtain payment of claims in certain cases, or to realize on
certain property received by it in respect of any such claims, as security or
otherwise.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (i) existing at the time such Person becomes a Restricted
Subsidiary of the Company or at the time it merges or consolidates with the
Company or any of its Restricted Subsidiaries or (ii) 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 of the Company or such
acquisition, merger or consolidation.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director
or officer (A) of such specified Person, (B) of any subsidiary of such
specified Person or (C) of any Person described in clause (i) above. For
purposes of this definition, control of a Person means the power, direct or
indirect, to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
provisions described in "Limitation on Restricted Payments," and "Limitation
on Affiliate Transactions" only, "Affiliate" shall also mean any beneficial
owner of Capital Stock representing 5% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Capital Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger or
consolidation in excess of $250,000 (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (w) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (x) for purposes of the covenant
described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" or a disposition specifically excepted from the
definition of Restricted Payment), (y) settlement, surrender, waiver or
release of contract rights or contract, tort or other claims and (z) grant of
licenses of intellectual property including patent, trademark and know-how.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means all Obligations pursuant to the Revolving Credit
Facility and reimbursement of letters of credit issued pursuant to the
Revolving Credit Facility.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
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"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated), including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such
equity.
"Change of Control" means the occurrence of any of the following events:
(i) prior to the first public offering of common stock of the Company,
the Permitted Holders cease to be the "beneficial owners" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Stock of
the Company, whether as a result of issuance of securities of the Company,
any merger, consolidation, liquidation or dissolution of the Company, any
direct or indirect transfer of securities or otherwise (for purposes of
this clause (i) and clause (ii) below, the Permitted Holders shall be
deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent corporation);
(ii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in clause (i) above except that a
person shall be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 35% of the total voting power of the Voting Stock of the Company;
and (B) the Permitted Holders "beneficially own" (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors of the Company (for the purposes of this clause (ii), such other
person shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other person
"beneficially owns" (as defined in this clause (ii)), directly or
indirectly, more than 30% of the voting power of the Voting Stock of such
parent corporation and the Permitted Holders "beneficially own" (as defined
in clause (i) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the Board of
Directors of such parent corporation);
(iii) (A) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or (B) the Company
conveys, transfers or leases all or substantially all its assets (computed
on a consolidated basis) to any person or group, in one transaction or a
series of transaction other than any conveyance, transfer or lease between
the Company and a Wholly Owned Subsidiary of the Company, in each case in
one transaction or a series of related transactions with the effect that
either (x) immediately after such transaction any person or entity or group
(as so defined) of persons or entities (other than a Permitted Holder)
shall have become the beneficial owner of securities of the surviving
corporation of such merger or consolidation representing a majority of the
combined voting power of the outstanding securities of the surviving
corporation ordinarily having the right to vote in the election of
directors or (y) the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
combined voting power of the securities of the Company ordinarily having
the right to vote in the election of directors are changed into or
exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
combined voting power of the securities of the surviving corporation
ordinarily having the right vote in the election of directors; or
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(iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 60% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the
Company then in office.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters for which financial statements are
available to (ii) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that (1) if the Company or any Restricted Subsidiary has
issued any Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated EBITDA Coverage Ratio is an issuance of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been issued on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, (2) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be (including Capital Stock of a
Subsidiary) reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period, and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Dispositions for such period (or,
if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of assets (including Capital Stock of a Subsidiary), including
any acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto
(including the issuance of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period, and (4) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Disposition or
any Investment that would have required an adjustment pursuant to clause (2)
or (3) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition
or Investment occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto, and the amount of
Consolidated Interest Expense associated with any Indebtedness issued in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate
in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Protection Agreement
applicable to such Indebtedness if such Interest Rate Protection Agreement has
a remaining term in excess of 12 months). For purposes of this definition,
whenever pro
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forma effect is to be given to any Indebtedness Incurred pursuant to a
revolving credit facility the amount outstanding under such Indebtedness shall
be equal to the average of the lesser of (computed on a daily basis) (1) the
amount outstanding during the period commencing on the first day of the first
of the four most recent fiscal quarters for which financial statements are
available and ending on the date of determination and (2) the total available
commitment under such revolving credit facility as of the date of
determination (if such commitment has been permanently reduced).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense but Incurred by the Company
or its Restricted Subsidiaries, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing, (vi) net costs under Hedging Obligations
(including amortization of fees), (vii) Preferred Stock dividends in respect
of all Preferred Stock held by Persons other than the Company or a Wholly
Owned Subsidiary, (viii) interest Incurred in connection with investments in
discontinued operations, (ix) interest actually paid by the Company or any of
its consolidated subsidiaries under any Guarantee of Indebtedness or other
obligation of any other Person and (x) the cash contributions to any employee
stock ownership plan or similar trust to the extent such contributions are
used by such plan or trust to pay interest or fees to any Person (other than
the Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income
(i) any net income of any Person if such Person is not a Restricted
Subsidiary, except that (A) the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated
Net Income, but only to the extent of the Company's net Investment in such
Person;
(ii) any net income of any Person acquired by the Company or a Subsidiary
in a pooling of interests transaction for any period prior to the date of
such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Subsidiary,
directly or indirectly, to the Company, except that (A) the Company's
equity in the net income of any such Restricted Subsidiary for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Restricted Subsidiary during
such period to the Company or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the limitation contained
in this clause) and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
subsidiaries (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(v) non-cash charges relating to the any compensation plan, including,
but not limited to stock option and stock appreciation rights plan;
provided, that actual cash amounts paid in connection with
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any such plan which have been previously excluded under this clause (v)
shall be included in determination of Consolidated Net Income when such
amount are paid;
(vi) non-cash charges related to the Recapitalization and all charges
related to the issuance of the Notes or the use of proceeds thereof; and
(vii) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of such Person for which financial statements
of such Person are available, as (i) the par or stated value of all
outstanding Capital Stock of such Person plus (ii) paid-in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Deferred Amount" means the $6.0 million deposited pursuant to that certain
Deferred Purchase Price and Security Agreement dated as of February 14, 1997
among the Company and the Buyers, Sellers and the Escrow Agent (each as
defined therein).
"Depository" means The Depository Trust Company, its nominees and their
respective successors.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $25 million and is specifically designated by the Company in
the instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the first anniversary of the Stated Maturity of
the Notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions described
under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" and "--Certain Covenants--Change of Control."
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following (but without duplication) to the extent deducted in
calculating such Consolidated Net Income for such period: (i) income tax
expense, (ii) Consolidated Interest Expense, (iii) depreciation expense, (iv)
amortization expense and (v) all other non-cash charges (other than any
recurring non-cash charges to the extent such charges represent an accrual of
or reserve for cash expenditures in any future period). Notwithstanding clause
(v) above, there shall be deducted from EBITDA in any period any cash expended
in such period that funds a non-recurring, non-cash charge accrued or reserved
in a prior period which was added back to EBITDA pursuant to clause (v) in
such prior period. For the purpose of the calculation of EBITDA, net cash
payments by the Company that are reimbursed from the Deferred Amount shall be
excluded from the calculation.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means a Restricted Subsidiary whose assets are located,
or whose operations are conducted primarily outside of the United States or
the majority of whose sales are to Persons outside the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered
into for purposes of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such Person against
changes in interest rates or foreign exchange rates.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable for
Indebtedness; provided, however, that any Indebtedness of a Person existing at
the time such Person becomes a subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A) indebtedness
of such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(iv) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third Business Day
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following receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (but
excluding any accrued dividends);
(vi) all Hedging Obligations;
(vii) all obligations of the type referred to in clauses (i) through (vi)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee (other than in each case by reason of activities described in the
proviso to the definition of "Guarantee"); and
(viii) all obligations of the type referred to in clauses (i) through
(vii) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the amount of liability
required by GAAP to be accrued or reflected on the most recently published
balance sheet of such Person.
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 to be determined in good
faith by the Board of Directors. For purposes hereof, the amount of any
Indebtedness issued with original issue discount shall be the original
purchase price plus accrued interest, provided, however, that such accretion
shall not be deemed an incurrence of Indebtedness.
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement
designed to protect the Company or any Restricted Subsidiary against
fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee
or similar arrangement) or capital contribution to (by means of any transfer
of cash or other property to others or any payment for property or services
for the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person. For
purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment" and the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments," (i) "Investment" shall include the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that if such designation is made in connection with the acquisition
of such Subsidiary or the assets owned by such Subsidiary, the "Investment" in
such Subsidiary shall be deemed to be the consideration paid in connection
with such acquisition; provided further, however, that upon a redesignation of
such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to
continue to have a permanent investment in an Unrestricted Subsidiary in an
amount (if positive) equal to (x) the Company's "Investment" in such
Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of such Subsidiary at the time of such
redesignation, and (ii) any property transferred to
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or from an Unrestricted Subsidiary shall be valued at its fair market value at
the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"issue" means issue, assume, Guarantee, Incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be issued by such
Subsidiary at the time it becomes a Subsidiary; and the term "issuance" has a
corresponding meaning.
"Issue Date" means the date on which the Old Notes were originally issued.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to such properties or assets or received in any other non-cash form)
therefrom, in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred, and all Federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any lien upon or other
security agreement of any kind with respect to such assets, or which must by
its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, (iii) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any liabilities
associated with the property or other assets disposed of in such Asset
Disposition and retained by the Company or any Restricted Subsidiary after
such Asset Disposition, 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 Disposition. Further, with respect to an Asset Disposition by a
Subsidiary which is not a Wholly Owned Subsidiary, Net Available Cash shall be
reduced pro rata for the portion of the equity of such Subsidiary which is not
owned by the Company.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
Incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications,
reimbursements, and other amounts payable pursuant to the documentation
governing such Indebtedness.
