<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1998
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REGISTRATION NO. 333-62795
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SIMONDS INDUSTRIES INC.
ARMSTRONG MANUFACTURING COMPANY
SIMONDS HOLDING COMPANY, INC.
SIMONDS INDUSTRIES FSC, INC.
(Exact Name of Registrants as Specified in their Charters)
<TABLE>
<S> <C> <C>
DELAWARE 05-0484518
OREGON 930114520
DELAWARE 04-3003261
U.S. VIRGIN ISLANDS 5995 66-0447366
(States or Other Jurisdictions of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Nos.)
</TABLE>
135 INTERVALE ROAD
FITCHBURG, MASSACHUSETTS 01420
(978) 343-3731
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
CHRISTINE M. MARX
EDWARDS & ANGELL
150 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NEW JERSEY 07078
(973) 376-7700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]____________
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<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT REGISTRATION FEE
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<S> <C> <C> <C>
10 1/4% Senior Subordinated Notes due 2008.................. $ 100,000,000 100% $ 29,500
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Guarantee of Notes of Armstrong Manufacturing Company,
Inc....................................................... -- -- --
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Guarantee of Notes of Simonds Holding Company, Inc.......... -- -- --
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Guarantee of Notes of Simonds Industries FSC, Inc........... -- -- --
</TABLE>
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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 THE 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> 2
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THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO COMPLETION
OR AMENDMENT. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY. SUBJECT TO COMPLETION, DATED
OCTOBER 21, 1998
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PROSPECTUS
$100,000,000
SIMONDS INDUSTRIES INC.
[LOGO]
OFFER TO EXCHANGE ITS
10 1/4% SENIOR SUBORDINATED NOTES DUE JULY 1, 2008,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR AN EQUAL PRINCIPAL AMOUNT OF ITS
10 1/4% SENIOR SUBORDINATED NOTES DUE JULY 1, 2008,
WHICH HAVE NOT BEEN SO REGISTERED
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS THEREUNDER WILL EXPIRE AT
5:00 P.M. NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
Simonds Industries Inc., a Delaware corporation ("Simonds" or the
"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 $100,000,000 of its 10 1/4% Senior Subordinated Notes due 2008
(the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), for a like principal amount of its
outstanding 10 1/4% Senior Subordinated Notes due 2008 (the "Original Notes"
and, together with the Exchange Notes, the "Notes"), which have not been so
registered, from the holders thereof. The terms of the Exchange Notes are
identical in all material respects to the Original Notes, except for certain
transfer restrictions and registration rights relating to the Original Notes.
The Company will accept for exchange any and all Original Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on
,1998, unless extended (as so extended, the "Expiration Date"). Tenders
of Original Notes may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Original
Notes being tendered for exchange pursuant to the Exchange Offer. Pursuant to
the Registration Agreement (as defined), the Exchange Offer will remain open for
not less than 30 days (or longer if required by applicable law) after the date
hereof. The Exchange Offer is subject to certain other customary conditions. See
"The Exchange Offer."
Interest on the Exchange Notes will be payable semi-annually on January 1
and July 1 of each year, commencing January 1, 1999. The Exchange Notes are
subject to redemption on or after July 1, 2003, at the option of the Company, in
whole or in part, at the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In addition, prior to July 1, 2001,
the Company may, at its option, redeem up to an aggregate of 35% of the original
principal amount of the Notes issued with the net proceeds from one or more
Public Equity Offerings (as defined) at the redemption price set forth herein
plus accrued and unpaid interest to the date of redemption; provided that at
least 65% of the Notes issued remain outstanding immediately after giving effect
to any such redemption. In the event of a Change of Control (as defined), the
Company will be obligated to make an offer to purchase all of the outstanding
Notes at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase. In addition, the Company
will be obligated to make an offer to purchase Notes in the event of certain
asset sales. See "Description of Exchange Notes."
The Exchange Notes will be general unsecured obligations of the Company
ranking subordinate in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. As of October 3, 1997, there were
approximately $3.3 million of debt and securities ranking senior to the Notes
and approximately $1.5 million ranking pari passu; there is no debt or
securities subordinate to the Notes. The Exchange Notes will be unconditionally
guaranteed (the "Guarantees"), on a senior subordinated basis, jointly and
severally, by each of the Company's Domestic Wholly Owned Restricted Subsidiary
(as defined) (the "Guarantors"). The Guarantee of each Guarantor will be
subordinate in right of payment to all Guarantor Senior Debt (as defined) of
such Guarantor. As of June 27, 1998, on a pro forma basis, the Company and the
Guarantors would have had no Senior Debt or Guarantor Senior Debt outstanding.
In addition, the Exchange Notes will be effectively subordinated in right of
payment to all liabilities, including indebtedness, of subsidiaries of the
Company which are not Guarantors. As of June 27, 1998, on a pro forma basis,
such subsidiaries would have had $14.4 million of total liabilities, including
approximately $6.5 million of indebtedness.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
July 7, 1998 (the "Registration Rights Agreement"), among the Company and the
other signatories thereto. The Company believes that based on interpretations by
the staff of the Securities and Exchange Commission (the "SEC"), Exchange Notes
issued pursuant to the Exchange Offer in exchange for Original Notes may be
offered for resale, resold and otherwise transferred by each holder thereof
(other than any 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 requirements of the Securities Act, provided that such
Exchange 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 Exchange Notes.
Each broker-dealer that receives Exchange 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 Exchange 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
Exchange Notes received in exchange for Original Notes where such Original Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business on the ninetieth day after
the Expiration Date, 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 and will
pay all expenses incident to the Exchange Offer.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE> 3
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Original Notes in any jurisdiction in
which such Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Exchange Note (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depositary")
and registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Exchange Note representing the Exchange Notes will be
shown on, and transfers thereof will be effected through, records maintained by
the Depositary and its participants. After the initial issuance of the Global
Exchange Note, Exchange Notes in certificated form will be issued in exchange
for interests in the Global Exchange Note only on the terms set forth in the
Indenture dated as of July 7, 1998 (the "Indenture") among the Company, the
Guarantors and State Street Bank and Trust Company, as trustee (the "Trustee").
See "Description of Exchange Notes -- Book-Entry Transfer."
Prior to this Exchange Offer, there has been no public market for the
Original Notes. To the extent that Original Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Original Notes could
be adversely affected. If a market for the Exchange Notes should develop, the
Exchange Notes could trade at a discount from their face value. The Company does
not currently intend to list the Exchange Notes on any securities exchange or to
seek approval for quotation through any automated quotation system.
Neither the Company nor any of its subsidiaries will receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES," "EXPECTS,"
"ANTICIPATES" AND SIMILAR EXPRESSIONS ARE USED TO IDENTIFY FORWARD LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THE COMPANY
WISHES TO CAUTION READERS THAT ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
CERTAIN STATEMENTS UNDER "SUMMARY," "USE OF PROCEEDS," "SELECTED PRO FORMA
FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING
THE COMPANY'S FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD
LOOKING STATEMENTS. ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON
ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED ON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN
THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT
ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD
LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1)
INCREASED COMPETITION; (2) INCREASED COSTS; (3) LOSS OR DISRUPTION ON SUPPLY
SOURCES OF SPECIALTY STEELS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF
MANAGEMENT; (5) INCREASES IN THE COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY
OF ADDITIONAL DEBT OR EQUITY CAPITAL ON TERMS CONSIDERED REASONABLE BY
MANAGEMENT; (6) ADVERSE STATE, FEDERAL OR FOREIGN
i
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LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7)
CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY
COMPETE AND FLUCTUATIONS IN DEMAND IN THE METAL PROCESSING AND PRIMARY WOOD
INDUSTRIES. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND
ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE
FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK
FACTORS."
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (herein referred
to, together with all exhibits and schedules thereto and any amendments thereto,
as the "Exchange Offer Registration Statement") under the Securities Act with
respect to the Exchange Notes offered hereby. This Prospectus, which forms a
part of the Exchange Offer Registration Statement, does not contain all of the
information set forth in the Exchange Offer Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. For further information with respect to the Company and the Exchange Notes
offered hereby, reference is made to the Exchange Offer Registration Statement.
Statements made in this Prospectus as to the contents of certain documents are
not necessarily complete and, in each instance, reference is made to the copy of
the document filed as an exhibit to the Exchange Offer Registration Statement.
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Upon effectiveness of the Exchange Offer Registration
Statement, the Company will become subject to the periodic reporting
requirements of Section 15(d) of the Exchange Act. Pursuant to the Indenture,
the Company has agreed that, until such time as the Company shall become subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, (a)
the Company shall file with the SEC and provide to the Trustee, the Initial
Purchasers (as defined) and holders of Notes such annual reports and such
information, documents and other reports to be filed with the SEC pursuant to
Sections 13 and 15(d) of the Exchange Act, whether or not the Company is subject
to such filing requirements so long as the SEC will accept such filings, and (b)
the Company shall provide to the Trustee and the holders of the Notes, and make
available to prospective purchasers of Notes, securities analysts and
broker-dealers upon request, consolidated financial statements comparable to
those required to appear in annual or quarterly reports. In addition, for so
long as any of the Original Notes remain outstanding, the Company has agreed to
make available to any prospective purchaser of the Original Notes or beneficial
owner of the Original Notes in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act.
Any reports or documents filed by Simonds with the SEC (including the
Exchange Offer Registration Statement) may be inspected and copied at the Public
Reference Section of the SEC's office at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices in New York (7 World
Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661). Copies of
such reports or other documents may be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the SEC maintains a web site that contains reports and other
information that is filed through the SEC's Electronic Data Gathering Analysis
and Retrieval System. The web site can be accessed at http://www.sec.gov.
ii
<PAGE> 5
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the consolidated financial statements and notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, references to the "Company" are to
Simonds Industries Inc. and its wholly owned subsidiaries. References herein to
various financial information on a "pro forma basis" (i) give effect to the
acquisitions of Armstrong Manufacturing Company ("Armstrong") and W. Notting
Limited ("Notting") as if such transactions had been completed as of the first
day of the related period and (ii) reflect certain adjustments described in
"Selected Pro Forma Financial Data." This Prospectus includes product names and
trademarks of the Company and of other organizations.
THE COMPANY
GENERAL
Simonds, with operations since 1832, is a leading global manufacturer and
marketer of high quality industrial cutting tools. With facilities in North
America and Europe, the Company sells its products into three distinct end user
markets: metal (49% of 1997 net sales on a pro forma basis), wood (40%), and
paper (11%). Management believes the Company holds a number one, two or three
share position in each of the markets it serves.
The Company manufactures saw blades, files, knives and steel rule that,
when mounted on industrial machinery, cut, shape, bend and perforate metal, wood
and paper. In addition, the Company manufactures and distributes machinery,
including a complete line of filing room equipment used primarily in saw mills.
Management believes that Simonds manufactures and markets the most
technologically advanced industrial cutting tools available in the industry. The
Company's more than 25,000 products are used in a wide variety of industrial
applications. End users of Simonds' products range from large companies such as
General Motors Corp. and Georgia Pacific Corp. to small businesses such as
machine shops. The primary end users of the Company's metal cutting tools
include aerospace, automotive, construction and home appliance manufacturers as
well as steel service centers, forge shops and aluminum foundries. The Company's
wood cutting products are used in saw mills, pulp and paper mills, furniture
manufacturing facilities and wood chipping operations. Steel rule products
produced by the Company are used in the die making and packaging industries. The
products are consumable and require replacement many times per year. More than
85% of the Company's net sales are derived from sales of replacement products
for use in the aftermarket. In addition, despite the significant value added by
the Company's products in the processes in which they are used, these products
add relatively little cost to end users' operations. These factors have
contributed to the Company's historically stable revenue stream.
Management believes that as a result of its long and successful history,
Simonds has been able to create a loyal, knowledgeable and efficient
distribution base. A substantial majority of the Company's products are marketed
and sold to end users in each of its market segments worldwide through
approximately 7,000 independent distributors. This distribution base provides
the Company with a competitive advantage by allowing the Company to more easily
sell its broad range of products, including new and sophisticated tools. In
addition, through its independent distributors the Company is able to offer end
users the highest quality customer service, including the resharpening and
maintenance of its cutting tools. The Company complements its distribution base
with a service oriented, highly trained and experienced sales force who spend
most of their time with end users. The Company sells its products directly to
over 12,000 distributors and end users with no single customer representing more
than 2.1% of total net sales for 1997.
Simonds' products are marketed and sold worldwide in 92 countries through
facilities located in the United States, Canada, Germany, Spain and the United
Kingdom. The Company has expanded its product sales outside of North America
from 15% of net sales in 1991 to 24% in 1997 on a pro forma basis through
acquisitions and internal growth. The Company intends to continue its
international growth by broadening its
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1
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product offerings in existing markets and entering new geographic areas. For the
year ended December 27, 1997, the Company's net sales in the United States,
Canada, Europe and the rest of the world represented approximately 62%, 14%, 17%
and 7% of total Company net sales, respectively, on a pro forma basis.
Simonds benefits from an experienced management team with a demonstrated
track record of successfully implementing the Company's business strategy. The
senior management team averages more than 20 years of industry experience.
Management believes that this experience, in combination with the Company's 166
year history and superior product quality, has made Simonds a widely recognized
brand name among its target customer base.
BUSINESS STRATEGY
Management believes that Simonds is well positioned to maintain its current
leadership position within the cutting tool industry. The Company's strategic
objective is to continue to design, manufacture and sell superior cutting tools
and equipment while leveraging its metallurgy and tooth edge geometry expertise.
The Company focuses on end user markets where high product performance is valued
and in geographic markets with a developed and large industrial base. The
Company's objective is to continue to grow its sales and expand its operating
margins by pursuing the following business strategy:
Continued Margin Expansion Through Focus on Profitability. The Company's
culture and organization focuses on consistently improving profitability. The
Company's compensation structure creates incentives for all personnel to focus
on profit margins. In each of the manufacturing facilities, all levels of
employees from machine operators through plant managers receive bonuses tied to
the profitability or productivity of their particular facility. The Company's
corporate sales management and sales force receive incentive compensation based
on achieving specific profit margins as well as sales targets. Senior
management's incentive compensation is based on targeted levels of the Company's
profitability. As a result of this cultural focus and emphasis on profitability,
Simonds' EBITDA margin has grown from 10.4% of net sales in 1990 to 15.2% of net
sales in 1997.