"Permitted Holders" means Andrew Goldfarb, Windward Capital Associates,
L.P., Windward/Park HCC, L.L.C., Windward/Merchant, L.P., Windward/Merban,
L.P. or any of their respective members or partners or any Affiliate of any of
the foregoing.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary
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Cash Investments; (iv) receivables owing to the Company or any Restricted
Subsidiary if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as
the Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; and (viii) any Person to the
extent such Investment represents the non-cash portion of the consideration
received for an Asset Disposition as permitted pursuant to the covenant
described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock."
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law, including carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings; or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an
appeal or other proceedings for review; (c) Liens for taxes, assessments or
other governmental charges not yet subject to penalties for non-payment or
which are being contested in good faith by appropriate proceedings provided
appropriate reserves have been taken on the books of the Company; (d) Liens in
favor of issuers of surety bonds or letters of credit issued pursuant to the
request of and for the account of such Person in the ordinary course of its
business; provided, however, that such letters of credit do not constitute
Indebtedness; (e) encumbrances, easements or reservations of, or rights of
others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as
to the use of real properties or liens incidental to the conduct of the
business of such Person or to the ownership of its properties which do not in
the aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such Person;
(f) Liens securing an Interest Rate Protection Agreement so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured
by a Lien on the same property securing the Interest Rate Protection
Agreement; and (g) leases and subleases of real property which do not
materially interfere with the ordinary conduct of the business of the Company
or any of its Subsidiaries; (h) judgement Liens not giving rise to an Event of
Default so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment
shall not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired; (i) Liens for the purpose
of securing the payment (or the refinancing of the payment) of all or a part
of any Purchase Money Indebtedness relating to assets or property acquired or
constructed in the ordinary course of business provided that (x) the aggregate
principal amount of Indebtedness secured by such Liens shall not exceed the
cost of the assets or property so acquired or constructed and (y) such Liens
shall not encumber any other assets or property of the Company or any
Restricted Subsidiary other than such Assets or property and assets affixed or
appurtenant thereto; (j) Liens arising solely by virtue of any statutory or
common law provision relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor expository institution; provided that (x) such deposit account is not
a dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated
by the Federal Reserve Board, and (y) such deposit account is not intended by
the Company or any Subsidiary to provide collateral to the depository
institution; and (k) Liens
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arising from precautionary Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Company and its Subsidiaries in
the ordinary course of business.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock
company, trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means an underwritten primary or combined primary
and secondary public offering of common stock of the Company pursuant to an
effective registration abatement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 20% of the total issued and outstanding common
stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness of a Person to any
seller or other Person incurred to finance the acquisition (including in the
case of a Capitalized Lease Obligation, the lease) of any real or personal
tangible property which, in the reasonable good faith judgment of the Board of
Directors, is directly related to the business of the Company or any
Subsidiary and which is incurred substantially concurrently with such
acquisition and is secured only by the assets so financed.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the earlier of
(x) the Stated Maturity of the Indebtedness being Refinanced and (y) the
Stated Maturity of the Notes, (ii) such Refinancing Indebtedness has an
Average Life at the time such Refinancing Indebtedness is Incurred that is
equal to or greater than the Average Life of the Indebtedness being Refinanced
and (iii) such Refinancing Indebtedness has an aggregate principal amount (or
if Incurred with original issue discount, an aggregate issue price) that is
equal to or less that the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus unpaid accrued interest and any premium and defeasance costs)
under the Indebtedness being Refinanced, plus actual fees and expenses
Incurred in connection with the Refinancing; provided, further, however, that
(x) Refinancing Indebtedness shall not include (1) Indebtedness of a
Subsidiary that is not a Wholly Owned Subsidiary that Refinances Indebtedness
of the Company or (2) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary and (y) if the
Indebtedness being Refinanced is subordinate or junior to the Notes, then such
Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"Related Business" means any business related, ancillary or complementary to
the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; provided that
if, and for so long as, any Designated Senior
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Indebtedness lacks such a representative, then the Representative for such
Designated Senior Indebtedness shall at all times be the holders of a majority
in outstanding principal amount of such Designated Senior Indebtedness in
respect of any Designated Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the credit agreement dated February 14,
1997, as amended on May 6, 1997, by and among the Company, certain of its
subsidiaries, certain financial institutions and Fleet Capital Corporation, as
agent, providing for an aggregate $20.0 million revolving credit facility
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, as such credit agreement and/or
related documents may be further amended, restated, supplemented, renewed,
replaced or otherwise modified from time to time whether or not with the same
agent, trustee, representative lenders or holders, and irrespective of any
changes in the terms and conditions thereof. Without limiting the generality
of the foregoing, the term "Revolving Credit Facility" shall include
agreements in respect of reimbursement of letters of credit issued pursuant to
the Revolving Credit Facility and agreements in respect of Hedging Obligations
with lenders party to the Revolving Credit Facility and shall also include any
amendment, amendment and restatement, renewal, extension, restructuring,
supplement or modification to any Revolving Credit Facility and all
refundings, refinancings (in whole or in part) and replacements of any
Revolving Credit Facility, including any agreement (i) extending the maturity
of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding
or deleting borrowers or guarantors thereunder, so long as borrowers and
issuers include one or more of the Company and its Restricted Subsidiaries and
their respective successors and assigns.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of any Person secured by a
Lien.
"Senior Indebtedness" means with respect to any Person (x) Bank Indebtedness
and (y) any other Indebtedness other than (1) any obligation of such Person to
any subsidiary of such Person, (2) any liability of such Person for federal,
state, local or other taxes owed or owing by such Person, (3) any accounts
payable or other liability of such Person to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of
such Person which is, expressly by its terms, subordinate or junior in any
respect to any other Indebtedness, Guarantee or obligation of such Person, (5)
that portion of any Indebtedness of such Person which at the time of issuance
is issued in violation of the Indenture or (6) Indebtedness of such Person
represented by Disqualified Capital Stock.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness
is to rank pari passu with the Notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the final date
specified in such security as the fixed date on which all outstanding
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company or any
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of
104
<PAGE>
payment to the Notes or the relevant Subsidiary Guarantee, as applicable,
pursuant to a written agreement to that effect.
"Subsidiary" means any corporation, association, partnership, limited
liability company or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i) the
Company, (ii) the Company and one or more Subsidiaries or (iii) one or more
Subsidiaries.
"Subsidiary Guarantee" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Subsidiary Guarantor" means any Subsidiary of the Company that Guarantees
the Company's Obligations with respect to the Notes.
"Tangible Property" means all land, buildings, machinery and equipment and
leasehold interests and improvements which would be reflected on a balance
sheet of the Company prepared in accordance with generally accepted accounting
principles, excluding (i) all such tangible property located outside the
United States of America, (ii) all rights, contracts and other intangible
assets of any nature whatsoever and (iii) all inventories and other current
assets.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof.
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor.
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above.
(iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1." (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
105
<PAGE>
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of this Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be or shall have been designated an
Unrestricted Subsidiary by the Board of Directors in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or holds any Lien on any property of, the Company or any other Restricted
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated and subject to the "Limitation on Designations of Unrestricted
Subsidiaries;" provided, however, that the Subsidiary so designated and each
of its Subsidiaries has not at the time of such designation or thereafter
Incurred any Indebtedness pursuant to which the Lender has recourse to any of
the assets of the Company or any of its Restricted Subsidiaries. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) if such Unrestricted Subsidiary at such time has Indebtedness,
the Company could Incur $1.00 of additional Indebtedness under paragraph (a)
of the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness" and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced by the Company
to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an officer's certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by
other Persons to the extent such Shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned
by the Company or one or more Wholly Owned Subsidiaries.
106
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be considered a taxable exchange for U.S. federal income tax
purposes because the New Notes will not differ materially in kind or extent
from the Old Notes and because the exchange will occur by operation of the
terms of the Old Notes. Accordingly, such exchange should have no federal
income tax consequences to holders of Old Notes. A holder's adjusted tax basis
and holding period in a New Note will be the same as such holder's adjusted
tax basis and holding period in the Old Note exchanged therefor.
The foregoing discussion of certain U.S. federal income tax considerations
is not based upon and does not constitute an opinion of counsel. Holders
considering an exchange of Old Notes for New Notes should consult their own
tax advisors concerning the U.S. federal income tax considerations in light of
their particular situations as well as any considerations arising under state,
local, foreign and other tax laws or subsequent versions thereof.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until February 1, 1998, all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of the Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such document in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
107
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the issuance and sale of the New Notes
will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP has from
time to time represented the Windward Group in certain matters unrelated to
the Offering and represented the Windward Group in connection with the
Recapitalization. Skadden, Arps, Slate, Meagher & Flom LLP may continue to
represent the Windward Group and the Company in the future. Skadden, Arps,
Slate, Meagher & Flom LLP has from time to time represented Credit Suisse
First Boston Corporation and its affiliates and may continue to do so in the
future.
EXPERTS
The consolidated financial statements of HCC Industries Inc. and its
subsidiaries for the years ended April 1, 1995, March 30, 1996 and March 29,
1997 included in this Prospectus and Registration Statement, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, as stated in their report included herein given on
the authority of that firm as experts in accounting and auditing.
108
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of March 29, 1997 and March 30, 1996 ...... F-3
Consolidated Statements of Earnings for the Years Ended March 29, 1997,
March 30, 1996 and April 1, 1995......................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March
29, 1997, March 30, 1996 and April 1, 1995............................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 29, 1997,
March 30, 1996 and April 1, 1995......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Condensed Consolidated Balance Sheets as of June 28, 1997 and
March 29, 1997........................................................... F-17
Unaudited Condensed Consolidated Statements of Earnings for the Three
Months Ended June 28, 1997 and June 29, 1996............................. F-18
Unaudited Consolidated Statement of Stockholders' Deficit for the Three
Months Ended June 28, 1997............................................... F-19
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
June 28, 1997 and June 29, 1996.......................................... F-20
Notes to Unaudited Condensed Consolidated Financial Statements............ F-21
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts and Reserves............... S-1
</TABLE>
The guarantee obligations of the Subsidiary Guarantors (which are all direct
or indirect wholly owned subsidiaries of the Company) are full, unconditional
and joint and several. The aggregate assets, liabilities, earnings, and equity
of the Subsidiary Guarantors are substantially equivalent to the total assets,
liabilities, earnings and equity of HCC Industries Inc. and its subsidiaries on
a consolidated basis. Separate financial statements of the Subsidiary
Guarantors are not included in this Prospectus because management of the
Company has determined that separate financial statements of the Subsidiary
Guarantors would not be material to investors.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
HCC Industries Inc. and Subsidiaries
Rosemead, California
We have audited the consolidated financial statements and the financial
statement schedule of HCC Industries Inc. and Subsidiaries (the "Company")
listed in the Index on page F-1 of this Registration Statement on Form S-4.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HCC
Industries Inc. and Subsidiaries as of March 29, 1997 and March 30, 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 29, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements as a whole, present fairly, in all material
respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Los Angeles, California
May 30, 1997, except for
Note 10, as to which date is
June 20, 1997
F-2
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
-------- -------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................... $ 6,841 $ 6,647
Restricted cash............................................. 69,282 --
Trade accounts receivable, less allowance for doubtful
accounts of $40 (1997 and 1996)............................ 6,904 7,755
Inventories................................................. 4,376 4,053
Prepaid and deferred income taxes........................... 533 180
Other current assets........................................ 223 123
-------- -------
Total current assets...................................... 88,159 18,758
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 12,264 10,090
OTHER ASSETS:
Excess of purchase price over net assets acquired, net...... 4,507 4,696
Deferred financing costs, net............................... 1,827 70
Deferred income taxes....................................... 3,269 --
Restricted cash............................................. 6,039 --
Other....................................................... 76 54
-------- -------
TOTAL ASSETS................................................ $116,141 $33,668
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 3,537 $ 1,326
Accounts payable............................................ 2,553 1,911
Accrued liabilities......................................... 5,193 3,970
Due to stockholders......................................... 69,282 --
Income taxes payable........................................ -- 1,164
-------- -------
Total current liabilities................................. 80,565 8,371
LONG TERM LIABILITIES:
Deferred income taxes....................................... -- 601
Long-term debt, net of current portion...................... 78,916 9,811
Other long-term liabilities................................. 10,000 --
-------- -------
169,481 18,783
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000 shares,
issued and outstanding 143,569 shares at March 29, 1997 and
499,866 shares at March 30, 1996........................... 14 50
Additional paid-in capital.................................. -- 1,757
Less: Note receivable from stockholder...................... -- (175)
Retained earnings (deficit)................................. (53,354) 13,253
-------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................ (53,340) 14,885
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $116,141 $33,668
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------
MARCH MARCH
29, 30, APRIL
1997 1996 1, 1995
------- ------- -------
<S> <C> <C> <C>
NET SALES........................................... $56,683 $52,207 $40,307
Cost of goods sold.................................. 35,729 32,562 25,423
------- ------- -------
GROSS PROFIT........................................ 20,954 19,645 14,884
Selling, general and administrative expenses........ 9,308 9,107 6,274
Non-recurring expense............................... 10,000 --- ----
------- ------- -------
EARNINGS FROM OPERATIONS............................ 1,646 10,538 8,610
------- ------- -------
OTHER INCOME (EXPENSE):
Interest and other income........................... 479 279 136
Interest expense.................................... (2,946) (1,924) (1,715)
Loss on sale of building............................ --- --- (1,369)
------- ------- -------
Total other expenses, net......................... (2,467) (1,645) (2,948)
------- ------- -------
Earnings (loss) before taxes and extraordinary
item............................................. (821) 8,893 5,662
Taxes (benefit) on earnings (loss).................. (293) 3,230 1,810
------- ------- -------
Earnings (loss) before extraordinary item......... (528) 5,663 3,852
Extraordinary loss on retirement of debt, net of
tax benefit of $657.............................. (1,186) --- ----
------- ------- -------
NET EARNINGS (LOSS)................................. $(1,714) $ 5,663 $ 3,852
======= ======= =======
EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY LOSS. $ (1.46) $ 11.44 $ 7.76
Extraordinary loss per share........................ (3.29) --- ----
------- ------- -------
NET EARNINGS (LOSS) PER SHARE....................... $ (4.75) $ 11.44 $ 7.76
======= ======= =======
Weighted average shares outstanding................. 360,585 494,968 496,166
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------- PAID-IN NOTE EARNINGS EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) (DEFICIT)
------ ------ ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 2, 1994.. 514 $51 $ 1,918 $-- $ 3,738 $ 5,707
Repurchase of stock... (24) (2) (360) -- -- (362)
Net earnings.......... -- -- -- -- 3,852 3,852
---- --- ------- ---- -------- --------
Balance, April 1, 1995.. 490 49 1,558 -- 7,590 9,197
Sale of stock......... 10 1 199 (175) -- 25
Net earnings.......... -- -- -- -- 5,663 5,663
---- --- ------- ---- -------- --------
Balance, March 30, 1996. 500 50 1,757 (175) 13,253 14,885
Payment of note
receivable............ -- -- -- 175 -- 175
Repurchase of stock
(June 1996)........... (206) (21) (14,489) -- -- (14,510)
Repurchase of stock
(February 1997)...... (246) (25) (22,949) -- (64,893) (87,867)
Sale of stock in
recapitalization...... 96 10 35,681 -- -- 35,691
Net loss.............. -- -- -- -- (1,714) (1,714)
---- --- ------- ---- -------- --------
Balance, March 29, 1997. 144 $14 $ -- $-- $(53,354) $(53,340)
==== === ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------------
MARCH 29, MARCH 30, APRIL 1,
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $ (1,714) $ 5,663 $ 3,852
Reconciliation of net earnings to net cash
provided by operating activities:
Non-recurring expense......................... 10,000 -- --
Depreciation.................................. 1,195 934 809
Amortization.................................. 604 435 392
Deferred income taxes......................... (4,223) 181 27
Extraordinary loss............................ 1,186 -- --
Loss on sale of building...................... -- -- 1,369
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable, net.............................. 851 (2,057) (1,256)
(Increase) in inventories..................... (323) (798) (993)
(Increase) decrease in other assets........... (6,161) 23 34
Increase (decrease) in accrued liabilities.... 260 (259) 657
Increase in accounts payable and income taxes
payable...................................... 135 940 805
-------- ------- -------
Net cash provided by operating activities... 1,810 5,062 5,696
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (1,943) (615) (994)
Proceeds from sale of building.................. -- -- 1,050
Cash collected on note receivable............... 175 -- 80
-------- ------- -------
Net cash provided by (used) in investing ac-
tivities................................... (1,768) (615) 136
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt............ (22,489) (1,449) (3,658)
Proceeds from issuance of long-term debt........ 90,309 -- 1,500
Deferred financing costs........................ (1,945) -- --
Repurchases of stock............................ (30,148) -- --
Restricted cash due to selling stockholders..... (69,282) -- --
Sale of stock................................... 35,691 25 (362)
Cost of recapitalization........................ (1,984) -- --
-------- ------- -------
Net cash provided by (used) in financing
activities................................. 152 (1,424) (2,520)
-------- ------- -------
Net increase in cash and cash equivalents....... 194 3,023 3,312
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD......................................... 6,647 3,624 312
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 6,841 $ 6,647 $ 3,624
======== ======= =======
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Due to selling stockholders................... $ 70,245 $ -- $ --
Capital lease obligations..................... 1,426 1,417 161
Note received from sale of stock.............. -- 175 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
HCC Merger Corp. was organized in 1989 to acquire HCC Industries Inc. and
Subsidiaries ("HCC" or "Company"). HCC designs, manufactures and markets broad
lines of state-of-the-art, high precision electronic connection devices known
as hermetic seals. The Company's products are sold primarily in North America
and Europe to the aerospace, energy, test and measurement and automotive
industries.
On October 18, 1995, HCC Merger Corp. ("Merger Corp."), entered into an
agreement (as amended, the "Option Agreement") with a stockholder of Merger
Corp. (who is also a stockholder of Special Devices, Inc., the Company's
largest customer) in anticipation of a prior proposed acquisition of the
Company by a third party. In the Option Agreement, Merger Corp. was granted an
option on such stockholder's shares in Merger Corp. Such proposed transaction
was not consummated. In June 1996, Merger Corp. exercised its option and such
stockholder received $13,500,000 (at $70 per share, including the additional
$963,000 discussed below) in consideration for his shares. Pursuant to the
Option Agreement, such stockholder (i) also received certain additional
amounts ($963,000) in connection with the consummation of the Recapitalization
described below and (ii) agreed that he would have no interest in any future
amounts actually paid to the other stockholders of the Company in connection
with any subsequent transaction, including the Recapitalization. On August 28,
1996, Merger Corp. merged into the Company (the "Merger").