Strategic Acquisitions. The Company intends to continue to pursue
strategic acquisitions in the highly fragmented industrial cutting tool
industry. Management believes that there are many attractive potential
acquisition targets both domestically and internationally. Since 1989, the
Company has completed eight acquisitions as described in the following table.
<TABLE>
<CAPTION>
MARKET YEAR
ENTITY ACQUIRED SEGMENT PRODUCT TYPE LOCATIONS ACQUIRED
--------------- ------- ----------------------- --------------------- --------
<S> <C> <C> <C> <C>
Michigan Knife Company Wood - Industrial Knives North America 1989
- Circular Saws
Mainland Manufacturing Inc. Wood - Wide Band Saws Western Canada 1990
- Circular Saws
- Filing Room Equipment
A.H. Ralston Limited Metal - Industrial Files United Kingdom 1990
Wespa Metallsagenfabrik-Lorenz Weisel
KG ("Wespa") Metal - Band Saws Germany 1992
- Hack Saws
Strongridge Limited ("Strongridge") Metal - Sales & Marketing North America 1996
Product line of Pacific Hoe Company Wood - Bits and Shanks -- 1997
Armstrong Wood - Filing Room Equipment United States 1997
Notting Paper - Steel Rule Europe, North America 1998
</TABLE>
Each of these acquisitions has provided significant strategic opportunities for
the Company by either expanding product offerings or geographic markets in which
these products are sold. For example, Notting expanded the Company's steel rule
product line, Armstrong expanded the Company's filing room equipment machinery,
Strongridge provided access to smaller distributors, and Wespa further developed
the metal band product line. The Company is presently evaluating certain
acquisition opportunities and as part of its strategy will continue to do so in
the future. There can be no assurance that the Company will consummate any such
acquisitions or, if consummated, the timing thereof.
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Emphasis on Product Innovation. Management believes that the Company is a
leader in the development of innovative and technologically superior products.
Throughout its history, the Company has often been first to introduce new
product technologies, including bits and shanks, carbide tipped band saws,
circular and band levelers, band tensioners, computerized saw control and narrow
wood band technology. An even greater emphasis on product innovation was
initiated in 1996 with the creation of a staff level position devoted to product
development. Recent new products include (i) "Epic(R)," a state-of-the-art metal
band saw line; (ii) automated band saws and circular saw levelers, revolutionary
products which allow for automated tensioning and leveling of band saws and
circular saws; (iii) "Red Streak(R)," a premier product for portable saw mill
use that enables users to cut lumber in the forest, resulting in lower operating
expenses; and (iv) "Dominator(R)," carbide tip bits which last significantly
longer than high speed steel bits. Management estimates that the Company
introduces approximately 10 to 25 new product innovations annually. New product
innovations are important to the Company's independent distributors, providing
them with the ability to expand their product lines, the opportunity to improve
their margins and the ability to offer their customers enhanced products.
Low Cost Manufacturing. The Company continues to focus on being a low cost
producer of high value-added products within the cutting tool industry. The
Company has continued to benefit from economies of scale in both purchasing and
manufacturing. Management believes that the Company is able to purchase
specialty steel, its primary raw material, more efficiently than many of its
smaller competitors, generating significant savings. The Company has reduced its
manufacturing costs and improved its consistency of product quality as a result
of capital investment and process control programs. Capital investment of more
than $10 million since 1995 in new and upgraded equipment such as electron beam
welding, milling equipment, grinding equipment, heat treating equipment, and
in-line process controls has resulted in productivity and quality gains. The
Company's Fitchburg and Newcomerstown facilities received ISO 9002 certification
in 1993 and 1997, respectively. As a measure of improved efficiency, the
Company's sales per employee has increased from approximately $87,000 in 1989 to
approximately $151,000 in 1997.
COMPANY HISTORY
The Company has been in continuous operation selling cutting tools with
headquarters in Fitchburg, Massachusetts since 1832. The Company originally
manufactured agricultural cutting tools, evolving into an industry leader in the
development of industrial cutting tools for metal, wood and paper. In 1995, the
Company was acquired by Fleet Venture Resources, Inc. and certain of its
affiliates ("Fleet") and management. The Company is incorporated in Delaware and
maintains its principal executive offices at 135 Intervale Road, Fitchburg,
Massachusetts 01420. Its phone number is (978) 343-3731.
ORIGINAL OFFERING AND RECAPITALIZATION
On July 7, 1998, the Company consummated the sale of the Original Notes in
a transaction exempt from the registration requirements of the Securities Act
(the "Original Offering"). The Original Offering was made in connection with a
recapitalization (the "Recapitalization") of the Company pursuant to which (i)
the Company repurchased certain of its outstanding equity securities for an
aggregate purchase price of $58.3 million (the "Recapitalization
Consideration"), (ii) the Company issued new shares of voting and non-voting
Common Stock to certain existing stockholders and new investors with aggregate
proceeds to the Company of $18.8 million (the "New Shares"), (iii) the Company
issued certain warrants and options to certain existing stockholders and new
investors, and (iv) certain of the Company's existing stockholders retained
voting Common Stock with an aggregate value of approximately $16.2 million (the
"Retained Shares").
Fleet received approximately $39.0 million of the Recapitalization
Consideration, purchased approximately $7.8 million of the New Shares and
retained approximately $9.6 million of the Retained Shares. It also received
warrants to purchase 3,538.66 shares of Common Stock at a price of $458.52 per
share, 1,357.73 of which are exercisable only under certain circumstances.
Management of the Company received approximately $16.0 million of the
Recapitalization Consideration, purchased approximately $0.3 million of the New
Shares and retained approximately $6.4 million of the Retained Shares. In
addition, certain members of Management received warrants to purchase 573.58
shares of Common Stock at a price of $458.52 per share. See "Certain
Transactions."
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THE EXCHANGE OFFER
The Exchange Offer............ Up to $100,000,000 aggregate principal amount
of Exchange Notes are being offered in exchange
for a like aggregate principal amount of
Original Notes. The Company is making the
Exchange Offer in order to satisfy its
obligations under the Registration Rights
Agreement relating to the Original Notes. For a
description of the procedures for tendering
Original Notes, see "The Exchange Offer --
Procedures for Tendering."
Expiration Date............... 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended (in
which case the Expiration Date will be the
latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer --
Terms of the Exchange Offer."
Conditions of the Exchange
Offer......................... The Exchange Offer is subject to the condition
that the Exchange Offer does not violate
applicable law or SEC staff interpretation. If
the Company determines that the Exchange Offer
is not permitted by applicable federal law, it
may terminate the Exchange Offer. The Exchange
Offer is not conditioned upon any minimum
principal amount of Original Notes being
tendered. See "The Exchange Offer -- Conditions
of the Exchange Offer."
Resale of the Exchange
Notes......................... Based on an interpretation by the staff of the
SEC set forth in no-action letters issued to
third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Original Notes may be
offered for resale, resold and otherwise
transferred by any holder thereof (other than
(i) a broker-dealer who purchased such Original
Notes directly from the Company for resale
pursuant to Rule 144A ("Rule 144A") or any
other available exemption under the Securities
Act or (ii) a person that 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
the holder is acquiring the Exchange Notes in
its ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes.
Holders of Original Notes wishing to accept the
Exchange Offer must represent to the Company
that such conditions have been met. In the
event that the Company's belief is inaccurate,
holders of Exchange Notes who transfer Exchange
Notes in violation of the prospectus delivery
provisions of the Securities Act and without an
exemption from registration thereunder may
incur liability under the Securities Act. The
Company does not assume or indemnify holders of
Exchange Notes against such liability, although
the Company does not believe that any such
liability should exist. Each broker-dealer that
receives Exchange Notes for its own account in
exchange for Original Notes, where such
Original 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 Exchange
Notes. Although such broker-dealer may be an
"underwriter" within the
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4
<PAGE> 9
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meaning of the Securities Act, 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. See "Plan of Distribution."
All resales must be made in compliance with
applicable state securities or "blue sky" laws.
Such compliance may require that the Exchange
Notes be registered or qualified in a
particular state or that the resales be made by
or through a licensed broker-dealer, unless
exemptions from these requirements are
available. The Company assumes no
responsibility with regard to compliance with
such requirements.
The Exchange Offer is not being made to, nor
will the Company accept surrenders for exchange
from, holders of Original Notes in any
jurisdiction in which the Exchange Offer or the
acceptance thereof would not be in compliance
with the securities or blue sky laws of such
jurisdiction.
Procedures for Tendering
Notes......................... Each holder of Original Notes wishing to accept
the Exchange Offer must complete, sign and date
the accompanying Letter of Transmittal or a
facsimile hereof, as the case may be, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Original Notes and
any other required documentation to the
Exchange Agent (as defined) at the address set
forth herein. By executing a Letter of
Transmittal, each holder will represent to the
Company that, among other things, (i) the
Exchange Notes acquired pursuant to such
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such Exchange Notes, whether or not
such person is the holder, (ii) neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such
Exchange Notes and that such holder is not
engaged in, and does not intend to engage in, a
distribution of Exchange Notes, and (iii) that
neither the holder nor any such other person is
an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. See "The
Exchange Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. See "The Exchange Offer --
Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Original Notes who wish to tender
their Original Notes and whose Original Notes
are not immediately available or who cannot
deliver their Original Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal, as the case may be,
to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to
the Expiration Date must
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5
<PAGE> 10
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tender their Original Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures."
Untendered Notes.............. Following the consummation of the Exchange
Offer, holders of Original Notes eligible to
participate but who do not tender their
Original Notes will not have any further
exchange rights and such Original Notes will
continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the
market for such Original Notes could be
adversely affected by the Exchange Offer.
Consequences of Failure to
Exchange...................... The Original Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such
Original Notes may be resold only (i) to the
Company, (ii) to a qualified institutional
buyer pursuant to Rule 144A or pursuant to Rule
144 under the Securities Act, (iii) in an
offshore transaction pursuant to the
requirements of Rule 903 or Rule 904 of
Regulation S under the Securities Act, (iv) to
an institutional accredited investor pursuant
to an exemption under the Securities Act, or
(v) pursuant to an effective registration
statement under the Securities Act. See "The
Exchange Offer -- Consequences of Failure to
Exchange."
Shelf Registration
Statement..................... If (i) the Company is not permitted to effect
the Exchange Offer as contemplated hereby
because the Exchange Offer is not permitted by
applicable law or SEC policy, (ii) any holder
of Original Notes notifies the Company within
the specified time period that (A) due to a
change in law or policy it is not entitled to
participate in the Exchange Offer or such
holder may not resell the Exchange Notes to the
public without delivering a Prospectus and the
prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales by such holder or
(B) it is a broker-dealer and owns Original
Notes acquired directly from the Company or an
affiliate of the Company, the Company has
agreed pursuant to the Registration Rights
Agreement to register the Original Notes issued
by it on a shelf registration statement (the
"Shelf Registration Statement") and use its
reasonable best efforts to cause it to be
declared effective by the SEC, as promptly as
practicable after the filing thereof, and if
applicable, use its reasonable best efforts to
keep the Shelf Registration Statement effective
for a period of two years from the Issue Date.
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Original Notes
and Delivery of Exchange
Notes....................... The Company will accept for exchange any and
all Original Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer."
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6
<PAGE> 11
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Federal Income Tax
Consequences.................. The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
federal income tax purposes. See "Federal
Income Tax Consequences."
Use of Proceeds............... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent................ State Street Bank and Trust Company.
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7
<PAGE> 12
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THE EXCHANGE NOTES
Issuer........................ Simonds Industries Inc.
Securities Offered............ $100 million aggregate principal amount of
10 1/4% Senior Subordinated Notes due 2008
registered under the Securities Act.
Maturity Date................. July 1, 2008
Interest...................... The Exchange Notes will bear interest at a rate
of 10 1/4% per annum, payable semi-annually on
January 1 and July 1 commencing January 1,
1999.
Guarantees.................... The Exchange Notes will be unconditionally
guaranteed, on a senior subordinated basis,
jointly and severally, by each of the Company's
existing Domestic Wholly Owned Restricted
Subsidiaries and by certain of the Company's
future subsidiaries as described under
"Description of Exchange Notes -- Guarantees"
and "Description of Exchange Notes -- Certain
Covenants -- Issuance of Subsidiary
Guarantees."
Ranking....................... The Exchange Notes will be unsecured
obligations of the Company ranking subordinate
in right of payment with all existing and
future Senior Debt of the Company. Each
Guarantee will be an unsecured obligation of
the applicable Guarantor ranking subordinate in
right of payment to all Guarantor Senior Debt
of such Guarantor. As of June 27, 1998, on a
pro forma basis, the Company and the Guarantors
would have had no Senior Debt or Guarantor
Senior Debt outstanding. In addition, the Notes
will be effectively subordinated in right of
payment to all liabilities, including
indebtedness, of subsidiaries of the Company
which are not Guarantors. As of June 27, 1998,
on a pro forma basis, such subsidiaries would
have had approximately $14.4 million of total
liabilities, including $6.5 million of
indebtedness.
Optional Redemption........... Except as provided below, the Exchange Notes
are not redeemable at the Company's option
prior to July 1, 2003. Thereafter, the Exchange
Notes will be redeemable, in whole or in part,
at the option of the Company, at the redemption
prices set forth herein plus accrued and unpaid
interest to the date of redemption. In
addition, prior to July 1, 2001, the Company
may, at its option, redeem up to an aggregate
of 35% of the principal amount of Exchange
Notes issued with the net proceeds from one or
more Public Equity Offerings at the redemption
price set forth herein plus accrued and unpaid
interest to the date of redemption; provided
that 65% of the Exchange Notes issued remain
outstanding immediately after giving effect to
any such redemption. See "Description of
Exchange Notes -- Redemption."
Change of Control............. In the event of a Change of Control, the
Company will be obligated to make an offer to
purchase all of the outstanding Exchange Notes
at a purchase price of 101% of the principal
amount thereof plus accrued and unpaid interest
to the date of purchase. See "Description of
Exchange Notes -- Change of Control."
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8
<PAGE> 13
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Asset Sales................... The Company will be required in certain
circumstances to make an offer to purchase
Exchange Notes at a price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest to the date of purchase, with
the net cash proceeds of certain asset sales.
See "Description of Exchange Notes -- Certain
Covenants -- Limitation on Asset Sales."
Certain Covenants............. The Indenture contains covenants, including,
but not limited to, covenants with respect to
limitations on the following matters: (i)
incurrence of additional indebtedness, (ii)
issuance of preferred stock by subsidiaries,
(iii) creation of liens, (iv) restricted
payments, (v) sales of assets and subsidiary
stock, (vi) incurrence of other senior
subordinated indebtedness, (vii) mergers and
consolidations, (viii) payment restrictions
affecting subsidiaries, and (ix) transactions
with affiliates. See "Description of Exchange
Notes -- Certain Covenants."