On February 14, 1997, pursuant to a Stock Purchase and Sale Agreement (the
"Recapitalization Agreement") dated as of December 23, 1996, the Company,
certain members of management, Windward Capital Associates, L.P. ("Windward")
and certain affiliates of Windward (collectively, with Windward, the "Windward
Group") and Metropolitan Life Insurance Company ("MetLife") completed a
recapitalization of the Company (the "Recapitalization"). The Windward Group
is a group of related entities which make merchant banking investments
pursuant to certain program agreements. In connection with the
Recapitalization, among other things: (i) the Company entered into Credit
Facilities, consisting of: (a) a $10,000,000 five year Revolving Credit
Facility, (b) a $30,000,000 five year Tranche A Term Loan and (c) a
$30,000,000 six and one-half year Tranche B Term Loan; (ii) the Company issued
$19,300,000, net of discount, in subordinated notes to the Windward Group and
MetLife along with 8,614 shares of Common Stock and certain contingent
antidilution warrants for an aggregate purchase price of $22,500,000; (iii)
the Company purchased a portion of the shares of Common Stock (at $370 per
share) beneficially owned by existing stockholders for $87,500,000, including
certain transaction expenses, in cash (a portion of which was paid at closing
and the remainder of which was deposited in escrow at closing (reflected in
the accompanying balance sheet as restricted cash and due to stockholders) and
paid to the stockholders on April 1, 1997 in order to comply with applicable
state law) and $5,000,000 in contingent subordinated notes; (iv) the Windward
Group purchased 87,721 shares of Common Stock (at $370 per share) from the
Company for $32,500,000 in cash; and (v) the Company repaid certain of its
outstanding indebtedness. At March 29, 1997, as a result of item (iii) above,
$69,282,000 remained in an escrow account and is reflected on the balance
sheet of the Company as restricted cash and due to stockholders. This escrow
was disbursed in April 1997. In accounting for the Recapitalization, no fair
value adjustments were made to the book value of the Company's assets and no
goodwill was recognized. The contingent subordinated notes vest upon
achievement by the Company of certain operating performance thresholds or
achievement by the Windward Group of certain investment performance
thresholds. At the time of vesting, the Company will record a charge to equity
to reflect the additional purchase price associated with the shares purchased
in the Recapitalization.
F-7
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, in connection with the Recapitalization, a $6,000,000 escrow
was established by the selling stockholders to fund certain contingencies
and/or items specifically indemnified by the selling stockholders. The escrow
account has been classified as restricted cash on the consolidated balance
sheet. Any funds remaining in this account upon satisfaction of conditions
specified in the escrow agreement, will be paid to the selling stockholders.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED:
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany transactions
(which are primarily sales/purchases and receivables/payables) have been
eliminated in consolidation.
The Company's 10 3/4% Senior Subordinated Notes are guaranteed by all
operating subsidiaries of the Company (the "Subsidiary Guarantors") (See Note
10). The guarantee obligations of the Subsidiary Guarantors (which are all
direct or indirect wholly owned subsidiaries of the Company) are full,
unconditional and joint and several. The aggregate assets, liabilities,
earnings, and equity of the Subsidiary Guarantors are substantially equivalent
to the total assets, liabilities, earnings and equity of HCC Industries Inc.
and its subsidiaries on a consolidated basis. Separate financial statements of
the Subsidiary Guarantors are not included in the accompanying financial
statements because management of the Company has determined that separate
financial statements of the Subsidiary Guarantors would not be material to
investors.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
reported results of operations and disclosure of contingencies at the dates of
the consolidated financial statements. Actual results could differ from those
estimates.
Accounting Period
The consolidated financial statements are based on the fiscal year ending on
the Saturday nearest to March 31.
Revenue Recognition
The Company recognizes revenue at the time of product shipment.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The Company
has bank balances, including cash and cash equivalents, which at times may
exceed federally insured limits.
Accounts Receivable And Concentration Of Credit Risk
The Company grants uncollateralized credit to its customers who are located
in various geographical areas. Estimated credit losses and returns have been
provided for in the financial statements and, to date, have been within
management's expectations. Sales to the Company's four largest customers
accounted for 43% (1997), 45% (1996) and 44% (1995) of total sales. At March
29, 1997 and March 30, 1996, the four largest customers accounted for
approximately 30% and 43% of total accounts receivable, respectively.
Prior to August 1996, a stockholder of the Company was also a stockholder of
Special Devices, Inc. ("SDI"). Sales to SDI were $15,243,000, $12,212,000 and
$11,873,000 for the years ended March 29, 1997, March 30, 1996 and April 1,
1995, respectively. Accounts receivable from SDI as of March 29, 1997 and
March 30, 1996 was $1,392,000 and $1,668,000, respectively. In fiscal 1997,
the stockholder sold his outstanding shares back to the Company.
F-8
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED:
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the respective
assets of 3 years to 40 years.
Repairs and maintenance are charged directly to expense as incurred.
Additions and betterments to property, plant and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is
included in operations.
Excess of Purchase Price over Net Assets Acquired
The excess of purchase price over net assets acquired is amortized on a
straight-line basis over 40 years. Amortization expense was $189,000 for each
of the three years in the period ended March 29, 1997. Accumulated
amortization on the excess purchase price over net assets acquired was
$1,694,000 and $1,505,000 as of March 29, 1997 and March 30, 1996,
respectively.
Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," was issued. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS No.
121 was effective for fiscal years beginning after December 15, 1995. The
impact of the adoption of SFAS No. 121 was not material to the Company's
consolidated financial statements.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Stock Based Employee Compensation Awards
Statement of Financial Accounting Standards No. 123, "Accounting for the
Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages,
but does not require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123, which involves proforma disclosure of net income
under SFAS No. 123, detailed descriptions of plan terms and assumptions used
in valuing stock option grants. The Company has chosen to continue to account
for stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
F-9
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED:
Earnings (Loss) Per Share
Earnings (loss) per share is computed based on the weighted average number
of common and common equivalents shares outstanding during the periods
presented, using the treasury stock method. Common stock equivalents related
to stock options are excluded from the computation when their effect is
antidilutive.
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires dual presentation of newly defined basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures. This method is considered more
compatible with International Accounting Standards. SFAS No. 128 is effective
for all fiscal years ending after December 15, 1997. The Company is currently
evaluating the impact of SFAS No. 128.
Reclassifications
Certain reclassifications have been made to previously reported amounts to
conform with the current year presentation.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH MARCH
29, 30,
1997 1996
-------- -------
<S> <C> <C>
Raw materials and component parts......................... $ 1,910 $ 1,948
Work in process........................................... 2,466 2,105
-------- -------
$ 4,376 $ 4,053
======== =======
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<CAPTION>
MARCH MARCH
29, 30,
1997 1996
-------- -------
<S> <C> <C>
Land...................................................... $ 3,180 $ 3,180
Buildings and improvements................................ 5,450 5,018
Furniture, fixtures and equipment......................... 9,350 6,413
-------- -------
17,980 14,611
Less accumulated depreciation............................. (5,716) (4,521)
-------- -------
$ 12,264 $10,090
======== =======
</TABLE>
F-10
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
Tranche A Term Loan--bearing interest at the bank's
prime rate plus 1 1/4% payable monthly in arrears;
principal payments of $500,000 payable quarterly
through June 1998; $1,000,000 payable quarterly
through March 1999; $2,000,000 payable quarterly
thereafter with balance due February 14, 2002......... $30,000 $ --
Tranche B Term Loan--bearing interest at the bank's
prime rate plus 1 3/4% payable monthly in arrears;
principal payments of $75,000 payable quarterly
through March 2002; $3,500,000 payable quarterly
through March 2003; $7,500,000 payable June 2003 and
balance due August 14, 2003........................... 30,000 --
12% subordinated notes--interest payable semi--
annually; face value of $22,500,000 due April 15,
2004, recorded at present value discounted to an
effective interest rate of 15.38%..................... 19,352 --
12 1/2% convertible subordinated debentures--interest
payable semi-annually; sinking fund payments of
$750,000 annually with remaining balance due November
15, 2000.............................................. -- 5,497
7 1/4% subordinated debentures--interest payable semi-
annually; face value of $5,320,000 due April 15, 2001,
recorded at present value discounted to an effective
interest rate of 19.12%............................... -- 3,293
Term loan on land, building and improvements payable in
monthly installments of $9,000 plus interest at the
bank's prime rate plus 1 1/2% with balance due August
1997.................................................. 596 706
Other.................................................. 2,505 1,641
------- ------
82,453 11,137
Less current portion................................... 3,537 1,326
------- ------
$78,916 $9,811
======= ======
</TABLE>
At March 29, 1997 and March 30, 1996, the prime rate was 8.50% and 8.25%,
respectively.
The 12 1/2% and 7 1/4% debentures were redeemed on February 14, 1997. As a
result, the Company recognized an extraordinary loss ($1,186,000 net of tax
benefit) on unamortized discount and issuance costs.
In issuing the Tranche A Term Loan, the Tranche B Term Loan and the 12%
subordinated notes, the Company incurred $1,945,000 in deferred financing
costs. These costs will be amortized using the straight-line method which
approximates the effective interest method over the term of the respective
debt. For the year ended March 29, 1997, the Company incurred amortization
expense of $118,000 on the deferred financing costs. See Note 11 for a
description of a subsequent transaction to refinance this debt.
In accordance with SFAS No. 107 "Disclosure About Fair Value of Financial
Instruments," the fair values of the Company's long-term debt has been
established based on current rates offered to the Company for debt of the same
remaining maturities. The carrying amounts of the Company's loans approximate
their fair values.
F-11
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT--CONTINUED:
Minimum payments due under long-term debt as of March 29, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1998................................. $ 3,537
1999................................. 4,918
2000................................. 8,868
2001................................. 8,764
2002................................. 8,514
2003 and thereafter.................. 47,852
-------
$82,453
=======
</TABLE>
Cash payments for interest were $2,241,000 (1997), $1,379,000 (1996) and
$1,419,000 (1995).
5. LINES OF CREDIT:
The Company has a revolving credit facility agreement (the "Agreement") of
$10,000,000 expiring on February 14, 2002. The Agreement provides for interest
on outstanding balances at the bank's prime rate plus 1 1/4%. Under the
Agreement, any amounts outstanding under the line of credit are collateralized
by accounts receivable and inventories of the Company. The Agreement includes
covenants requiring maintenance of certain financial ratios. At March 29, 1997
there were no borrowings outstanding under the Agreement.
The Company has a capital lease line of credit of $3,417,000 for financing
manufacturing equipment expiring March 31, 1997. The agreement provides for
thirty-six (36) or sixty (60) month terms with interest at 2.00% above the
bank's index rate. The bank's index rate is the U.S. Treasury Note bond-
equivalent yield per annum corresponding to the average life of the lease. At
March 29, 1997 and March 30, 1996 there were $2,335,000 and $1,417,000 in
borrowings outstanding under the capital lease line, respectively.