RISK FACTORS
See "Risk Factors" beginning on page 11 for a discussion of certain factors
that should be considered in evaluating an investment in the Exchange Notes.
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9
<PAGE> 14
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
----------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
-------- ------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales......................................... $101,144 $98,661 $114,182 $131,808 $55,376 $ 62,641 $ 66,290
Cost of goods sold................................ 71,455 69,828 78,798 89,892 38,247 42,281 44,940
-------- ------- -------- -------- ------- -------- --------
Gross profit.................................... 29,689 28,833 35,384 41,916 17,129 20,360 21,350
Selling, general and administrative expense....... 17,594 17,135 21,149 26,913 9,944 11,961 13,165
Special compensation expense...................... 7,920 -- -- -- -- -- --
-------- ------- -------- -------- ------- -------- --------
Operating income................................ 4,175 11,698 14,235 15,003 7,185 8,399 8,185
Interest expense.................................. 3,530 4,399 4,963 11,549 2,394 2,477 5,822
Other expense (income), net....................... (484) 245 520 543 172 167 49
-------- ------- -------- -------- ------- -------- --------
Income before income taxes...................... 1,129 7,054 8,752 2,911 4,619 5,755 2,314
Income taxes...................................... 469 3,071 3,751 1,375 1,971 2,441 1,180
-------- ------- -------- -------- ------- -------- --------
Net income...................................... $ 660 $ 3,983 $ 5,001 $ 1,536 $ 2,648 $ 3,314 $ 1,134
======== ======= ======== ======== ======= ======== ========
OTHER GAAP FINANCIAL DATA:
Cash flows provided by operating activities....... $ 7,097 $ 6,665 $ 13,046 $ 4,976 $ 2,700
Cash flows used in investing activities........... (47,193) (4,788) (17,304) (7,082) (8,809)
Cash flows (used in) provided by financing
activities...................................... 40,373 (2,526) 4,299 1,764 5,814
Depreciation and amortization(4).................. 2,687 2,328 3,064 3,782 1,370 1,847 2,020
Capital expenditures.............................. 2,640 3,638 3,708 4,105 1,542 2,085 2,224
OTHER NON-GAAP FINANCIAL DATA:
EBITDA(3)......................................... $ 14,782 $14,026 $ 17,299 $ 18,785 $ 8,555 $ 10,246 $ 10,205
BALANCE SHEET DATA:(5)
Working capital........................................................................................ $ 23,726 $ 32,671
Total assets........................................................................................... 108,594 114,827
Total debt............................................................................................. 59,882 106,497
Shareholders' equity(deficit).......................................................................... 24,704 (13,525)
</TABLE>
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(1) The 1995 results and data include the five months ended May 26, 1995 for the
Predecessor and seven months ended December 30, 1995 for the Company. The
Predecessor's results include a $7,920 special compensation expense as
described in Note 2 of Notes to Consolidated Financial Statements.
(2) The pro forma operating data presented gives effect to the acquisitions of
Armstrong and Notting and the Original Offering as if they had occurred on
January 1, 1997.
(3) EBITDA is defined as operating income plus depreciation, amortization (other
than amortization of debt discount and deferred financing costs) and special
compensation expense. The Company believes that EBITDA provides additional
information for determining its ability to meet debt service requirements.
EBITDA as calculated by the Company may not be consistent with calculations
of EBITDA by other companies. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations as
determined by generally accepted accounting principles, and EBITDA does not
necessarily indicate whether cash flow will be sufficient to meet cash
requirements.
(4) Depreciation and amortization excludes amortization of deferred financing
costs and debt discount.
(5) The pro forma balance sheet gives effect to the Original Offering and the
use of proceeds therefrom as if they had occurred on June 27, 1998.
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10
<PAGE> 15
RISK FACTORS
Prospective investors should carefully consider the following risk factors
in addition to the other information set forth in this Prospectus before making
an investment in the Notes.
SUBSTANTIAL LEVERAGE
As of June 27, 1998, on a pro forma basis, the Company would have had
$106.5 million of consolidated indebtedness and consolidated stockholders'
deficit of $13.5 million.
The Company's indebtedness will have several important consequences for the
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to debt service requirements on its indebtedness and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, to refinance
other indebtedness or for general corporate purposes may be impaired; (iii) the
Company's leverage may increase its vulnerability to economic downturns and
limit its ability to withstand competitive pressures; and (iv) the Company's
ability to capitalize on significant business opportunities may be limited.
The Company's ability to make payments with respect to the Notes and to
satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. The Company believes, based on current circumstances, that the
Company's cash flow, together with available borrowings under the Senior Credit
Facility (as defined), will be sufficient to permit the Company to meet its
operating expenses and to service its debt requirements as they become due.
Significant assumptions underlie this belief, including, among other things,
that the Company will succeed in implementing its business strategy and there
will be no material adverse developments in the business, liquidity or capital
requirements of the Company. If the Company is unable to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts the ability of the Company and certain of its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments or investments, consummate
certain asset sales, enter into certain transactions with affiliates, incur
liens, or merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of their assets.
In addition, the Senior Credit Facility contains other and more restrictive
covenants. The Senior Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests may be affected by events beyond its
control, and there can be no assurance that the Company will meet such tests. A
breach of any of these covenants could result in an event of default under the
Senior Credit Facility. In an event of default under the Senior Credit Facility,
the lenders thereunder could elect to declare all amounts borrowed, together
with accrued interest, to be immediately due and payable and the lenders under
the Senior Credit Facility could terminate all commitments thereunder. If such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay such indebtedness and the Notes. See
"Description of Senior Debt" and "Description of Exchange Notes -- Certain
Covenants."
SUBORDINATION OF NOTES AND GUARANTEES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes will be subordinated to the prior payment
in full of all existing and future Senior Debt of the Company, including all
amounts owing or guaranteed under the Senior Credit Facility. The Guarantees
will be similarly subordinated to Guarantor Senior Debt. Consequently, in the
event of a bankruptcy, liquidation, dissolution,
11
<PAGE> 16
reorganization or similar proceeding with respect to the Company or a Guarantor,
assets of the Company or such Guarantor will be available to pay obligations on
the Notes or Guarantees only after all Senior Debt of the Company or Guarantor
Senior Debt of such Guarantor, as applicable, has been paid in full, and there
can be no assurance that there will be sufficient assets to pay amounts due on
any or all of the Notes. In addition, neither the Company nor any Guarantor may
pay principal, premium, interest or other amounts on account of the Notes or any
Guarantee in the event of a payment default (or, with respect to a non-payment
default on Designated Senior Debt (as defined), for a specified period) in
respect of Senior Debt. See "Description of Exchange Notes -- Subordination." As
of June 27, 1998, on a pro forma basis, the Company and the Guarantors would
have had no Senior Debt or Guarantor Senior Debt outstanding. In addition, the
Notes will be effectively subordinated in right of payment to all liabilities,
including indebtedness, of subsidiaries of the Company which are not Guarantors.
As of June 27, 1998, on a pro forma basis, such subsidiaries would have had
$14.4 million of total liabilities, including $6.5 million of indebtedness.
DEPENDENCE ON KEY INDIVIDUALS
The success of the Company is largely dependent on the experience and
knowledge of certain key executive officers. The loss of the services of one or
more of these individuals and the Company's inability to attract and retain
other key members of the Company's management could have a material adverse
effect upon the Company.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company operates manufacturing, sales and service facilities in
Germany, the United Kingdom, Spain and Canada. In 1997, sales of its products in
foreign countries accounted for approximately 38% of the Company's net sales. As
a result, the Company is subject to risks associated with operations in foreign
countries, including fluctuations in currency exchange rates, imposition of
limitations on conversion of foreign currencies into dollars or remittance of
dividends and other payments by foreign subsidiaries, imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries, hyperinflation in certain foreign countries and imposition or
increase of investment, subjection to certain foreign labor laws and other
restrictions by foreign governments. Fluctuations in currency exchange rates
have had an impact on the Company's operations in the past, and historically the
Company has hedged some of its foreign currency risks. No assurance can be given
that the risks associated with operating in foreign countries will not have a
material adverse effect on the Company in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
DEPENDENCE ON SPECIALTY STEELS; RELIANCE ON LIMITED SOURCES OF SUPPLY
The principal raw material used by the Company is specialty steels. The
Company relies on limited sources for its supply of specialty steels. The loss
of any such source, or any major disruption in such source's business or failure
by it to meet the Company's needs on a timely basis could cause shortages in the
Company's supply of specialty steels that could have a material adverse effect
on the Company's business and financial condition.
The steel industry is highly cyclical in nature and steel prices are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, labor costs, molybdenum and chrome costs,
competition, import duties, tariffs and currency exchange rates. If the Company
is unable to pass some or all of future steel price increases to its customers,
the Company could be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Raw Materials."
RELIANCE ON METAL PROCESSING AND PRIMARY WOOD INDUSTRIES
Demand for the Company's metal and wood products generally follows
movements in the metal processing and primary wood industries. The metal
processing and primary wood industries are both cyclical in
12
<PAGE> 17
nature and are affected by global and national economic conditions. A material
change in either industry or general economic conditions could have a material
adverse effect on the Company's business and financial condition.
UNION CONTRACTS
The Company's facilities at Fitchburg and Newcomerstown employ members of
the United Steel Workers of America Union. The current contracts at these
facilities expire in 2000 and 2001, respectively. Although the Company considers
its relations with the unions to be good, there can be no assurance that the
contracts with the unions will be timely renewed without work stoppages. Work
stoppages could have a material adverse effect on the Company's business and
financial condition.
COMPETITION
The industrial cutting tool market is fragmented with numerous
participants. Although there is no one company which competes with the Company
in all three of the market sectors which the Company serves and there is no one
company which is dominant in any of such market sectors, there can be no
assurance that the Company's products will be able to compete successfully with
those of its competitors. See "Business -- Competition."
ACQUISITION STRATEGY
The Company has pursued and intends to continue to pursue acquisitions as
an important component of its strategy. No assurance can be given that in the
future other suitable acquisition candidates can be acquired on acceptable terms
or that future acquisitions, if completed, will be successful. Future
acquisitions by the Company could result in the incurrence of additional debt
and contingent liabilities which could materially adversely affect the Company's
business, operating results and financial condition. The success of any
completed acquisition will depend on the Company's ability to integrate
effectively the acquired business into the Company's. The process of integrating
acquired businesses may involve numerous risks, including difficulties in the
assimilation of operations and products, the diversion of management's attention
from other business concerns and the potential loss of key employees of the
acquired businesses. See "Business -- Business Strategy."
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and waste
materials. While the Company believes that it is currently in material
compliance with those laws and regulations, there can be no assurance that the
Company will not incur significant costs to remediate violations thereof or to
comply with changes in existing laws and regulations (or the enforcement
thereof). Such costs could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Environmental Matters."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or a portion of such holder's
Notes at a price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
However, the Company's ability to repurchase the Notes upon a Change of Control
may be limited by the terms of then existing contractual obligations of the
Company and its subsidiaries. In addition, the occurrence of a Change of Control
will constitute an Event of Default under the Senior Credit Facility. The Senior
Credit Facility will prohibit the purchase of the Notes unless and until such
time as the indebtedness under the Senior Credit Facility is paid in full. There
can be no assurance that the Company will have the financial resources to repay
amounts due under the Senior Credit Facility, or to repurchase or redeem the
Notes. If the
13
<PAGE> 18
Company fails to repurchase all of the Notes tendered for purchase upon the
occurrence of a Change of Control, such failure will constitute an Event of
Default under the Indenture. See "-- Substantial Leverage."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under the applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company or any Guarantor, at
the time it issues the Notes or incurs a Guarantee, as the case may be, (a)(i)
was or is insolvent or rendered insolvent by reason of such issuance or
incurrence, as the case may be, (ii) was or is engaged in a business or
transaction for which the assets remaining with the Company or such Guarantor,
as the case may be, constituted unreasonably small capital or (iii) intended or
intends to incur, or believed or believes that it would incur, debt beyond its
ability to pay such debts as they mature and (b) received or receives less than
reasonably equivalent value or fair consideration, the obligations of the
Company under the Notes or such Guarantor under its Guarantee, as the case may
be, could be avoided or claims in respect of the Notes or such Guarantee, as the
case may be, could be subordinated to all other debts of the Company or such
Guarantor, as the case may be. Among other things, a legal challenge of the
Notes or a Guarantee, as the case may be, on fraudulent conveyance grounds may
focus on the benefits, if any, realized by the Company or such Guarantor, as the
case may be, as a result of the issuance of the Notes or the incurrence of a
Guarantee, as the case may be. To the extent that the Notes or any Guarantee was
a fraudulent conveyance or held unenforceable for any other reason, the holders
of the Notes would cease to have any claim in respect of the Company, in the
case of the Notes, or in respect of a Guarantor whose Guarantee was avoided or
held unenforceable. In such event, the claims of the holders of the Notes would
be subject to the prior payment of all liabilities of the Company, in the case
of the Notes, or the Guarantor whose Guarantee was avoided. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portion of the Notes or a Guarantee.
Each Guarantor has agreed, jointly and severally with the other Guarantors,
to contribute to the obligation of any Guarantor under a Guarantee of the Notes.
Further, the Guarantee of each Guarantor provides that it is limited to an
amount that would not render the Guarantor thereunder insolvent. The Company
believes that it and the Guarantors received equivalent value at the time the
indebtedness was incurred under the Notes and the Guarantees. In addition, the
Company believes that neither it nor any of the Guarantors is or was insolvent
or is or was engaged in a business or transaction for which its remaining assets
constitute unreasonably small capital and that neither it nor any of the
Guarantors have intended or will intend to incur debts beyond its ability to pay
such debts as they mature. Since each of the components of the question of
whether the Notes or a Guarantee is a fraudulent conveyance is inherently fact
based and fact specific, there can be no assurance that a court passing on such
questions would agree with the Company.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON RESALE
The Exchange Notes are new securities for which there currently is no
market. Although the Initial Purchasers have informed the Company that they
intend to make a market in the Exchange Notes, they are not obligated to do so
and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes. The Company does not intend to apply for listing
of the Exchange Notes on any securities exchange or for quotation through the
Nasdaq National Market.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, Simonds.