6. TAXES ON EARNINGS:
The components of income tax (benefit) expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.............................................. $2,484 $2,403 $1,426
State................................................ 488 646 357
------ ------ ------
2,972 3,049 1,783
------ ------ ------
Deferred:
Federal.............................................. (3,334) 147 25
State................................................ (588) 34 2
------ ------ ------
(3,922) 181 27
------ ------ ------
$ (950) $3,230 $1,810
====== ====== ======
</TABLE>
F-12
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. TAXES ON EARNINGS--CONTINUED:
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Tax provision at the statutory rate.................... (34.0%) 34.0% 34.0%
Nondeductible expenses................................. 2.7% 0.8% 3.6%
State taxes, net of federal benefit.................... (1.9%) 5.0% 1.8%
Other.................................................. (2.5%) (3.5%) (7.4%)
------ ----- -----
(35.7%) 36.3% 32.0%
====== ===== =====
</TABLE>
The components of the net deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Environmental liabilities................................ $4,000 $ --
Accrued vacation and other............................... 215 214
------ -----
4,215 214
Deferred Tax Liabilities:
Depreciation............................................. (730) (635)
------ -----
Deferred Tax Asset (Liability), net...................... $3,485 $(421)
====== =====
</TABLE>
Cash tax payments were $4,454,000 (1997), $2,079,000 (1996) and $1,673,000
(1995).
7. CAPITAL STOCK:
The Company is authorized to issue an aggregrate of 550,000 shares of common
stock. Prior to the Recapitalization, the Company had only one class of common
stock. Subsequent to the Recapitalization, common stock may be issued in four
different classes, which differ only in voting rights per share as follows:
<TABLE>
<CAPTION>
VOTING RIGHTS
CLASS PER SHARE
----- -------------
<S> <C>
A........................... 1
B........................... 1
C..........................None.
D...........................10
</TABLE>
F-13
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL STOCK--CONTINUED
The changes in each class of common shares for each of the three years in
the period ended March 29, 1997 are as follows:
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK
-----------------------------------------------------
A B C D TOTAL
------------- ------------ ------------ ------------ ------------
PAR PAR PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--April 2, 1994.. 514 $ 51 514 $ 51
Repurchase of Stock.... (24) (2) (24) (2)
----- ---- ---- ----
Balance--April 1, 1995.. 490 49 490 49
Sale of Stock.......... 10 1 10 1
----- ---- ---- ----
Balance--March 30, 1996 500 50 500 50
Repurchase of Stock
(June 1996)........... (206) (21) (206) (21)
Repurchase of Stock
(February 1997)....... (246) (25) (246) (25)
Sale of Stock.......... 63 6 28 $ 3 4 $ 1 1 $-- 96 10
----- ---- --- --- --- --- --- ---- ---- ----
Balance--March 29, 1997 111 $ 10 28 $ 3 4 $ 1 1 $-- 144 $ 14
===== ==== === === === === === ==== ==== ====
</TABLE>
In February 1997, the Company adopted a stock option plan (the "Option
Plan") which provides for the grant to employees, from time to time, of non-
qualified stock options to purchase up to an aggregate of 22,887 shares of
common stock at exercise prices to be determined by the Board of Directors.
The Option Plan provides for the grant of management options to purchase 6,393
shares of common stock (the "Management Options"), management performance
options to purchase 14,206 shares of common stock (the "Management Performance
Options"), director options to purchase 710 shares of common stock (the
"Director Options") and director performance options to purchase 1,578 shares
of common stock (the "Director Performance Options"). The Management Options
and Director Options are subject to a vesting schedule that generally provides
for each series of options to vest 20% per year over five years if the Company
attains specified annual or cumulative earnings targets as defined in the
Option Plan. The Management Performance Options and Director Performance
Options are subject to a vesting schedule based on a change in control in
which the Windward Group realizes specified annual rates of return on its
equity investment in the Company as defined in the Option Plan. All options
are exercisable over a period of 10 years and will automatically vest on the
seventh anniversary of the date of grant, regardless of whether the
performance criteria are achieved.
During the year ended March 29, 1997, the Company granted options to
purchase 18,160 shares of common stock with an exercise price equal to the
fair value of common stock as determined by the Board of Directors at the date
of grant ($370 per share). No options were exercisable at March 29, 1997 and
options to purchase 4,727 shares of common stock remained available for grant.
The Company has adopted the disclosure only provisions of SFAS No. 123. For
the year ended March 29, 1997, due to the limited time period for which stock
options were outstanding, there was no significant difference between the
Company's net loss or net loss per share and pro forma amounts calculated in
accordance with Statements of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation".
The fair value of each option granted was estimated on the date of grant to
be $99 using the minimum value method with the following assumptions (i) risk-
free interest rate of 6.25%, (ii) expected option life of 5 years, (iii)
forfeiture rate of 0 and (iv) no expected dividends.
F-14
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
In 1993, the Company adopted the HCC Savings and Investment Plan (the
"Plan") which covers all eligible full-time employees. The Company established
the Plan to meet the requirements of a qualified retirement plan pursuant to
the provisions of Section 401(k) of the Internal Revenue Code. The Plan
provides participants the opportunity to make tax deferred contributions to a
retirement trust account in amounts up to 15% of their gross wages. The
Company has elected to make matching contributions in amounts that may change
from year to year. The Company contributed $480,000 (1997), $323,000 (1996)
and $318,000 (1995) in matching contributions to the Plan.
9. COMMITMENTS AND CONTINGENCIES:
Environmental
As an ongoing facet of the Company's business, it is required to maintain
compliance with various environmental regulations. The cost of this compliance
is included in the Company's operating results as incurred. These ongoing
costs include permitting fees and expenses and specialized effluent control
systems as well as monitoring and site assessment costs required by various
governmental agencies. In the opinion of management, the maintenance of this
compliance will not have a significant effect on the financial position or
results of operations of the Company.
In August 1994, the U.S. Environmental Protection Agency ("EPA") identified
the Company as a potentially responsible party ("PRP") in the El Monte
Operable Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early
1995, the Company and the EPA executed an Administrative Consent Order which
requires the Company and other PRP's to perform a Remedial Investigation and
Feasibility Study ("RI/FS") for the EMOU. In addition, the Company's facility
in Avon, Massachusetts is subject to Massachusetts "Chapter 21E", the State's
hazardous site clean-up program. Uncertainty as to (a) the extent to which the
Company caused, if at all, the conditions being investigated, (b) the extent
of environmental contamination and risks, (c) the applicability of changing
and complex environmental laws, (d) the stage of the investigation and/or
remediation, (e) the unpredictability of investigation and/or remediation
costs (including as to when they will be incurred), (f) applicable clean-up
standards, (g) the remediation (if any) that will ultimately be required, and
(h) available technology make it difficult to assess the likelihood and scope
of further investigation or remediation activities or to estimate the future
costs of such activities if undertaken. In addition, liability under CERCLA is
joint and several, and any potential inability of other PRPs to pay their pro
rata share of the environmental remediation costs may result in the Company
being required to bear costs in excess of its pro rata share.
In fiscal 1997, the Company with the help of independent consultants,
determined a range of estimated costs of $9,000,000 to $11,000,000 associated
with the various claims and assertions it faces. The time frame over which the
Company expects to incur such costs varies with each site, ranging up to 20
years as of March 29, 1997. These estimates are based partly on progress made
in determining the magnitude of such costs, experience gained from sites on
which remediation is ongoing or has been completed, and the timing and extent
of remedial actions required by the applicable governmental authorities. As a
result, the Company has accrued $10,000,000 for estimated environmental
remediation as of March 29, 1997, which the Company believes to be the best
estimate of the liability.
In conjunction with the Recapitalization, an escrow of $6,000,000 was
established to secure certain indemnification obligations (including
environmental matters) of the Selling Group to the Company. Any environmental
costs, net of tax benefit, are expected to be funded from the escrow account.
Actual expenses for environmental remediation for each of the three years in
the period ended March 29, 1997 were $297,000 (1997), $730,000 (1996) and
$169,000 (1995).
F-15
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES--CONTINUED
Claims for recovery of costs already incurred and future costs have been
asserted against various insurance companies. The Company has neither recorded
any asset nor reduced any liability in anticipation of recovery with respect
to such claims made.
The Company believes its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, this reserve may be modified and
related charges against earnings may be made.
Leases
The Company leases certain facilities under non-cancelable operating lease
agreements expiring through 2002. The leases are subject to increases from
time to time primarily based on CPI adjustments. The lease terms vary from 4
to 7 years and include options to extend the leases for additional terms.
At March 29, 1997, the minimum lease payments due over the remaining life of
the facility leases consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH AMOUNT
---------------- ------
<S> <C>
1998........................................................... $159
1999........................................................... 159
2000........................................................... 163
2001........................................................... 136
2002........................................................... 34
</TABLE>
Rent expense under operating leases was $165,000 (1997), $77,000 (1996) and
$12,000 (1995).
Other
In addition to the above, the Company is involved in other claims and
litigation arising in the normal course of business. Based on the advice of
counsel and in the opinion of management, the ultimate resolution of these
matters will not have a significant effect on the financial position or the
results of operations of the Company.
10. SUBSEQUENT EVENTS:
In May 1997, the Company issued $90,000,000 of senior subordinated notes due
in May 2007. Interest is payable semi-annually at 10.75% per annum. Proceeds
from the offering were used to (i) retire the Tranche A Term Loan, the Tranche
B Term Loan and the 12% subordinated notes and accompanying equity, and (ii)
provide approximately $3,800,000 (net of offering expenses) for additional
working capital needs of the Company. As a result of this refinancing, the
Company will record an extraordinary loss of approximately $1,100,000, net of
taxes, in the first quarter of fiscal 1998. Concurrent with the offering, the
Company's bank increased the revolving credit facility to an aggregate of
$20,000,000.
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Connector Industries of America, a glass-to-
metal sealing company. The purchase price included $2,100,000 in cash and a
contingent payment of $400,000 based upon the volume of business retained in
the immediately subsequent 18 month period. In its last fiscal year of
operations, the acquired company generated sales of approximately $3,200,000.