14
<PAGE> 19
USE OF PROCEEDS
The Company will receive no proceeds from the issuance of the Exchange
Notes. The proceeds of the Original Notes were used as follows: approximately
$53.1 million for the repayment of certain indebtedness, approximately $39.5
million to finance a partial redemption of the Company's common stock and the
repurchase of all outstanding options of the Company (see "Certain
Transactions"), approximately $5 million to pay certain fees and expenses
relating to the Original Offering and the Recapitalization, and the balance for
working capital.
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company at June
27, 1998 and after giving effect to the Original Offering and the acquisition of
Notting. This table should be read in conjunction with the Company's historical
financial statements and "Selected Pro Forma Financial Data" and the respective
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------- ---------
<S> <C> <C>
Indebtedness (including current portion):
Senior Credit Facility(1)................................. $ -- $ --
Foreign debt(2)........................................... 2,697 2,697
Note payable(3)........................................... 3,800 3,800
Existing indebtedness..................................... 53,385 -0-
Original Notes............................................ -0- 100,000
-------- -------
Total debt........................................ 59,882 106,497
-------- -------
Shareholders' Equity........................................ 24,704 (13,525)
-------- -------
Total capitalization.............................. $ 84,586 $92,972
======== =======
</TABLE>
- ---------------
(1) In connection with the consummation of the Original Offering, the Company
entered into a new Senior Credit Facility which provides for borrowing in an
outstanding principal amount of $30,000.
(2) Includes the Company's retained foreign credit facility and term loan.
(3) Note issued to partially fund the acquisition of Notting; the note matures
in May 1999 and debt assumed in the acquisition of Notting.
15
<PAGE> 20
SELECTED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The Company completed the acquisitions of Armstrong and Notting on August
1, 1997 and May 8, 1998, respectively. The Company acquired all of the
outstanding stock of Armstrong for $9,000 in cash, which acquisition was
accounted for as a purchase. All of the outstanding stock of Notting was
acquired by the Company for $6,781, of which $5,358 was paid in cash and the
balance was paid for by a Promissory Note bearing interest at 8.5% and maturing
on April 30, 1999. This acquisition was also accounted for as a purchase.
The following pro forma statements of operations are presented as if such
acquisitions and the Original Offering of the Company's 10 1/4% Senior
Subordinated Notes due July 1, 2008 in the aggregate principal amount of
$100,000 had occurred and the Senior Credit Facility providing for up to $30,000
of revolving loans was in place on January 1, 1997. The following pro forma
balance sheet gives effect to the Original Offering and the use of proceeds
therefrom as if they had occurred on June 27, 1998.
The accompanying selected pro forma financial data have been prepared
utilizing a preliminary purchase price allocation for Notting. The preliminary
purchase price allocation of Notting is subject to refinement until all
pertinent information regarding the acquisition is obtained and, accordingly,
the amounts presented herein are subject to change. Management believes that the
pro forma effects of any actual variations will not materially impact the pro
forma financial data. The actual results of operations presented for both
Armstrong and Notting are unaudited. In addition, the pro forma adjustments
presented in both the pro forma statements of operations and the pro forma
balance sheet have not been audited.
The accompanying pro forma information is presented for illustrative
purposes and is not necessarily indicative of the financial position or results
of operations which would actually have been reported had the above transactions
been in effect during the periods presented or which may be reported in the
future. The results of operations for the six months ended June 27, 1998 are not
necessarily indicative of the results of operations to be expected for the full
year.
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 1997
-------------------------------------------------------------------------------------
7 MONTHS
ARMSTRONG ARMSTRONG NOTTING NOTTING OFFERING PRO
ACTUAL ACTUAL(A) ADJUSTMENTS ACTUAL(B) ADJUSTMENTS ADJUSTMENTS FORMA
-------- --------- ----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $114,182 $5,720 -- $11,906 -- -- $131,808
Cost of goods sold......... 78,798 3,764 -- 7,330 -- -- 89,892
-------- ------ ----- ------- ----- ------- --------
Gross profit............. 35,384 1,956 -- 4,576 -- -- 41,916
Selling, general and
administrative expense... 21,149 1,608 154(c) 3,955 47(c) -- 26,913
-------- ------ ----- ------- ----- ------- --------
Operating income
(loss)................. 14,235 348 (154) 621 (47) -- 15,003
Interest expense........... 4,963 -- 390(d) 198 723(d) 5,275(d) 11,549
Other expense (income)..... 520 35 -- (12) -- -- 543
-------- ------ ----- ------- ----- ------- --------
Income (loss) before
income taxes........... 8,752 313 (544) 435 (770) (5,275) 2,911
Income taxes............... 3,751 110 (196)(e) 109 (289)(e) (2,110)(e) 1,375
-------- ------ ----- ------- ----- ------- --------
Net income (loss).......... $ 5,001 $ 203 $(348) $ 326 $(481) $(3,165) $ 1,536
======== ====== ===== ======= ===== ======= ========
</TABLE>
See Notes to the Selected Pro Forma Financial Data.
16
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 1998
-------------------------------------------------------------
NOTTING NOTTING OFFERING PRO
ACTUAL ACTUAL(b) ADJUSTMENTS ADJUSTMENTS FORMA
------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Net sales............................ $62,641 $3,649 $ -- $ -- $66,290
Cost of goods sold................... 42,281 2,659 -- -- 44,940
------- ------ ----- ------- -------
Gross profit....................... 20,360 990 -- -- 21,350
Selling, general and administrative
expense............................ 11,961 1,188 16(c) -- 13,165
------- ------ ----- ------- -------
Operating income (loss)............ 8,399 (198) (16) -- 8,185
Interest expense..................... 2,477 71 241(d) 3,033(d) 5,822
Other expense........................ 167 (118) -- -- 49
------- ------ ----- ------- -------
Income (loss) before income
taxes........................... 5,755 (151) (257) (3,033) 2,314
Income taxes......................... 2,441 48 (96)(e) (1,213)(e) 1,180
------- ------ ----- ------- -------
Net income (loss).................... $ 3,314 $ (199) $(161) $(1,820) $ 1,134
======= ====== ===== ======= =======
</TABLE>
See Notes to the Selected Pro Forma Financial Data.
17
<PAGE> 22
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 27, 1998
------------------------------------
OFFERING
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash....................................................... $ 835 $ 1,955(f) $ 2,790
Accounts receivable........................................ 18,842 -- 18,842
Inventories, net........................................... 28,697 -- 28,697
Other current assets....................................... 3,568 -- 3,568
-------- -------- --------
Total current assets.................................. 51,942 1,955 53,897
Property, plant and equipment, net......................... 32,956 -- 32,956
Goodwill, net of accumulated amortization.................. 22,065 -- 22,065
Deferred financing costs, net of accumulated
amortization............................................. 722 4,278(g) 5,000
Other assets............................................... 909 -- 909
-------- -------- --------
Total assets..................................... $108,594 $ 6,233 $114,827
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Overdraft facilities....................................... $ 150 $ -- $ 150
Bank Loans................................................. -- -- --
Notes payable.............................................. 5,802 (1,786)(h) 4,016
Current portion of long-term debt.......................... 5,255 (3,051)(h) 2,204
Accounts payable........................................... 6,578 -- 6,578
Accrued payroll and employee benefits...................... 3,693 -- 3,693
Other accrued liabilities.................................. 4,088 (2,153)(i) 1,935
Currently deferred income taxes............................ 2,650 -- 2,650
-------- -------- --------
Total current liabilities............................. 28,216 (6,990) 21,226
Deferred income taxes...................................... 4,386 -- 4,386
Other long-term liabilities................................ 933 -- 933
Long-term pension expense.................................. 1,530 -- 1,530
Long-term debt, net of current portion..................... 48,825 (48,548)(h) 277
Notes...................................................... -- 100,000 100,000
-------- -------- --------
Total liabilities..................................... 83,890 44,462 128,352
Common stock............................................... 1 -- 1
Additional paid-in capital................................. 10,553 (35,000)(j) (24,447)
Retained earnings.......................................... 15,173 (3,229)(j) 11,944
Cumulative translation adjustment.......................... (976) -- (976)
Treasury stock, at cost.................................... (47) -- (47)
-------- -------- --------
Total shareholders' equity (deficit).................. 24,704 (38,229) (13,525)
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)...................................... $108,594 $ 6,233 $114,827
======== ======== ========
</TABLE>
See Notes to the Selected Pro Forma Financial Data.
18
<PAGE> 23
NOTES TO SELECTED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) The Company acquired Armstrong on August 1, 1997. Reflects actual 1997
historical results of Armstrong prior to acquisition.
(b) The Company acquired Notting on May 8, 1998. For purposes of determining
1997 pro forma results, Notting's statement of operations is for its fiscal
year ended September 30, 1997. For purposes of calculating pro forma
results for the periods ended June 27, 1998, the statement of operations
reflects actual historical results of Notting prior to acquisition.
(c) Reflects adjustments related to amortization of non-compete agreement and
additional goodwill as shown below:
<TABLE>
<CAPTION>
6 MONTHS
YEAR ENDED ENDED
DECEMBER 27, JUNE 27,
1997 1998
------------ -------------
<S> <C> <C>
Armstrong non-compete (5 year life)......................... $101 --
Armstrong goodwill (40 year life)........................... 53 --
---- ---
Total............................................... $154 --
==== ===
Notting goodwill (40 year life)............................. $ 47 $16
==== ===
</TABLE>
(d) Reflects the net increase in interest expense attributed to the increased
indebtedness resulting from the acquisitions of Armstrong and Notting and
the Original Offering as if they had occurred and the Senior Credit
Facility as if it had been in place on the first day of the periods
indicated as shown below:
<TABLE>
<CAPTION>
6 MONTHS
YEAR ENDED ENDED
DECEMBER 27, JUNE 27,
1997 1998
------------ -------------
<S> <C> <C>
Interest expense related to increase in the Company's
revolving credit line for the acquisition of Armstrong
($7,800 at 8.3%).......................................... $ 390 --
======= ======
Interest expense related to indebtedness incurred in the
acquisition of Notting ($1,660 at 8.5%)................... $ 141 $ 47
Interest expense related to increase in the Company's
revolving credit line due to the acquisition of Notting in
May 1998 ($7,006 at 8.3%)................................. 582 194
------- ------
Total interest expense.............................. $ 723 $ 241
======= ======
Interest expense on the Original Offering ($100,000 at
10.25%)................................................... $10,250 $5,125
Amortization of deferred financing cost related to the
Original Offering ($5,000 over 10 years).................. 500 250
Amortization of debt discount related to refinanced
indebtedness ($270 over 7 years).......................... (38) (19)
Senior Credit Facility unused line fee...................... 150 75
Interest related to Armstrong's indebtedness to be
refinanced ($7,800 at 8.3%)............................... (390) --
Interest related to Notting's indebtedness to be refinanced
($7,006 at 8.3%).......................................... (582) (194)
Interest expense related to indebtedness to be refinanced... (4,259) (2,045)
Benefit from write-off of deferred financing costs related
to refinanced indebtedness................................ (356) (158)
------- ------
$ 5,275 $3,033
======= ======
</TABLE>
19
<PAGE> 24
NOTES TO SELECTED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(e) Reflects the impact on income taxes of the increase in interest expense and
the amortization of the non-compete agreement computed at statutory rates
as shown below:
<TABLE>
<CAPTION>
6 MONTHS
YEAR ENDED ENDED
DECEMBER 27, JUNE 27,
1997 1998
------------ -------------
<S> <C> <C>
Tax provision on the amortization of the noncompete
agreement related to the acquisition of Armstrong and the
related financing ($101 at 40%)........................... $ (40) --
Tax provision on the interest expense adjustments related to
the acquisition of Armstrong and the related financing
($390 at 40%)............................................. (156) --
------ ------
Total............................................... $ (196) --
====== ======
Tax provision on the interest expense adjustments related to
the acquisition of Notting and the related financing ($723
and $241 at 40%).......................................... $ (289) $ (96)
====== ======
Tax benefit on the interest expense adjustments related to
the Original Offering ($5,275 and $3,033 at 40%).......... $2,110 $1,213
====== ======
</TABLE>
(f) Reflects excess cash resulting from the Original Offering as shown below:
<TABLE>
<CAPTION>
AS OF
JUNE 27,
1998
--------
<S> <C>
Total sources of financing for the Original Offering:
Gross proceeds from the Original Offering............... $100,000
Cash investment from equity partners.................... 18,833
--------
118,833
Total uses of financing for the Original Offering:
Cash portion of Recapitalization Distribution........... 53,833
Repayment of indebtedness............................... 53,545
Cash payment for buyout of stock options*............... 4,500
Transaction fees and expenses related to the Original
Offering............................................... 5,000
--------
116,878
--------
Increase in working capital (excess cash)................... $ 1,955
========
</TABLE>
- ---------------
* In connection with the Original Offering, the Company bought out all
outstanding stock options of the Company. A compensation charge of
$4.5 million related to the stock option buyout will be reflected in
the Company's operating results in July 1998.
(g) Reflects estimated increase in deferred financing fees related to the
Original Offering and the Senior Credit Facility and the estimated
write-off of deferred financing costs related to the repaid indebtedness.
The write-off was recorded as an extraordinary loss on the extinguishment
of debt, net of tax, in the month the Original Offering closed.
(h) Represents estimated repayment of the Company's existing domestic
indebtedness.
(i) Reflects decrease in income taxes payable resulting from a benefit
attributed to a compensation charge of $4,500 incurred in connection with
the repurchase of all outstanding stock options of the Company with
proceeds from the Original Offering. The compensation charge was reflected
in the Company's operating results in July 1998 when the Original Offering
was closed. In addition, reflects decrease in income taxes payable from a
benefit resulting from the write-offs of unamortized debt discount and
deferred financing costs totalling $882.