The transaction was accounted for as an asset purchase. In conjunction with
the acquisition, the Company assigned $1,372,000 to intangibles which will be
amortized over a 14 year period on a straight line basis. If the contingent
payment becomes payable, such amount will be recorded as additional purchase
price consideration and added to intangibles. Pro forma results of operations
are not provided as the impact on Company operations is not material.
F-16
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 28, MARCH 29,
1997 1997
-------- ---------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................... $ 8,780 $ 6,841
Restricted cash............................................. -- 69,282
Trade accounts receivable, less allowance for doubtful
accounts of $49 at June 28, 1997 and $40 at March 29, 1997. 8,917 6,904
Inventories................................................. 4,482 4,376
Prepaid and deferred income taxes........................... 970 756
------- --------
Total current assets...................................... 23,149 88,159
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 12,961 12,264
OTHER ASSETS:
Intangible assets........................................... 5,832 4,507
Deferred financing costs, net............................... 3,643 1,903
Deferred income taxes....................................... 3,269 3,269
Restricted cash............................................. 6,079 6,039
------- --------
TOTAL ASSETS................................................ $54,933 $116,141
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 1,215 $ 3,537
Accounts payable............................................ 2,604 2,553
Accrued liabilities......................................... 6,604 5,193
Due to stockholders......................................... -- 69,282
------- --------
Total current liabilities................................. 10,423 80,565
LONG TERM LIABILITIES:
Long-term debt, net of current portion...................... 91,697 78,916
Other long-term liabilities................................. 9,940 10,000
------- --------
112,060 169,481
------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value: authorized 550,000 shares,
issued and outstanding 134,955 shares at June 28, 1997 and
143,569 shares at March 29, 1997........................... 13 14
Accumulated deficit......................................... (57,140) (53,354)
------- --------
TOTAL STOCKHOLDERS' DEFICIT................................. (57,127) (53,340)
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $54,933 $116,141
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-17
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS--UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------
JUNE JUNE
28, 29,
1997 1996
------- -------
<S> <C> <C>
NET SALES.................................................... $15,505 $14,747
Cost of goods sold........................................... 9,319 9,222
------- -------
GROSS PROFIT................................................. 6,186 5,525
Selling, general and administrative expenses................. 2,129 2,234
------- -------
EARNINGS FROM OPERATIONS..................................... 4,057 3,291
------- -------
OTHER INCOME (EXPENSE):
Interest and other income................................... 100 108
Interest expense............................................ (2,605) (387)
------- -------
Total other expenses, net.................................. (2,505) (279)
------- -------
EARNINGS BEFORE TAXES AND EXTRAORDINARY ITEM................. 1,552 3,012
Taxes on earnings............................................ 609 1,174
------- -------
Earnings before extraordinary item........................... 943 1,838
Extraordinary loss on retirement of debt, net of tax benefit
of $640..................................................... (1,002) --
------- -------
NET EARNINGS (LOSS).......................................... $ (59) $ 1,838
======= =======
EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS................. $ 6.84 $ 3.68
Extraordinary loss per share................................. (7.27) --
------- -------
NET EARNINGS (LOSS) PER SHARE................................ $ (.43) $ 3.68
======= =======
Weighted average shares outstanding.......................... 137,826 499,866
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-18
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT--UNAUDITED
FOR THE THREE MONTHS ENDED JUNE 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 29, 1997................. 144 $14 $(53,354) $(53,340)
Repurchase of stock................... (9) (1) (3,727) (3,728)
Net loss.............................. -- -- (59) (59)
--- --- -------- --------
BALANCE, JUNE 28, 1997.................. 135 $13 $(57,140) $(57,127)
=== === ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-19
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................... $ (59) $ 1,838
Reconciliation of net earnings (loss) to net cash pro-
vided by operating activities:
Depreciation......................................... 330 259
Amortization......................................... 245 112
Deferred income taxes................................ (285) --
Extraordinary loss................................... 1,002 --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable,
net............................................... (1,634) 323
Decrease (increase) in inventories................. 153 (309)
(Increase) in other assets......................... (211) (159)
Increase (decrease) in accrued liabilities......... 1,351 (310)
Increase in accounts payable and income taxes pay-
able.............................................. 866 829
--------- --------
Net cash provided by operating activities.......... 1,758 2,583
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition................................. (2,200) --
Purchases of property, plant and equipment........... (694) (297)
--------- --------
Net cash used in investing activities.............. (2,894) (297)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt................. (79,497) (153)
Proceeds from issuance of long-term debt............. 90,000 --
Deferred financing costs............................. (3,700) --
Repurchase of stock.................................. (3,728) --
--------- --------
Net cash provided by (used in) financing activi-
ties.............................................. 3,075 (153)
--------- --------
Net increase in cash and cash equivalents.............. 1,939 2,133
Cash and cash equivalents at beginning of period....... 6,841 6,647
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 8,780 $ 8,780
========= ========
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations............................ $ -- $ 465
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements of
HCC Industries Inc., a Delaware corporation, include all adjustments
(consisting of normal recurring entries) which management believes are
necessary for a fair presentation of the financial position and results of
operations for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The year end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. It is suggested that the accompanying
financial statements be read in conjunction with the Company's audited
financial statements and footnotes as of and for the year ended March 29,
1997. Operating results for the three month period ended June 28, 1997 are not
necessarily indicative of the operating results for the full fiscal year.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
28, MARCH 29,
1997 1997
------ ---------
<S> <C> <C>
Raw materials and component parts........................... $1,889 $ 1,910
Work in process............................................. 2,593 2,466
------ -------
$4,482 $ 4,376
====== =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands)
<TABLE>
<CAPTION>
JUNE
28, MARCH 29,
1997 1997
------- ---------
<S> <C> <C>
Land...................................................... $ 3,180 $ 3,180
Buildings and improvements................................ 5,450 5,450
Furniture, fixtures and equipment......................... 10,377 9,350
------- -------
19,007 17,980
Less accumulated depreciation............................. (6,046) (5,716)
------- -------
$12,961 $12,264
======= =======
</TABLE>
4. BUSINESS ACQUISITION:
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Connector Industries of America, a glass-to-
metal sealing company. The purchase price included $2,100,000 in cash and a
contingent payment of $400,000 based upon the volume of business retained in
the immediately subsequent 18 month period. In its last fiscal year of
operations, the acquired company generated sales of approximately $3,200,000.
The transaction was accounted for as an asset purchase. In conjunction with
the acquisition, the Company assigned $1,372,000 to intangibles which will be
amortized over a 14 year period on a straight line basis. If the contingent
payment becomes payable, such amount will be recorded as additional purchase
price consideration and added to intangibles. Pro forma results of operations
are not provided as the impact on Company operations is not material.
F-21
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, MARCH 29,
1997 1997
-------- ---------
<S> <C> <C>
10 3/4% senior subordinated notes--interest payable
semi-annually due May 15, 2007......................... $ 90,000 $ --
Tranche A Term Loan..................................... -- 30,000
Tranche B Term Loan..................................... -- 30,000
12% subordinated notes.................................. -- 19,352
Term loan on land, building and improvements due August
1997.................................................... 578 596
Other................................................... 2,334 2,505
-------- -------
92,912 82,453
Less current portion.................................... 1,215 3,537
-------- -------
$ 91,697 $78,916
======== =======
</TABLE>
In May 1997, the Company issued $90,000,000 of senior subordinated notes due
in May 2007. Interest is payable semi-annually at 10.75% per annum. Proceeds
from the offering were used to (i) retire the Tranche A Term Loan, the Tranche
B Term Loan and the 12% subordinated notes, and (ii) provide approximately
$3,800,000 (net of offering expenses) for additional working capital needs of
the Company. As a result of this refinancing, the Company recorded an
extraordinary loss of $1,002,000, net of taxes, in the first quarter of fiscal
1998. Concurrent with the offering, the Company's bank increased the revolving
credit facility to an aggregate of $20,000,000.
6. CAPITAL STOCK:
The Company is authorized to issue an aggregate of 550,000 shares of common
stock. Prior to the Recapitalization, the Company had only one class of common
stock. Subsequent to the Recapitalization, common stock may be issued in four
different classes, which differ only in voting rights per share as follows:
<TABLE>
<CAPTION>
VOTING RIGHTS
CLASS PER SHARE
----- -------------
<S> <C>
A...................................................... 1
B...................................................... 1
C...................................................... None
D...................................................... 10
</TABLE>
The changes in each class of common shares for the quarter ended June 28,
1997 are as follows:
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK
----------------------------------------------------------------
A B C D TOTAL
------------ ------------ ------------ ------------ ------------
PAR PAR PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--March 29, 1997. 111 $10 28 $ 3 4 $ 1 1 $-- 144 $14
Repurchase of Stock..... (8) (1) (1) -- -- -- -- -- (9) (1)
--- --- --- --- --- --- --- ---- --- ---
Balance--June 28, 1997.. 103 $ 9 27 $ 3 4 $ 1 1 $-- 135 $13
=== === === === === === === ==== === ===
</TABLE>
F-22
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. CAPITAL STOCK--CONTINUED:
Concurrent with the $90,000,000 of Senior Subordinated Notes issued in May
1997, the Company repurchased $22,500,000 of Mezzanine Security Units,
composed of 7,831 shares of Class A and 783 shares of Class B common stock and
attached contingent anti-dilution warrants (at $370 per share) and
$19,300,000, net of discount, of subordinated notes. The remaining 406,431
shares of common stock are undesignated as to class.
7. COMMITMENTS AND CONTINGENCIES:
Environmental
As an ongoing facet of the Company's business, it is required to maintain
compliance with various environmental regulations. The cost of this compliance
is included in the Company's operating results as incurred. These ongoing
costs include permitting fees and expenses and specialized effluent control
systems as well as monitoring and site assessment costs required by various
governmental agencies. In the opinion of management, the maintenance of this
compliance will not have a significant effect on the financial position or
results of operations of the Company.