20
<PAGE> 25
NOTES TO SELECTED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(j) Reflects decrease in shareholders' investment resulting from the
Recapitalization (as defined) distribution paid to existing
securityholders, including the repurchase of stock options, and the
write-off of deferred financing costs, net of tax, as shown below:
<TABLE>
<CAPTION>
AS OF
JUNE 27,
1998
--------
<S> <C>
Shareholder's investment:
Redemption of Common Stock.............................. $(53,833)
Common Stock Sold....................................... 18,833
--------
Reduction in additional paid-in capital................. $(35,000)
========
Compensation charge for buyout of stock options, net of
tax.................................................... $ (2,700)
Write-off of deferred financing costs related to the
refinanced indebtedness, net of tax.................... (529)
--------
$ (3,229)
========
</TABLE>
21
<PAGE> 26
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The selected consolidated operating and balance sheet data for and as of the
seven months ended December 30, 1995 and the years ended December 28, 1996 and
December 27, 1997 are derived from the Company's audited consolidated financial
statements included elsewhere herein. The selected consolidated operating and
balance sheet data as of and for the years ended January 1, 1994 and December
31, 1994 and the five months ended May 26, 1995 are derived from the
Predecessor's audited consolidated financial statements. The selected
consolidated operating and balance sheet data for the six months ended June 28,
1997 and June 27, 1998, and as of the end of such periods, have been derived
from the Company's unaudited condensed consolidated financial statements
included elsewhere herein which reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair statement of the
interim periods presented. The results of operations for the six months ended
June 27, 1998 are not necessarily indicative of the results of operations to be
expected for the full year. The following selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------- --------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED 5 MONTHS 7 MONTHS YEAR ENDED JUNE
----------------- ENDED ENDED ------------------ ------------------
1993 1994 5/26/95 12/30/95 1996 1997 1997 1998
------- ------- -------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................... $86,528 $95,284 $42,212 $58,932 $98,661 $114,182 $55,376 $ 62,641
Cost of goods sold.......................... 62,263 68,537 30,102 41,353 69,828 78,798 38,247 42,281
------- ------- ------- -------- ------- -------- ------- --------
Gross profit.......................... 24,265 26,747 12,110 17,579 28,833 35,384 17,129 20,360
Selling, general and administrative
expense................................... 16,513 17,028 7,418 10,176 17,135 21,149 9,944 11,961
Special compensation expense................ -- -- 7,920 -- -- -- -- --
------- ------- ------- -------- ------- -------- ------- --------
Operating income (loss)............... 7,752 9,719 (3,228) 7,403 11,698 14,235 7,185 8,399
Interest expense............................ 1,978 1,623 650 2,880 4,399 4,963 2,394 2,477
Other expense (income), net................. 149 (432) (276) (208) 245 520 172 167
------- ------- ------- -------- ------- -------- ------- --------
Income (loss) before income taxes..... 5,625 8,528 (3,602) 4,731 7,054 8,752 4,619 5,755
Income taxes................................ 2,413 3,491 (1,387) 1,856 3,071 3,751 1,971 2,441
------- ------- ------- -------- ------- -------- ------- --------
Net income (loss)..................... $ 3,212 $ 5,037 $(2,215) $ 2,875 $ 3,983 $ 5,001 $ 2,648 $ 3,314
======= ======= ======= ======== ======= ======== ======= ========
OTHER GAAP DATA:
Cash flows provided by operating
activities................................ 6,656 6,771 1,453 5,644 6,665 13,046 4,976 2,700
Cash flows used in investing activities..... (5,555) (1,758) (700) (46,493) (4,788) (17,304) (7,082) (8,809)
Cash flows (used in)/provided by financing
activities................................ (123) (4,393) (1,230) 41,603 (2,526) 4,299 1,764 5,814
Depreciation and amortization............... 3,079 3,307 1,498 1,500 2,712 3,459 1,552 2,023
Capital expenditures........................ 2,091 2,377 745 1,895 3,638 3,708 1,542 2,085
OTHER NON-GAAP FINANCIAL DATA:
EBITDA from operations(1)................... $10,723 $12,964 $ 6,109 $ 8,673 $14,026 $ 17,299 $ 8,555 $ 10,246
Ratio of income to fixed charges(2)......... 3.6x 5.7x -- 2.6x 2.5x 2.7x 2.8x 3.2x
BALANCE SHEET DATA:
Working capital............................. $14,386 $17,753 $16,033 $21,786 $22,209 $ 21,651 $23,260 $ 23,726
Total assets................................ 56,172 56,931 62,413 77,728 82,620 95,343 89,620 108,594
Total debt.................................. 21,484 16,278 14,899 46,809 46,175 51,692 52,016 59,882
Shareholders' equity........................ 19,866 24,986 24,608 13,185 17,198 21,615 17,882 24,704
</TABLE>
- ---------------
(1) EBITDA is defined as operating income plus depreciation, amortization (other
than amortization of debt discount and deferred financing costs) and special
compensation expense. The Company believes that EBITDA provides additional
information for determining its ability to meet debt service requirements.
EBITDA as calculated by the Company may not be consistent with calculations
of EBITDA by other companies. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations as
determined by generally accepted accounting principles, and EBITDA does not
necessarily indicate whether cash flow will be sufficient to meet cash
requirements.
(2) For purposes of calculating this ratio, "income" consists of income before
provision for income taxes and fixed charges. "Fixed charges" consists of
interest expense and the estimated interest portion of rental payments on
operating leases. Such income was insufficient to cover fixed charges by
approximately $2,100 for the five months ended May 26, 1995. Readers should
be cautioned that by definition the concept of "ratio of income to fixed
charges" as used in this table differs significantly from definitions in the
Indenture of similar-sounding concepts such as "Consolidated Fixed Charges
Coverage Ratio."
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto, as well as the selected financial
information, all appearing elsewhere herein.
GENERAL
Simonds has been in continuous operation selling cutting tools for 166
years. In May 1995, the Company was acquired by Fleet and senior management. The
acquisition enabled the Company to continue to implement its business strategy,
including pursuing strategic acquisitions. Since 1995, the Company has completed
four acquisitions, including Strongridge in October 1996, the bit and shank
product line of Pacific Hoe Company in January 1997, Armstrong in August 1997,
and Notting on May 5, 1998. The Company's results of operations for the periods
1995-1997 and the six months ending June 27, 1998 reflect the impact of all of
the acquisitions. In particular, the Company benefited from three months in 1996
and a full year in 1997 of operations of Strongridge, five months of operations
of Armstrong in 1997 and two months of operations of Notting in 1998. Results
for the year ended December 30, 1995 contain a one-time compensation expense
related to the acquisition of the Company. See Note 2 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage
which such results bears to net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER JUNE
------------------------- ----------------
1995(a) 1996 1997 1997 1998
------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 70.6 70.8 69.0 69.1 67.5
----- ----- ----- ----- -----
Gross profit............................ 29.4 29.2 31.0 30.9 32.5
Selling, general and administrative expense....... 17.4 17.4 18.5 18.0 19.1
Special compensation expense...................... 7.8 -- -- -- --
----- ----- ----- ----- -----
Operating income........................ 4.2 11.8 12.5 12.9 13.4
Interest expense.................................. 3.5 4.5 4.3 4.3 4.0
Other expense (income), net....................... (0.5) 0.2 0.5 0.3 0.3
----- ----- ----- ----- -----
Income before income taxes.............. 1.2 7.1 7.7 8.3 9.1
Income taxes...................................... 0.5 3.1 3.3 3.6 3.9
----- ----- ----- ----- -----
Net income.............................. 0.7% 4.0% 4.4% 4.7% 5.2%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(a) The year ended 1995 includes the five months ended May 26, 1997 of the
Predecessor and seven months ended December 30, 1995 of the Company.
Six Months Ended June 27, 1998 Compared To Six Months Ended June 28, 1998
Net Sales: Net sales increased 13.1% to $62,641 for the first half of 1998
from $55,376 for the same period in 1997. This increase was primarily the result
of increased wood product sales of $4,917 in the first half of 1998 from the
acquisition of Armstrong which was completed on August 1, 1997 and, to a lesser
extent, from increased sales of carbide tip bits and Red Streak(R) bands.
Additionally, 1998 sales included $1,727 due to the recent acquisition of W.
Notting Limited, effective May 1, 1998. Changes in foreign currency exchange
23
<PAGE> 28
rates in the first half of 1998 (primarily the weaker Canadian dollar and German
Mark) negatively impacted the Company's net sales by $886 when compared to the
corresponding period last year.
Gross Profit Margin: Gross profit as a percentage of net sales for 1998
was 32.5% compared to 30.9% for the comparable period in 1997. Favorable raw
material prices for Red Streak(R) bands, carbide tips, and the majority of the
Company's knife steel along with higher production levels without significant
increases in fixed expenses are the main reasons for margin improvements. In
addition, the gross profit of Armstrong in the first six months of 1998 and of
Notting for May and June of 1998 increased gross profit for the reported period.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales were 19.1% for the first six
months of 1998 and 18.0% for the comparable period a year ago. The higher level
of expenses in 1998 as compared to 1997 was primarily due to the addition of
Armstrong and Notting in 1998.
Operating Income: As a result of the aforementioned factors, operating
income increased 16.9% to $8,399 or 13.4% of net sales in 1998 from $7,185 or
12.9% in 1997.
Interest Expense: Interest expense was higher in 1998 compared to the
corresponding period in 1997 as a result of higher debt balances primarily due
to the above mentioned acquisitions of Armstrong and Notting.
Income Taxes: The Company's effective tax rate in 1998 decreased to 42.4%
from 42.7% in 1997. Improved profitability in the United Kingdom, which has a
lower tax rate, has affected the consolidated effective tax rate.
Net Income: As a result of the foregoing, net income increased 25.2% to
$3,314 in 1998 from $2,648 in 1997.
Year Ended December 27, 1997 Compared To Year Ended December 28, 1996
Net Sales: Net sales increased 15.7% to $114,182 for 1997 from $98,661 for
1996. Of this increase, $3,457 resulted from the contribution of five months of
Armstrong and $4,647 from a full year of results of Strongridge in 1997 as
compared to three months in 1996. In addition, the Company benefited from the
acquisition of the bit and shank business from Pacific Hoe Company. The
remaining increase in net sales was due to increased demand from the wood and
metal markets in the United States and Canada, which was reflected in increased
sales of levelers and tensioners, Red Streak(R) and waferizer knives as well as
increased sales of metal band saws and files.
Gross Profit Margin: Gross profit as a percentage of net sales increased
to 31.0% in 1997 compared to 29.2% in 1996. This increase was primarily due to
lower costs of raw materials, other manufacturing efficiencies and the addition
of higher gross profit margin products at Armstrong.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased as a percent of net sales to 18.5% in 1997
from 17.4% in 1996. This was partly due to additional bonus accruals,
commissions, and marketing incentive plans resulting from the Company exceeding
incentive targets. In addition, the increase resulted from the inclusion of
Strongridge and Armstrong, which have higher percentages of selling, general and
administrative expenses to net sales than the Company.
Operating Income: As a result of the aforementioned factors, operating
income increased 21.7% to $14,235 or 12.5% of net sales in 1997 from $11,698 or
11.9% in 1996.
Interest Expense: Interest expense increased to $4,963 in 1997 from $4,399
in 1996 as a result of borrowings to finance acquisitions.
Income Taxes: The Company's effective tax rate decreased to 42.9% in 1997
from 43.5% in 1996. The income tax rates principally differed from the statutory
U.S. rate of 34% as a result of state income tax provisions, nondeductible
amortization expense (for tax purposes), the change in tax valuation reserves
and the effect of foreign income tax on foreign source income.
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<PAGE> 29
Net Income: As a result of the foregoing, net income increased 25.6% to
$5,001 in 1997 from $3,983 in 1996.
Year Ended December 28, 1996 Compared To Year Ended December 30, 1995
Net Sales: Net sales decreased 2.5% to $98,661 in 1996 from $101,144 in
1995. This reduction was primarily attributable to reduced demand for the
Company's wood cutting products. Demand was impacted by a softening in new home
sales, a drop in lumber consumption and a corresponding decrease in lumber
prices. Lumber prices began to fall in the latter part of 1995 and continued
into 1996, resulting in the lumber mills cutting back production and postponing
capital investment in new filing room equipment. The majority of the decrease
was in filing room equipment and knife grinders.
Gross Profit Margin: Gross profit as a percentage of net sales remained
relatively stable at 29.2% in 1996 compared to 29.4% in 1995.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses remained flat at 17.4% of net sales in 1996 compared to
1995.
Special Compensation Expense: In 1995 the Predecessor incurred a one-time
compensation expense totaling $7,920 related to the acquisition of Simonds.
Operating Income: As a result of the aforementioned factors, excluding the
special compensation expense, operating income decreased 3.3% to $11,698 or
11.9% of net sales in 1996 from $12,095 or 11.9% of net sales in 1995.
Interest Expense: Interest expense increased $869 in 1996 from 1995 as a
result of the acquisition of Simonds in May 1995.
Other Expense (Income), net: Other expense (income), net was ($484) in
1995 and $245 in 1996 due to a foreign exchange gain in 1995 and a foreign
exchange loss in 1996.
Income Taxes: The Company's effective tax rate increased to 43.5% in 1996
from 41.5% in 1995. The Company's 1996 effective tax rate was impacted by
increased profit in its German operations, where there is a higher tax rate.
Net Income: As a result of the foregoing, net income increased to $3,983
in 1996 as compared to $660 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs, meet required debt payments, and to complete planned maintenance and
manufacturing improvements.
During 1995, 1996, 1997 and the six months ended June 27, 1998, net cash
provided by operations was $7,097, $6,665, $13,046 and $2,700, respectively.
During 1995, 1996, 1997 and for the six months ended June 27, 1998, net cash
used in investing activities was $47,193, $4,788, $17,304 and $8,809,
respectively, consisting primarily of capital expenditures and acquisitions. In
1995, $44,620 was used to acquire the Predecessor. In 1997, approximately
$14,000 was used for the acquisitions of Armstrong and the bit and shank product
line of Pacific Hoe Company. During 1995, 1996, 1997 and for the six months
ended June 27, 1998, net cash provided (used) by financing activities was
$40,373, ($2,526), $4,299 and $5,814. In 1995, $35,800 was provided from the
proceeds of the issuance of long-term debt, which was used to pay off $9,710 in
existing debt, and to finance the acquisition of the Predecessor.
On July 7, 1998, the Company consummated the sale of an aggregate principal
amount of $100,000 of the Original Notes. The proceeds of the Original Notes
were used as follows: approximately $53.1 million for the repayment of certain
indebtedness, approximately $39.5 million to finance a partial redemption of the
Company's common stock and the repurchase of all outstanding options of the
Company in the Recapitalization (see "Certain Transactions"), approximately $5
million to pay certain fees and expenses relating to the Original Offering and
the Recapitalization, and the balance for working capital.
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<PAGE> 30
In connection with the Original Offering, the Company entered into an
agreement with a group of bank lenders to provide the Senior Credit Facility.
The Senior Credit Facility provides a $30,000 line of credit to meet acquisition
and expansion needs as well as seasonal working capital and general corporate
requirements. Borrowings under the Senior Credit Facility bear interest at a
fluctuating rate based on, at the Company's option, either the lender's
alternate base rate, as defined, or LIBOR plus the applicable margin. A
commitment fee calculated based upon the unused portion of the revolving credit
facility is payable quarterly in arrears. As of June 27, 1998, the Company had
approximately $30,000 of unused borrowing capacity under the Senior Credit
Facility. See "Description of Senior Debt -- Senior Credit Facility."
One of the Company's strategies is to pursue strategic acquisitions in the
highly fragmented industrial cutting tool industry. See "Business -- Business
Strategy -- Strategic Acquisitions." Since 1989, the Company has completed eight
acquisitions, each of which was financed by borrowings under the Company's
credit facilities. The Company anticipates that any future acquisitions will be
financed through funds generated from operations, borrowings under the Senior
Credit Facility, additional debt financing, or a combination thereof. However,
there can be no assurances that any such financing will be available on terms
acceptable to the Company.
The Company's capital expenditures in 1997 were approximately $4 million.
The Company anticipates capital expenditures in 1998 and 1999 to be
approximately $4.5 million per year, which it expects to finance through funds
generated from operations or additional borrowings under the Senior Credit
Facility.
The Company believes that future cash flows from operations, together with
the borrowings available under the Senior Credit Facility will provide the
Company with sufficient liquidity and financial resources to finance its growth
and satisfy its working capital requirements for the foreseeable future. The
Company may not be able to generate sufficient cash flows from operations to pay
the entire principal amount of the Notes when due in 2008. In such event, the
Company would be required to refinance the Notes. However, there can be no
assurance that the Company will be able to obtain financing acceptable terms.
See "Risk Factors -- Substantial Leverage."
Seasonality
Historically, the Company's business has not been subject to seasonality in
any material respect. The Company's third quarter, which includes July through
September, is typically lower due to customers' and plant vacation shutdowns.
Inflation
Certain of the Company's expenses, such as wages and benefits, occupancy
costs and equipment repair and replacement, are subject to normal inflationary
pressures. Although the Company to date has been able to offset inflationary
cost increases through operating efficiencies, there can be no assurance that
the Company will be able to offset any future inflationary cost increases
through similar efficiencies.
YEAR 2000
The Company has a formal Year 2000 Compliance Plan which it began to
implement in 1996 to ensure that its hardware, operating systems and software
will function properly with respect to dates in the year 2000 and thereafter.
The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company has initiated formal communications
with all of its significant suppliers and large customers to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 issues. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.
26
<PAGE> 31
BUSINESS
GENERAL
Simonds, with operations since 1832, is a leading global manufacturer and
marketer of high quality industrial cutting tools. With facilities in North
America and Europe, the Company sells its products into three distinct end user
markets: metal (49% of 1997 net sales on a pro forma basis), wood (40%), and
paper (11%). Management believes the Company holds a number one, two or three
share position in each of the markets it serves.
The Company manufactures saw blades, files, knives and steel rule that,
when mounted on industrial machinery, cut, shape, bend and perforate metal, wood
and paper. In addition, the Company manufactures and distributes machinery,
including a complete line of filing room equipment used primarily in saw mills.
Management believes that Simonds manufactures and markets the most
technologically advanced industrial cutting tools available in the industry. The
Company's more than 25,000 products are used in a wide variety of industrial
applications. End users of Simonds' products range from large companies such as
General Motors Corporation and Georgia-Pacific Corporation to small businesses
such as machine shops. The primary end users of the Company's metal cutting
tools include aerospace, automotive, construction and home appliance
manufacturers as well as steel service centers, forge shops and aluminum
foundries. The Company's wood cutting products are used in saw mills, pulp and
paper mills, furniture manufacturing facilities and wood chipping operations.
Steel rule products produced by the Company are used in the die making and
packaging industries. The products are consumable and require replacement many
times per year. More than 85% of the Company's net sales are derived from sales
of replacement products for use in the aftermarket. In addition, despite the
significant value added by the Company's products in the processes in which they
are used, these products add relatively little cost to end users' operations.
These factors have contributed to the Company's historically stable revenue
stream.
Management believes that as a result of its long and successful history,
Simonds has been able to create a loyal, knowledgeable and efficient
distribution base. A substantial majority of the Company's products are marketed
and sold to end users in each of its market segments worldwide through
approximately 7,000 independent distributors. This distribution base provides
the Company with a competitive advantage by allowing the Company to more easily
sell its broad range of products, including new and sophisticated tools. In
addition, through its independent distributors the Company is able to offer end
users the highest quality customer service, including the resharpening and
maintenance of its cutting tools. The Company complements its distribution base
with a service oriented, highly trained and experienced sales force who spend
most of their time with end users. The Company sells its products directly to
over 12,000 distributors and end users with no single customer representing more
than 2.1% of total net sales for 1997.
Simonds' products are marketed and sold worldwide in 92 countries through
facilities located in the United States, Canada, Germany, Spain and the United
Kingdom. The Company has expanded its product sales outside of North America
from 15% of net sales in 1991 to 24% in 1997 on a pro forma basis through
acquisitions and internal growth. The Company intends to continue its
international growth by broadening its product offerings in existing markets and
entering new geographic areas. For the year ended December 27, 1997, the
Company's net sales in the United States, Canada, Europe and the rest of the
world represented approximately 62%, 14%, 17% and 7% of total Company net sales,
respectively, on a pro forma basis.
Simonds benefits from an experienced management team with a demonstrated
track record of successfully implementing the Company's business strategy. The
senior management team averages more than 20 years of industry experience.
Management believes that this experience, in combination with the Company's 166
year history and superior product quality, has made Simonds a widely recognized
brand name among its target customer base.
BUSINESS STRATEGY
Management believes that Simonds is well positioned to maintain its current
leadership position within the cutting tool industry. The Company's strategic
objective is to continue to design, manufacture and sell
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<PAGE> 32
superior cutting tools and equipment while leveraging its metallurgy and tooth
edge geometry expertise. The Company focuses on end user markets where high
product performance is valued and in geographic markets with a developed and
large industrial base. The Company's objective is to continue to grow its sales
and expand its operating margins by pursuing the following business strategy:
Continued Margin Expansion Through Focus on Profitability. The Company's
culture and organization focuses on consistently improving profitability. The
Company's compensation structure creates incentives for all personnel to focus
on profit margins. In each of the manufacturing facilities, all levels of
employees from machine operators through plant managers receive bonuses tied to
the profitability or productivity of their particular facility. The Company's
corporate sales management and sales force receive incentive compensation based
on achieving specific profit margins as well as sales targets. Senior
management's incentive compensation is based on targeted levels of the Company's
profitability. As a result of this cultural focus and emphasis on profitability,
Simonds' EBITDA margin has grown from 10.4% of net sales in 1990 to 15.2% of net
sales in 1997.
Strategic Acquisitions. The Company intends to continue to pursue
strategic acquisitions in the highly fragmented industrial cutting tool
industry. Management believes that there are many attractive potential
acquisition targets both domestically and internationally. Since 1989, the
Company has completed eight acquisitions as described in the following table.
<TABLE>
<CAPTION>
MARKET YEAR
ENTITY ACQUIRED SEGMENT PRODUCT TYPE LOCATIONS ACQUIRED
- --------------- ------- ----------------------- --------------------- --------
<S> <C> <C> <C> <C>
Michigan Knife Company Wood - Industrial Knives North America 1989
- Circular Saws
Mainland Manufacturing Inc. Wood - Wide Band Saws Western Canada 1990
- Circular Saws
- Filing Room Equipment
A.H. Ralston Limited Metal - Industrial Files United Kingdom 1990
Wespa Metal - Band Saws Germany 1992
- Hack Saws
Strongridge Metal - Sales & Marketing North America 1996
Product line of Pacific Hoe Company Wood - Bits and Shanks -- 1997
Armstrong Wood - Filing Room Equipment United States 1997
Notting Paper - Steel Rule Europe, North America 1998
</TABLE>
Each of these acquisitions has provided significant strategic opportunities for
the Company by either expanding product offerings or geographic markets in which
these products are sold. For example, Notting expanded the Company's steel rule
product line, Armstrong expanded the Company's filing room equipment machinery,
Strongridge provided access to smaller distributors, and Wespa further developed
the metal band product line. The Company is presently evaluating certain
acquisition opportunities and as part of its strategy will continue to do so in
the future. There can be no assurance that the Company will consummate any such
acquisitions or, if consummated, the timing thereof.
Emphasis on Product Innovation. Management believes that the Company is a
leader in the development of innovative and technologically superior products.
Throughout its history, the Company has often been first to introduce new
product technologies, including bits and shanks, carbide tipped band saws,
circular and band levelers, band tensioners, computerized saw control and narrow
wood band technology. An even greater emphasis on product innovation was
initiated in 1996 with the creation of a staff level position devoted to product
development. Recent new products include (i) Epic(R), a state-of-the-art metal
band saw line; (ii) automated band saws and circular saw levelers, revolutionary
products which allow for automated tensioning and leveling of band saws and
circular saws; (iii) Red Streak(R), a premier product for portable saw mill use
that enables users to cut lumber in the forest, resulting in lower operating
expenses; and (iv) Dominator(R), carbide tip bits which last significantly
longer than high speed steel bits. Management estimates that the Company
introduces approximately 10 to 25 new product innovations annually. New product
innovations are important to the Company's independent distributors, providing
them with the ability
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<PAGE> 33
to expand their product lines, the opportunity to improve their margins and the
ability to offer their customers enhanced products.
Low Cost Manufacturing. The Company continues to focus on being a low cost
producer of high value-added products within the cutting tool industry. The
Company has continued to benefit from economies of scale in both purchasing and
manufacturing. Management believes that the Company is able to purchase
specialty steel, its primary raw material, more efficiently than many of its
smaller competitors, generating significant savings. The Company has reduced its
manufacturing costs and improved its consistency of product quality as a result
of capital investment and process control programs. Capital investment of more
than $10 million since 1995 in new and upgraded equipment such as electron beam
welding, milling equipment, grinding equipment, heat treating equipment, and
in-line process controls has resulted in productivity and quality gains. The
Company's Fitchburg and Newcomerstown facilities received ISO 9002 certification
in 1993 and 1997, respectively. As a measure of improved efficiency, the
Company's sales per employee has increased from approximately $87,000 in 1989 to
approximately $151,000 in 1997.
PRODUCTS AND MARKET
Simonds produces an array of world-class industrial cutting tools for a
wide variety of end user markets. The Company's products can be segmented into
three major market sectors: metal (49% of 1997 net sales on a pro forma basis);
wood (40%); and paper (11%).
Metal Cutting Products
The Company is a world leader in the manufacture and marketing of metal
cutting products with 1997 pro forma net sales of $64.3 million. The Company's
products primarily include metal band saw blades and files for use in
industrial/commercial applications. In addition, the Company manufactures and
markets other products for similar applications. Simonds is one of only two
companies with a significant presence in both the band saw and file markets.
This combined presence creates significant synergies at the distributor and end
user levels. In addition, management believes that the Company is a
technological innovator in a business where a premium is placed on such
innovation.
Band Saw Blades (62% of Metal Cutting Products Pro Forma Net
Sales). Management believes that Simonds is the second largest manufacturer of
metal band saw blades both globally and in North America. Management believes
the Company markets the world's most technologically advanced and complete metal
band saw blade product line with three broad varieties distributed for portable
and stationary band saws. The three varieties include bi-metal, carbide tip and
carbon blades sold under brand names including EPIC(R), Si-Clone(R), Bundle
Band(R), Si-Namic(R) and XL. These products are used on a variety of OEM
vertical and horizontal machines which are generally used in cut-off,
profile/contour and friction cutting applications. In cut-off applications, the
Company's products cut steel and non-ferrous bars from long to shorter lengths
which are ultimately used in finished products. This type of cutting is most
often found in steel mills, steel warehouses and manufacturing plants.
Profile/contour cutting involves the Company's narrower width blades, usually
one-half inch or less, which are used to saw arcs or curves in a wide variety of
materials ranging from sheet metal to tool steel, plastics and wood. Friction
cutting is a method of removing seams and other size overages created by metal
casting using a silicon carbon steel bandsaw blade, running at extremely high
speeds.
The Company's metal band products have a large number of industrial
applications. The largest consumers of these products include the automotive,
construction, home appliance and aerospace industries. Other important end user
markets, particularly in the United States, include specialty manufacturers,
maintenance shops, tool and die shops, machine shops, metal fabricators,
aluminum foundries and steel service centers. End users include General Motors
Corporation, Ford Motor Company, The Boeing Company and The Stanley Works.
Purchasing criteria vary by end user market but generally center around
performance, durability and speed, resulting in effective cost per cut.
Management believes the Company offers the highest quality products resulting in
the most effective cost per cut.
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<PAGE> 34
The Company continues to expand its comprehensive metal band saw line with
product innovations and designs. End user needs have become more specialized
with demand for particular applications. In 1998, the Company intends to
introduce additional new products, including an improved friction blade for the
investment casting industry with high volume usage applications, and new carbide
tipped products designed for aluminum foundries and for cutting high temperature
alloys.
File Products (31% of Metal Cutting Products Pro Forma Net Sales).
Management believes that Simonds is the second largest manufacturer of
industrial file products in North America and the third largest worldwide. The
Company's files are precision hand tools made from forged, hardened steel, and
are generally used to debur and shape metals and wood. These files are also used
to sharpen many types of cutting blades. In general, the Company sells its file
products under various brand names, including Red Tang(R), Black Maxi-Sharp(R),
Ralston and SI. The Company believes the Simonds' name itself is widely
recognized by industrial/ commercial users as a leader in the manufacture of
high quality files.
The Company's files are sold into two primary end user markets: industrial
and consumer. Industrial end users consist of machinists, millwrights, welders,
gunsmiths, plumbers, electricians, tool and die makers, watchmakers, automobile
body repair and manufacturing as well as many non-ferrous end user applications
such as filing copper, brass and aluminum. Industrial end users of the Company's
file products include General Motors Corporation, Chrysler Corporation, Ford
Motor Company and Jaguar Cars. The consumer end user market, a growing area for
the Company, primarily consists of do-it-yourself users. The Company
manufactures a rapidly expanding line of files which are sold to retail chains
and specialty suppliers such as Sears, Roebuck & Co. (Craftsman), The Stanley
Works and Fiskars under private label brand names. In addition, there are
several niche commercial markets, such as the farrier and formica markets, that
are also important to the Company. Purchasing criteria vary by end user market
but generally center around product availability, design, performance,
durability, and price.