In August 1994, the U.S. Environmental Protection Agency ("EPA") identified
the Company as a potentially responsible party ("PRP") in the El Monte
Operable Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early
1995, the Company and the EPA executed an Administrative Consent Order which
requires the Company and other PRP's to perform a Remedial Investigation and
Feasibility Study ("RI/FS") for the EMOU. In addition, the Company's facility
in Avon, Massachusetts is subject to Massachusetts "Chapter 21E", the State's
hazardous site clean-up program. Uncertainty as to (a) the extent to which the
Company caused, if at all, the conditions being investigated, (b) the extent
of environmental contamination and risks, (c) the applicability of changing
and complex environmental laws, (d) the stage of the investigation and/or
remediation, (e) the unpredictability of investigation and/or remediation
costs (including as to when they will be incurred), (f) applicable clean-up
standards, (g) the remediation (if any) that will ultimately be required, and
(h) available technology make it difficult to assess the likelihood and scope
of further investigation or remediation activities or to estimate the future
costs of such activities if undertaken. In addition, liability under CERCLA is
joint and several, and any potential inability of other PRPs to pay their pro
rata share of the environmental remediation costs may result in the Company
being required to bear costs in excess of its pro rata share.
In fiscal 1997, the Company with the help of independent consultants,
determined a range of estimated costs of $9,000,000 to $11,000,000 associated
with the various claims and assertions it faces. The time frame over which the
Company expects to incur such costs varies with each site, ranging up to 20
years as of March 29, 1997. These estimates are based partly on progress made
in determining the magnitude of such costs, experience gained from sites on
which remediation is ongoing or has been completed, and the timing and extent
of remedial actions required by the applicable governmental authorities. As a
result, the Company has accrued $10,000,000 for existing estimated
environmental remediation as of March 29, 1997, which the Company believes to
be the best estimate of the liability.
In conjunction with the Recapitalization, an escrow of $6,000,000 was
established to secure certain indemnification obligations (including
environmental matters) of the Selling Group to the Company. Any environmental
costs, net of tax benefit, are expected to be funded from the escrow account.
Actual expenses for environmental remediation for each of the three years in
the period ended March 29, 1997 were $297,000 (1997), $730,000 (1996) and
$169,000 (1995). No environmental expense has been recorded by the Company
during the three months ended June 28, 1997.
F-23
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES--CONTINUED
Claims for recovery of costs already incurred and future costs have been
asserted against various insurance companies. The Company has neither recorded
any asset nor reduced any liability in anticipation of recovery with respect
to such claims made.
The Company believes its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, this reserve may be modified and
related charges against earnings may be made.
Other
In addition to the above, the Company is involved in other claims and
litigation arising in the normal course of business. Based on the advice of
counsel and in the opinion of management, the ultimate resolution of these
matters will not have a significant effect on the financial position or the
results of operations of the Company.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". The standard establishes guidelines for the reporting
and display of comprehensive income and its components in financial
statements. Disclosure of comprehensive income and its components will be
required beginning with the Company's fiscal year ending 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The new
rules will be effective for the Company's 1999 fiscal year end. The Company
has not evaluated the impact, if any, of the new standard.
F-24
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY GUARANTOR OR ANY INITIAL PUR-
CHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Available Information................................................. 3
Disclosure Regarding Forward Looking Statements....................... 3
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 17
The Recapitalization.................................................. 24
Recent Developments................................................... 25
Use of Proceeds....................................................... 26
Capitalization........................................................ 27
Unaudited Pro Forma Consolidated Financial Information................ 28
Selected Consolidated Historical Financial Information................ 32
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 34
The Exchange Offer.................................................... 42
Business.............................................................. 49
Management............................................................ 60
Securities Ownership of Certain Beneficial Owners and Management...... 66
Certain Relationships and Related Transactions........................ 68
Description of Certain Indebtedness................................... 70
Description of the Notes.............................................. 72
Certain U.S. Federal Income Tax Considerations........................ 107
Plan of Distribution.................................................. 107
Legal Matters......................................................... 108
Experts............................................................... 108
Index to Financial Statements......................................... F-1
</TABLE>
Until February 1, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the New Notes, whether or not participating
in the Exchange Offer, may be required to deliver a Prospectus.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
$90,000,000
10 3/4% Senior
Subordinated Exchange
Notes Due 2007
----------------
PROSPECTUS
----------------
NOVEMBER 3, 1997
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was
an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was unlawful. A Delaware corporation may indemnify officers and
directors against expenses (including attorneys' fees) in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director actually and reasonably incurred.
Article V of the By-laws of the Registrant, a copy of which is filed as
Exhibit 3.2 to this Registration Statement, allows the Registrant to maintain
director and officer liability insurance on behalf of any person who is or was
a director or officer of the Registrant or such person who serves or served as
director, officer, employee or agent, of another corporation, partnership or
other enterprise at the request of the Registrant. Article V of the
Registrant's By-laws provides for indemnification of the officers and
directors of the Registrant to the fullest extent permitted by applicable law.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article Sixth
of the Certificate of Incorporation of the Registrant, a copy of which is
filed as Exhibit 3.1 to this Registration Statement, provides that no director
of the Registrant shall be personally liable to the Registrant or its
shareholders for monetary damages for any breach of his fiduciary duty as a
director; provided, however, that such clause shall not apply to any liability
of a director (1) for any breach of the Director's duty of loyalty to the
Registrant or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (3)
pursuant to Section 174 of the Delaware Corporation Law, or (4) for any
transaction from which the director derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 First Amendment and Restatement of the Stock Purchase and Sale
Agreement, dated as of December 23, 1996, by and among the Company, the
Windward Group,MetLife and the Sellers named therein.
2.2 Subordinated Note Agreement, dated as of February 14, 1997, by and
among theCompany, Windward/Merchant L.P., Windward/Merban L.P. and
MetLife.
2.3 Escrow Agreement, dated as of February 14, 1997, by and among the
Company, Windward Capital Associates L.P., the Sellers named therein and
U.S. Trust Company of California, N.A., as escrow agent.
II-1
<PAGE>
EXHIBIT DESCRIPTION
NO. -----------
---
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
3.3 Certificate of Incorporation of Hermetic Seal Corporation.
3.4 By-Laws of Hermetic Seal Corporation.
3.5 Certificate of Incorporation of Glasseal Products, Inc.
3.6 By-Laws of Glasseal Products, Inc.
3.7 Certificate of Incorporation of Sealtron, Inc.
3.8 By-Laws of Sealtron, Inc.
3.9 Certificate of Incorporation of Sealtron Acquisition Corp.
3.10 By-Laws of Sealtron Acquisition Corp.
3.11 Articles of Incorporation of HCC Industries International.
3.12 By-Laws of HCC Industries International.
3.13 Declaration of Trust of Norfolk Avon Realty Trust.
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of May 6, 1997 (the "Indenture"), among the
Company, the Subsidiary Guarantors and IBJ Schroder Bank & Trust
Company, as Trustee, relating to the 10 3/4% Senior Subordinated
Notes due 2007 and the 10 3/4% Senior Subordinated Exchange
Notes due 2007.
4.2 Form of 10 3/4% Senior Subordinated Exchange Notes due 2007 (included
in Exhibit 4.1).
4.3 Registration Rights Agreement, dated May 6, 1997, among the
Company, the Subsidiary Guarantors, and Credit Suisse First
Boston Corporation and Furman Selz LLC, as Initial Purchasers.
4.4 First Supplemental Indenture, dated as of October 24, 1997, to the
Indenture.
5. OPINIONS.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel
to the Company.
9. VOTING TRUST AGREEMENT.
9.1 Stockholders Agreement, dated as of February 14, 1997, by and among
the Company, the Windward Group and the Stockholders named therein.
10. MATERIAL CONTRACTS.
10.1 Credit Agreement, dated as of February 14, 1997, by and among the
Company, Fleet Capital Corporation, as Agent, and the Lender Parties
thereto.
10.2 Amendment No. 1 to the Credit Agreement, dated as of May 6, 1997, by
and among the Company, Fleet Capital Corporation, as Agent, and the
Lender Parties thereto.
10.3 HCC Industries, Inc. Stock Option Plan, dated February 14, 1997.
10.4 Form of Stock Option Agreement (included in Exhibit 10.3).
10.5 Contingent Bonus Plan of HCC Industries Inc., dated as of February 14,
1997.
10.6 Form of Contingent Bonus Plan Award Agreement (included in Exhibit
10.5).
10.7 Employment Agreement, dated as of February 14, 1997, by and between
the Company and Andrew Goldfarb.
II-2
<PAGE>
EXHIBIT DESCRIPTION
NO. -----------
---
10.8 Employment Agreement, dated as of February 14, 1997, by and between the
Company and Christopher Bateman.
10.9 Employment Agreement, dated as of February 14, 1997, by and between
the Company and Richard Ferraid.
10.10 Financial Advisory Services Agreement, dated as of February 14, 1997,
by and between Windward Capital Partners, L.P. and the Company.
10.11 Letter Agreement, dated February 14, 1997, from the Company to Windward
Capital Partners L.P., relating to fees.
10.12 Purchase Agreement, dated May 1, 1997, by and among the Company, the
Subsidiary Guarantors and Credit Suisse First Boston Corporation and
Furman Selz LLC, as Initial Purchasers.
12. RATIO OF EARNINGS TO FIXED CHARGES.
12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Company.
21. SUBSIDIARIES.
21.1 Subsidiaries of the Company.
23. CONSENTS.
*23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel
to the Company (included in Exhibit 5.1).
24. POWERS OF ATTORNEY.
24.1 Power of Attorney (included in signature page).
25. FORM T-1.
25.1 Statement of Eligibility and Qualification on Form T-1 of IBJ
Schroder Bank & Trust Company, as Trustee under the Indenture
relating to the Company's 10 3/4% Senior Subordinated Exchange
Notes due 2007.