Management believes that the Company's pursuit of innovative new products
and markets complemented by the quality, durability and reliability associated
with the Simonds' Red Tang(R) file will continue to provide excellent
opportunities. The Company introduced four new products in 1997 which address
specific needs within the end user markets: the Spot Welders Tip File, which
enables the user to dress and maintain the tip, thereby maximizing efficiency
and tip life; the MIG Welder Nozzle File, a self-cleaning hollow copper nozzle;
and the Diamond Needle and Diamond Escapement Files, specialty files that are
used on hardened steel.
Wood Cutting Products
The Company believes it is the North American leader in the manufacture of
wood cutting products with net sales of $52.9 million in 1997 on a pro forma
basis. The Company offers a broad array of wood cutting tools, including bandsaw
blades, wood cutting knives, bits and shanks for inserted tooth saws, and large
diameter circular saws. The Company's products are generally used to cut and
shape logs into dimensional lumber and chip lumber for the pulp and paper
industry. In addition, the Company manufactures and sells a complete line of
filing room equipment used primarily in saw mills.
The Company markets its cutting and sawing tools and associated products to
the primary wood industry, including saw mills, pulp mills, wood pallet
producers and plywood, wafer board and particle board plants. End users of the
Company's products include Georgia-Pacific Corporation, International Paper
Company, Louisiana-Pacific Corporation and Weyerhaeuser Company. Purchasing
criteria vary by end user market but generally center around performance,
durability, and effective cost per cut.
The Company continues to build on its breadth of wood cutting products and
accessories. The Company's wood products are designed to minimize kerf loss,
which reduces saw dust, and to maximize log yield. To address these objectives,
the Company has recently introduced automatic saw leveling and tensioning
machines as well as computerized systems to control the feed and speed of saw
mill carriages. These machines enable saw mills to reduce operating costs by
reducing manpower and lowering maintenance costs. In addition, the Company's Red
Streak(R) product offers a narrow kerf band which, when used in portable saw
mills, increases log yield and reduces operating costs.
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<PAGE> 35
Paper Products
The Company is a leading producer of precision steel rules used primarily
in the die making and packaging industries with net sales of $14.5 million in
1997 on a pro forma basis. Manufactured from hardened and beveled steel, rule
products are used to fold, cut and perforate paper, cardboard and other
packaging materials in addition to stamping and bending various types and grades
of sheet metal. The Company's paper products include flat, rotary and perforated
steel rule. Rule products purchasing criteria vary by end user but generally
center around performance, durability and cost.
Paper processors are particularly focused on products that are more easily
formed, maintain sharpness, minimize "dusting" and maximize tool life. Over the
past three years, the Company has introduced new steel rule products that
address each of these concerns, including Mirror Edge(R), Hard Edge and Micro
Perf II. In addition, in May 1998, the Company acquired Notting, a steel rule
products company headquartered in the United Kingdom. This acquisition expands
the Company's steel rule product line and its geographic market penetration.
MARKETING, SALES AND DISTRIBUTION
Management believes that the Company has one of the most extensive and
efficient distribution bases in the industry. The Company's products are
marketed and sold worldwide through an extensive distributor base serviced by
its subsidiaries located in the United States, Canada, Germany, Spain and the
United Kingdom. More than 85% of the Company's sales are through its extensive
independent distributor base. Direct end user shipments and agent channels are
also employed by the Company as dictated by private label programs, specific
geographic markets, industry practice and competition. The Company employs
separate independent distributors for its metal, wood and paper products in
North America and internationally. The Company's marketing and sales functions
are divided geographically between North America and the rest of the world.
The Company's distribution effort is comprised of three major components:
(i) independent distributors, (ii) the Company's field sales force, and (iii)
the Company's customer service representatives.
The Company's sales and distribution base encompasses approximately 3,800
metal products, 1,300 wood products and 200 paper products distributors in North
America and 1,300 metal products, 150 wood products and 200 paper products
distributors internationally. These distributors include mill supply houses, saw
shops, catalog houses, OEMs, welding suppliers and other manufacturers. Because
it offers high quality products and extensive training, service, and technical
support, the Company attracts and retains the industry's most highly coveted
distributors.
The Company's independent distributors are supported by 27 metal product
and 26 wood product representatives in North America and 21 and two,
respectively, internationally. The Company's field sales professionals provide
technical service, in-house formal training and on-going field training to both
distributors and end users.
The Company's 23 customer service representatives in North America and
eight internationally are a critical element of the Company's distribution and
service leadership. By responding to and processing many orders from different
points and providing tailored, real-time service, this group provides a
user-friendly interface with the distributors and end users. Each distributor
and field sales professional is assigned a customer service representative who
is trained in service techniques and has extensive product knowledge.
Steel rule products are marketed through the Notting direct sales force,
independent specialized distributors and Myersco Limited, an independent
representative agency. In addition to this effort, the Company maintains a team
of customer service representatives to market the rule products to smaller
accounts.
The Company distributes private label products directly to retailers,
including Sears, Roebuck & Co., catalog houses such as McMaster-Carr, and
industrial products marketers such as The Stanley Works and Matco through a
dedicated private label sales manager, supported by the Company's customer
service organization.
The Company distributes certain industrial products through its wholly
owned subsidiary, Strongridge Limited, located in Brampton, Ontario, Canada.
Since its acquisition in 1996, Strongridge has been operating
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<PAGE> 36
as a separate division with a separate identity in the industrial market place.
The primary focus of Strongridge has been to sell metal products to the small
and mid-size industrial and contractor distributors. Weld centers and warehouse
locations in Ontario, Canada, Texas, Ohio, California, North Carolina and
Georgia provide local service support to these distributors.
RAW MATERIALS
The primary raw material for the Company's products is specialty steels.
The Company does not believe it is substantially dependent on any single
supplier. However, Theis Precision Steel Corporation provides approximately 50%
of the Company's domestic metal bandsaw steels. The Company's agreements with
its suppliers generally are for a period of one year with prices, in some
instances, subject to adjustment.
In order to take advantage of volume price discounts, the Company pursues a
"primary" sourcing strategy through which most of the Company's strip steel is
purchased. Designated "primary" sources of steel inventory are supported by
identified secondary sources of raw materials. See "Risk Factors -- Dependence
on Specialty Steels; Reliance on Limited Sources of Supply." Each production
facility is responsible for coordinating and executing the materials for their
respective inventory needs. A purchasing manager at each facility oversees these
purchases.
MANUFACTURING FACILITIES
The following table provides information on the Company's facilities and
the products produced at these locations.
<TABLE>
<CAPTION>
MARKET OWNED/ SIZE
LOCATION SEGMENT PRODUCT TYPES LEASED (SQ. FT) EMPLOYEES
- -------- ------- ------------------------------- ------ -------- ---------
<S> <C> <C> <C> <C> <C>
Fitchburg, MA............... Metal - Weld Edged Bandsaw Blades Owned 401,000 340
- Carbide Tipped Bandsaw Blades
- Carbon Bandsaw Blades
Wood - Bits & Shanks
- Red Streak(R) Bandsaw Blades
Paper - Perforating
- Flat
- Rotary
Big Rapids, MI.............. Wood - Circular Saws Owned 127,500 105
- Knives
- Inserted Tooth Saws
Newcomerstown, OH........... Metal - Files Owned 208,000 130
Springfield, OR............. Wood - Wide Bandsaw Blades Owned 28,400 30
Portland, OR................ Wood - Filing Room Equipment Owned 40,000 98
Riverside, CA............... Paper - Perforating Leased 19,200 24
Tottenham, UK............... Paper - Flat Owned 30,000 42
- Perforating
Barcelona, Spain............ Paper - Rule Leased 4,040 9
Spangenberg, Germany........ Metal - Carbon Bandsaw Blades Owned 57,000 89
- Bi-Metal Bandsaw Blades
- Hacksaw Blades
</TABLE>
Since 1996, the Company has made substantial investments in its
manufacturing equipment and processes and instituted operational improvements
that have generated significant cost savings and productivity increases. The
Company's focused capital spending programs have targeted improvements in
technology, quality control, information systems and manufacturing efficiencies.
EMPLOYEES
At July 25, 1998, the Company had 938 full-time employees. Of such
employees, 729 were located in the United States, 48 were located in Canada, 87
were located in Germany, 9 were located in Spain and 65 were located in the
United Kingdom. The Company considers its relations with these employees to be
good.
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<PAGE> 37
The Fitchburg and Newcomerstown facilities employ members of the United
Steel Workers of America ("USWA") Union. Their contracts with the USWA expire in
2000 and 2001, respectively. The Company considers its relations with the unions
to be good. See "Risk Factors -- Union Contracts."
COMPETITION
The cutting tool market is highly fragmented with numerous participants.
The Company is a leader in the global cutting tools market and is consistently
among the top three competitors in the metal cutting saw blade, file, wood
cutting product and rule product markets. Competition is principally on the
basis of price, service, delivery, quality and technical expertise. The
Company's competitors vary in each of the market sectors it serves. There is no
one company which competes with the Company in all three of the market sectors
served by the Company and there is no one company which is dominant in any of
such market sectors. The Company believes that its reputation over its long
history for quality products, extensive sales and service network and its
in-depth product knowledge provide it with a competitive advantage in all of the
market sectors it services.
ENVIRONMENTAL MATTERS
As with most industrial companies, the Company's facilities and operations
are required to comply with and are subject to a wide variety of federal, state,
local and foreign environment and worker health and safety laws, regulations and
ordinances, including those related to air emissions, wastewater discharges and
chemical and hazardous waste management and disposal ("Environmental Laws").
Certain of these Environmental Laws hold owners or operators of land or
businesses liable for their own and for previous owners' or operators' releases
of hazardous or toxic substances, materials or wastes, pollutants or
contaminants, including petroleum and petroleum products. Compliance with
Environmental Laws also may require the acquisition of permits or other
authorizations for certain activities and compliance with various standards or
procedural requirements. The nature of the Company's operations, the long
history of industrial uses at some of its current or former facilities, and the
operations of predecessor owners or operators of certain of the businesses
expose the Company to risk of liabilities or claims with respect to
environmental and worker health and safety matters. There can be no assurance
that material costs or liabilities will not be incurred in connection with such
liabilities or claims.
In 1992 the Company's property in Ashburnham, Massachusetts, was identified
as having groundwater contamination. The Company has been indemnified from such
liability by prior owners and there is currently $2.7 million held in escrow to
cover such liability. Based on current estimates, management believes that the
amounts held in escrow will be sufficient to cover these environmental
liabilities, although there can be no assurance that such amounts will be
sufficient. In addition, environmental issues were previously identified at the
Company's Fitchburg, Massachusetts, and Newcomerstown, Ohio, properties which
have since been remediated. However, the state of Ohio has not yet issued its
certification to that effect with respect to the Newcomerstown site. The prior
owner has agreed to indemnify the Company for any post-closure care expenses at
the Newcomerstown site. See "Risk Factors -- Environmental Matters."
LITIGATION
The Company is party to a lawsuit that was litigated in China involving a
Chinese joint venture established by the Company's predecessor. This case was
filed by a Chinese joint venture company against the Company and its
predecessor, alleging breach of a sales agreement. Judgment was entered in 1993
against the Company in the approximate amount of $410,000. The plaintiff has
made no effort to enforce its foreign judgment in the U.S. If and when it does
so, the Company will interpose defenses of denial of due process in the Chinese
court, as well as other substantive defenses provided under the Massachusetts
General Laws. Management believes the lawsuit to be without merit. In addition,
the Company is a party to other lawsuits arising in the normal course of
business. In the opinion of management, the final resolutions of these lawsuits
are not expected to materially affect the financial condition or results of
operations of the Company.
33
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company. Directors serve for a term of
one year or until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ross George............. 65 President, Chief Executive Officer and Director
Joseph Sylvia........... 53 Executive Vice President, Chief Financial Officer and
Director
Robert Deedrick......... 55 Vice President -- Manufacturing
Roland Richard.......... 56 Vice President -- Sales and Marketing, Wood Products
James Palmer............ 57 Vice President -- Sales and Marketing, Metal Products
Harry Rogers............ 57 Vice President -- International and Rule Products
Peter Hopper............ 47 Vice President -- Product Development
F.A. DeVilling III...... 56 Vice President and General Manager -- Strongridge
Ron Owens............... 52 Vice President -- Business Development
Habib Gorgi............. 41 Director
Bernard Buonanno III.... 32 Director
</TABLE>
Ross George: Mr. George has been President, Chief Operating Officer and
member of the Board of Directors since 1988 and was made Chief Executive Officer
in 1995. Mr. George previously served as acting President and Vice President of
Operations at Simonds Cutting Tools -- Division of Household Manufacturing. Mr.
George joined Simonds in 1983. From 1980 to 1983, he was Vice President and
General Manager of the New England Carbide division of Wallace Murray Corp.
Prior to 1980 he held various positions at Johnson & Johnson and Texas
Instruments.
Joseph Sylvia: Mr. Sylvia has been Chief Financial Officer since 1988 and
is a member of the Board of Directors of Simonds. He was promoted to Executive
Vice President in 1995. Mr. Sylvia formerly held the position of Division
Controller of Simonds Cutting Tools -- Division of Household Manufacturing. He
joined Simonds in 1970 as Senior Programmer Analyst and held various management
positions in Information Services from 1972 to 1982. From 1982 to 1987, Mr.
Sylvia was Director of Finance and Information Services.
Robert Deedrick: Mr. Deedrick has been Vice President of Manufacturing
since 1991. He managed the Fitchburg plant from 1984 to 1991 and the
Newcomerstown operations from 1981 to 1984. Mr. Deedrick joined Simonds in 1973
as an Engineer, progressing through Production and Inventory Control and
Production Management positions.
Roland Richard: Mr. Richard has been Vice President of Sales and
Marketing -- Wood Products since 1991. He previously held the position of
Director of Corporate Development from 1989 to 1991 and was Corporate Sales
Manager of the acquired Michigan Knife Company from 1987 to 1989. Mr. Richard
originally joined Simonds in 1961, progressing through sales, sales management,
product management, and became a Strategic Business Unit Manager in 1980.
James Palmer: Mr. Palmer has been Vice President of Sales and Marketing
for Metal Products since 1995. He was Vice President of Sales of Milford
Products for 10 years. Mr. Palmer joined Milford Products in 1982. Prior to
1982, Mr. Palmer held various sales and management positions with a variety of
companies in the machine tool and cutting tool industries over a period of
approximately 16 years.