27. FINANCIAL DATA SCHEDULE.
27.1 Financial Data Schedule for the Fiscal year ended March 29, 1997.
27.2 Financial Data Schedule for the Quarter ended June 28, 1997.
99. MISCELLANEOUS.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.4 Form of Letter to Clients.
- --------
* Filed herewith.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts and Reserves.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
HCC INDUSTRIES INC.
/s/ Andrew Goldfarb
By: _____________________________
Andrew Goldfarb
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Chairman, President and Chief November 3, 1997
- ------------------------------------ Executive Officer
Andrew Goldfarb (Principal Executive Officer)
/s/ Christopher H. Bateman Director, Vice President and November 3, 1997
- ------------------------------------ Chief Financial Officer
Christopher H. Bateman (Principal Financial Officer)
(Principal Accounting Officer)
* Director November 3, 1997
- ------------------------------------
Richard Ferraid
* Director November 3, 1997
- ------------------------------------
Robert H. Barton, III
* Director November 3, 1997
- ------------------------------------
Gary L. Swenson
* Director November 3, 1997
- ------------------------------------
Noel E. Urban
* Director November 3, 1997
- ------------------------------------
Thomas J. Sikorski
* Director November 3, 1997
- ------------------------------------
John M. Leonis
</TABLE>
/s/ Christopher H. Bateman
*By: __________________________
Christopher H. Bateman
Attorney-in-fact
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
HERMETIC SEAL CORPORATION
By: /s/ Andrew Goldfarb
----------------------------------
Andrew Goldfarb
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Director, President and Chief November 3, 1997
- ------------------------ Executive Officer
Andrew Goldfarb (Principal Executive
Officer)
/s/ Christopher H. Bateman Director, Vice President, November 3, 1997
------------------------------ Treasurer and Secretary
Christopher H. Bateman (Principal Financial Officer
and Principal Accounting
Officer)
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
GLASSEAL PRODUCTS, INC.
By: /s/ Andrew Goldfarb
--------------------------------
Andrew Goldfarb
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Chairman and Chief Executive November 3, 1997
- -------------------------- Officer (Principal Executive
Andrew Goldfarb Officer)
/s/ Christopher H. Bateman Director, Treasurer and Secretary November 3, 1997
-------------------------- (Principal Financial Officer and
Christopher H. Bateman Principal Accounting Officer)
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
SEALTRON, INC
By: /s/ Andrew Goldfarb
-----------------------------
Andrew Goldfarb
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Chairman, President and November 3, 1997
- --------------------------- Chief Executive Officer
Andrew Goldfarb (Principal Executive Officer)
/s/ Christopher H. Bateman Director, Vice President and November 3, 1997
- --------------------------- Chief Financial Officer (Principal
Christopher H. Bateman Financial Officer and Principal
Accounting Officer)
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
SEALTRON ACQUISITION CORP.
By: /s/ Andrew Goldfarb
------------------------------
Andrew Goldfarb
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Chairman, President and Chief November 3, 1997
- --------------------------- Executive Officer (Principal
Andrew Goldfarb Executive Officer)
/s/ Christopher H. Bateman Director, Vice President, November 3, 1997
- --------------------------- Chief Financial Officer and
Christopher H. Bateman Secretary (Principal Financial
Officer and Principal Accounting
Officer)
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
HCC INDUSTRIES INTERNATIONAL
By: /s/ Andrew Goldfarb
-----------------------
Andrew Goldfarb
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb Chairman, President and Chief November 3, 1997
- --------------------------- Executive Officer (Principal
Andrew Goldfarb Executive Officer)
/s/ Christopher H. Bateman Director, Vice President, November 3, 1997
- --------------------------- Chief Financial Officer and
Christopher H. Bateman Secretary (Principal Financial
Officer and Principal Accounting
Officer)
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of New York, State of New York, on the 3rd day of November, 1997.
NORFOLK AVON REALTY TRUST
By: /s/ Andrew Goldfarb
------------------------
Andrew Goldfarb
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew Goldfarb President November 3, 1997
- ---------------------------- (Principal Executive Officer)
Andrew Goldfarb
/s/ Christopher H. Bateman Vice President November 3, 1997
- ---------------------------- Treasurer and Secretary (Principal
Christopher H. Bateman Financial Officer and Principal
Financial Officer and Principal
Accounting Officer)
</TABLE>
II-11
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE CHARGED DEDUCTIONS--
AT TO COSTS UNCOLLECTIBLE BALANCE
BEGINNING AND FROM ACCOUNTS AT END
OF YEAR EXPENSES ACQUISITIONS WRITES OFF OF YEAR
--------- -------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful
accounts............... $40.0 $ 4.2 $-- $ 4.2 $40.0
===== ===== ==== ===== =====
1996
Allowance for doubtful
accounts............... $65.0 $36.0 $-- $61.0 $40.0
===== ===== ==== ===== =====
1995
Allowance for doubtful
accounts............... $70.0 $ -- $-- $ 5.0 $65.0
===== ===== ==== ===== =====
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
NO. ----------- NO.
---- ---
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 First Amendment and Restatement of the Stock Purchase and Sale
Agreement, dated as of December 23, 1996, by and among the Company, the
Windward Group, MetLife and the Sellers named therein.
2.2 Subordinated Note Agreement, dated as of February 14, 1997, by and
among the Company, Windward/Merchant L.P., Windward/Merban L.P. and
MetLife.
2.3 Escrow Agreement, dated as of February 14, 1997, by and among the
Company, Windward Capital Associates L.P., the Sellers named therein
and U.S. Trust Company of California, N.A., as escrow agent.
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
3.3 Certificate of Incorporation of Hermetic Seal Corporation.
3.4 By-Laws of Hermetic Seal Corporation.
3.5 Certificate of Incorporation of Glasseal Products, Inc.
3.6 By-Laws of Glasseal Products, Inc.
3.7 Certificate of Incorporation of Sealtron, Inc.
3.8 By-Laws of Sealtron, Inc.
3.9 Certificate of Incorporation of Sealtron Acquisition Corp.
3.10 By-Laws of Sealtron Acquisition Corp.
3.11 Articles of Incorporation of HCC Industries International.
3.12 By-Laws of HCC Industries International.
3.13 Declaration of Trust of Norfolk Avon Realty Trust.
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of May 6, 1997 (the "Indenture"), among the
Company, the Subsidiary Guarantors and IBJ Schroder Bank & Trust
Company, as Trustee, relating to the 10 3/4% Senior Subordinated
Notes due 2007 and the 10 3/4% Senior Subordinated Exchange
Notes due 2007.
4.2 Form of 10 3/4% Senior Subordinated Exchange Notes due 2007 (included
in Exhibit 4.1).
4.3 Registration Rights Agreement, dated May 6, 1997, among the
Company, the Subsidiary Guarantors, and Credit Suisse First
Boston Corporation and Furman Selz LLC, as Initial Purchasers.
4.4 First Supplemental Indenture, dated as of October 24, 1997, to the
Indenture.
5. OPINIONS.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to
the Company.
9. VOTING TRUST AGREEMENT.
9.1 Stockholders Agreement, dated as of February 14, 1997, by and among the
Company, the Windward Group and the Stockholders named therein.
10. MATERIAL CONTRACTS.
10.1 Credit Agreement, dated as of February 14, 1997, by and among the
Company, Fleet Capital Corporation, as Agent, and the Lender Parties
thereto.
10.2 Amendment No. 1 to the Credit Agreement, dated as of May 6, 1997, by
and among the Company, Fleet Capital Corporation, as Agent, and the
Lender Parties thereto.
<PAGE>
EXHIBIT DESCRIPTION PAGE
NO. ----------- NO.
---- ----
10.3 HCC Industries Inc. Stock Option Plan, dated February 14, 1997.
10.4 Form of Stock Option Agreement (included in Exhibit 10.3).
10.5 Contingent Bonus Plan of HCC Industries Inc., dated as of February 14,
1997.
10.6 Form of Contingent Bonus Plan Award Agreement (included in Exhibit
10.5).
10.7 Employment Agreement, dated as of February 14, 1997, by and between
the Company and Andrew Goldfarb.
10.8 Employment Agreement, dated as of February 14, 1997, by and between
the Company and Christopher Bateman.
10.9 Employment Agreement, dated as of February 14, 1997, by and between
the Company and Richard Ferraid.
10.10 Financial Advisory Services Agreement, dated as of February 14, 1997,
by and between Windward Capital Partners, L.P. and the Company.
10.11 Letter Agreement, dated February 14, 1997, from the Company to
Windward Capital Partners L.P., relating to fees.
10.12 Purchase Agreement, dated May 1, 1997, by and among the Company, the
Subsidiary Guarantors and Credit Suisse First Boston Corporation and
Furman Selz LLC, as Initial Purchasers.
12. RATIO OF EARNINGS TO FIXED CHARGES.
12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Company.
21. SUBSIDIARIES.
21.1 Subsidiaries of the Company.
23. CONSENTS.
*23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel
to the Company (included in Exhibit 5.1).
24. POWERS OF ATTORNEY.
24.1 Power of Attorney (included in signature page).
25 FORM T-1.
25.1 Statement of Eligibility and Qualification on Form T-1 of IBJ
Schroder Bank & Trust Company, as Trustee under the Indenture
relating to the Company's 10 3/4% Senior Subordinated Exchange
Notes due 2007.
27. FINANCIAL DATA SCHEDULE.
27.1 Financial Data Schedule for the Fiscal Year ended March 29, 1997.
27.2 Financial Data Schedule for the Quarter ended June 28, 1997.
99. MISCELLANEOUS.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.4 Form of Letter to Clients.
- --------
* Filed herewith.
2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4,
Amendment No. 4, of our report dated May 30, 1997 (except for Note 10, as to
which the date is June 20, 1997), on our audits of the consolidated financial
statements and financial statement schedule of HCC Industries Inc. We also
consent to the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Los Angeles, CA
October 31, 1997