Harry Rogers: Mr. Rogers has been Vice President of International and Rule
Products since 1990. He previously held the position of General Sales Manager.
Since joining Simonds in 1971 as a salesman, he has held key positions in sales
and marketing management.
Peter Hopper: Mr. Hopper has been Vice President of Product Development
since 1996. He has held positions of increasing responsibility with Crucible
Specialty Metals from 1976 to 1983. He held research, metallurgy and quality
control positions with Milford Products Corporation from 1983 to 1991. From 1991
to
34
<PAGE> 39
1996 he served in various product development and design positions with
Milwaukee Electric Tool Corporation.
F.A. "Skip" DeVilling III: Mr. DeVilling joined Simonds as Vice President
of Business Development in 1995. In 1996, Mr. DeVilling became Vice President
and General Manager of Strongridge Limited, a wholly owned Canadian subsidiary
of Simonds. Mr. DeVilling was formerly Vice President of Sales and Marketing for
Columbus McKinnon Corporation from 1992 to 1995 and Vice President of Sales and
Marketing for National Twist Drill Division of Regal Beloit Corporation from
1986 to 1992. Prior to 1986, Mr. DeVilling worked for the Baystate Abrasives
Division of Dresser Industries in various sales and marketing management
positions, including National Sales Manager form 1979 to 1985.
Ron Owens: Mr. Owens joined Simonds in 1998 as Vice President of Business
Development. In 1990 Mr. Owens formed "SAWELL, INC", a manufacturing business
that produced jigsaw and recip blades for their own brand, as well as private
label product for all major brands. Black and Decker purchased "SAWELL, INC" in
late 1994 and Mr. Owens was President of the subsidiary until October 1996. Mr.
Owens was Vice President of Operations at Allen Industrial from 1965 to 1978;
Executive Vice President of Mid State Industrial from 1978 to 1982; and owned a
sales rep agency in Tampa, Florida prior to starting "SAWELL, INC".
Habib Gorgi: Mr. Gorgi has been a member of the Board of Directors since
1995. Since 1995, Mr. Gorgi has been President of each of (i) Fleet Ventures
Resources, Inc., (ii) Fleet Growth Resources II, Inc., a general partner of
Fleet Equity Partners VI, L.P., and (iii) Silverado III, Corp., the general
partner of Silverado III, L.P., the general partner of Chisholm Partners III,
L.P. Mr. Gorgi is also managing general partner of Kennedy Plaza Partners. Since
1986, Mr. Gorgi has held various management positions with Fleet Equity Partners
and its affiliates. Prior to 1986, he had worked in the Mergers, Acquisitions
and Leveraged Buyouts Group of BankAmerica. Mr. Gorgi serves on the Board of
Directors of several Fleet Equity Partners' portfolio companies.
Bernard Buonanno: Mr. Buonanno has been a member of the Board of Directors
since 1995. Since 1998, Mr. Buonanno has been Senior Vice President of each of
(i) Fleet Venture Resources, Inc., (ii) Fleet Growth Resources, Inc., a general
partner of Fleet Equity Partners VI, L.P., and (iii) Silverado III, Corp., the
general partner of Silverado III, L.P., the general partner of Chisholm Partners
III, L.P. Mr. Buonanno is also general partner of Kennedy Plaza Partners. Mr.
Buonanno has held various positions with Fleet Equity Partners and its
affiliates since 1993. Prior to joining Fleet Equity Partners in 1993, Mr.
Buonanno worked in the Mergers and Acquisitions Department of Prudential-Bache
Capital Funding. Mr. Buonanno serves on the Board of Directors of several Fleet
Equity Partners' portfolio companies.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Each non-employee director currently receives fees of $25,000 per year plus
reimbursement of out-of-pocket expenses. Directors who are employees receive no
additional compensation for serving as a director.
35
<PAGE> 40
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in 1997 by the
Company's Chief Executive Officer and each of the four most highly compensated
executive officers whose remuneration exceeded $100,000 (the "Named
Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
-------------------- ---------------------------
NAME AND POSITION SALARY BONUS OTHER(1) COMPENSATION(2)
----------------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Ross George................................. $262,080 $262,080 $20,895 $17,102
Chief Executive Officer, President
Joseph Sylvia............................... $178,605 $142,884 $16,958 $11,324
Executive Vice President, CFO
Robert Deedrick............................. $126,200 $ 75,720 $ 8,206 $ 8,683
Vice President -- Manufacturing
James Palmer................................ $120,935 $ 47,013 $ 7,553 $ 8,829
Vice President -- Sales & Marketing, Metal
Products
Roland Richard.............................. $116,844 $ 70,106 $ 7,617 $ 8,667
Vice President -- Sales & Marketing, Wood
Products
</TABLE>
- ---------------
(1) Consists of amounts reimbursed during the year for the payment of taxes
relating to company vehicles, tax preparation and club memberships.
(2) Consists of the Company's contributions to the 401(k) Plan (Messrs. George
and Sylvia, $4,750; Mr. Deedrick, $3,786; Mr. Palmer, $3,628; and Mr.
Richard, $3,505) and the profit-sharing plan (Messrs. George and Sylvia,
$4,800; Mr. Deedrick, $3,786; Mr. Palmer, $3,628; and Mr. Richard, $3,505),
and group insurance payments (Mr. George, $7,552; Mr. Sylvia, $1,774; Mr.
Deedrick $1,111; Mr. Palmer, $1,573; and Mr. Richard, $1,656).
Options
No options were granted in the year ended December 27, 1997 to the Named
Executives. The following table sets forth certain information with respect to
unexercised options to purchase the Company's Common Stock which were granted in
connection with the acquisition of the Company in May 1995. These options, which
were immediately exercisable at $400 per share, were repurchased by the Company
at a value of $458.52 per share less the exercise price in connection with the
Recapitalization. See "Certain Transactions."
FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NO. OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END OPTIONS AT FY-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ross George............................ 12,301.79 0 $719,900.75 0
Joseph Sylvia.......................... 8,201.20 0 $479,934.22 0
Robert Deedrick........................ 2,050.30 0 $119,983.55 0
James Palmer........................... 2,050.30 0 $119,983.55 0
Roland Richard......................... 2,050.30 0 $119,983.55 0
</TABLE>
- ---------------
(1) Based on the equity value per share being paid in connection with the
Recapitalization ($458.52).
The Company adopted the Amended and Restated 1998 Stock Incentive Plan in
July 1998 pursuant to which key employees (including officers who are also
directors of the Company) will be eligible for discretionary awards of stock
options at the discretion of the Board of Directors. The terms and prices of
36
<PAGE> 41
options granted will be in the discretion of the Board. Messrs. George and
Sylvia were granted options in July 1998 to purchase 351.13 and 222.45 shares,
respectively, of Common Stock at a price of $458.52 per share.
Employment Contracts
Messrs. George and Sylvia each entered into employment agreements with the
Company which expire May 26, 2000, subject to extension. The employment
agreements provide for base salaries and bonuses as determined by the Board of
Directors. In addition, the agreements provide that in the event of termination
of employment by the Company for any reason other than cause, the officer is
entitled to receive all salary and bonuses earned through the termination date
plus the remaining base salary for one year.
Messrs. Deedrick, Palmer, Richard and Rogers have also entered into
employment agreements with the Company which provide for one year's notice of
termination from the Company, and 90 days notice of termination from the
employee, except in the case of cause, in which event the agreement is
terminable on 30 days notice from the Company. The agreements provide that the
officers' base salary and bonuses will be determined by the Board. Each of these
agreements contains a covenant not to compete for two years after termination of
employment.
37
<PAGE> 42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting Common Stock (i) by each person known to the
Company to own more than 5% of the Company's voting Common Stock and (ii) by
each director of the Company, each of the executive officers of the Company
listed under "Management" and the directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------
NUMBER OF SHARES % OF CLASS
---------------- ----------
<S> <C> <C>
Fleet Venture Resources, Inc.(2).......................... 22,118.93 31.3
Fleet Equity Partners VI, L.P.(2)......................... 9,479.54 13.4
Chisholm Partners III, L.P.(2)............................ 8,014.92 11.4
Kennedy Plaza Partners.................................... 461.20 *
Private Market Fund, L.P. ................................ 8,723.72 12.7
Ross George............................................... 6,348.69 7.3
Joseph Sylvia............................................. 4,039.09 5.9
Robert Deedrick........................................... 436.19 *
Roland Richard............................................ 1,090.46 1.6
James Palmer.............................................. 381.66 *
Harry Rogers.............................................. 1,090.46 1.6
Peter Hopper.............................................. 163.57 *
F.A. DeVilling............................................ 218.09 *
Ron Owens................................................. -- --
Habib Gorgi(2)............................................ 40,074.59 56.7
Bernard Buonanno(2)....................................... 40,074.59 56.7
All directors and executive officers as a group, including
the above named persons(2).............................. 53,842.79 75.6
</TABLE>
- ---------------
* Less than 1%
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of, a security or the sole or shared power
to dispose, or direct the disposition of, a security, and includes options
and warrants exercisable within 60 days.
(2) Fleet Venture Resources, Inc. ("FVR"), Fleet Equity Partners VI, L.P.
("FEP"), Chisholm Partners III ("Chisholm") and Kennedy Plaza Partners
("Kennedy") are affiliated entities. As a result, they may be deemed to have
shared voting and investment power of the shares held by each of the other
entities. FVR and FEP are also affiliates of Fleet Financial Group, Inc.
("FFG"). As a result, FFG may be deemed to have shared voting and investment
power of the shares held by such entities. Mr. Gorgi is President of FVR and
of the corporate general partners of FEP and Chisholm, and a managing
general partner of Kennedy. As a result, he may be deemed to have shared
voting and investment power of the shares held by such entities. Mr.
Buonanno is Senior Vice President of FVR and of the corporate general
partners of FEP and Chisholm, and a general partner of Kennedy. As a result,
he may be deemed to have shared voting and investment power of the shares
held by such entities. Messrs. Gorgi and Buonanno disclaim beneficial
ownership for all shares held directly by these entities.
38
<PAGE> 43
CERTAIN TRANSACTIONS
The Original Offering was made in connection with a recapitalization (the
"Recapitalization") of the Company, the purpose of which was to provide
liquidity to the Company's equity investors. Pursuant to the Recapitalization
(i) the Company repurchased certain of its outstanding equity securities for an
aggregate purchase price of $58.3 million (or $458.52 per share of Common Stock
and equivalents) (the "Recapitalization Consideration"), (ii) the Company issued
new shares of voting and non-voting Common Stock to certain existing
stockholders and new investors with aggregate proceeds to the Company of $18.8
million (or $458.52 per share) (the "New Shares"), (iii) the Company issued
certain warrants and options to certain existing stockholders and new investors,
and (iv) certain of the Company's existing stockholders retained voting Common
Stock with an aggregate value (based on per share value of $458.52) of
approximately $16.2 million (the "Retained Shares").
Fleet (i) received approximately $39.0 million of the Recapitalization
Consideration, (ii) purchased approximately $7.8 million of the New Shares and
(iii) retained approximately $9.6 million of the Retained Shares. In addition,
Fleet received (a) warrants to purchase 2,180.93 shares of Common Stock at a
price of $458.52 per share and (b) warrants to purchase 1,357.73 shares of
Common Stock at a price of $458.52 per share which will be exercisable in full
upon the occurrence of a sale of the Company or an initial public offering of
its stock ("Liquidity Events") if Fleet does not earn a specified return on its
cash investment in the Company.
Management of the Company (i) received approximately $16.0 million of the
Recapitalization Consideration, (ii) purchased approximately $0.3 million of the
New Shares and (iii) retained approximately $6.4 million of the Retained Shares.
Messrs. George, Sylvia, Deedrick and Richard (or members of their respective
families) received approximately $6.7 million, $3.1 million, $0.9 million and
$1.2 million, respectively, of such Recapitalization Consideration. Mr. Palmer
purchased approximately $0.2 million of such New Shares, and Messrs. George,
Sylvia, Deedrick and Richard retained approximately $3.8 million, $2.1 million,
$0.2 million and $0.5 million, respectively, of such Retained Shares. In
addition, Messrs. George and Sylvia were granted options to purchase 351.13 and
222.45 shares, respectively, of Common Stock at a price of $458.52 per share.
Subsequent to the closing of the Recapitalization, Messrs. George and Sylvia
each sold $0.6 million of their Retained Shares to certain other members of
management.
First Union Investors, Inc., an affiliate of First Union Capital Partners,
one of the Initial Purchasers, and First Union National Bank, the principal
lender under the Senior Credit Facility, acquired 3,373.75 voting and 7,530.90
non-voting New Shares for approximately $5 million and also received warrants to
purchase 391.57 shares of Common Stock at a price of $458.52 per share which
will be exercisable in full upon the occurrence of certain Liquidity Events if
the holder does not earn a specified return on its cash investment in the
Company. The Private Market Fund, L.P. received warrants to purchase 313.26
shares of Common Stock at a price of $458.52 per share which will be exercisable
in full upon the occurrence of certain Liquidity Events if the holder does not
earn a specified return on its cash investment in the Company.
DESCRIPTION OF SENIOR DEBT
The following is a summary of certain Senior Debt of the Company. To the
extent such summary contains descriptions of the Senior Credit Facility and
other loan documents, such descriptions do not purport to be complete and are
qualified in their entirety by reference to such documents, which are available
upon request from the Company.
SENIOR CREDIT FACILITY
On July 7, 1998, the Company entered into an agreement with First Union
National Bank (the "Bank") to refinance its then existing credit agreement with
a syndicate of lenders, including their agent, Heller Financial Inc., with a
revolving credit facility (the "Senior Credit Facility") to the Company for up
to $30.0 million of revolving loans. Borrowings under the Senior Credit Facility
are available for permitted acquisitions and working capital, including letters
of credit. The Senior Credit Facility is secured by first
39
<PAGE> 44
priority liens on all tangible and intangible personal property and real
property assets of the Company and its subsidiaries.
The Senior Credit Facility expires in 2003, unless extended. The interest
rate per annum applicable to the Senior Credit Facility is, at the Company's
option, either LIBOR or the greater of the prime rate or the overnight federal
funds rate plus 0.50%, in each case plus 0.125% to 2.375% depending on the
Company's financial leverage (the "Applicable Margin"). The Company is required
to pay certain fees in connection with the Senior Credit Facility, including a
commitment fee of 0.50% initially and thereafter at a per annum rate equal to
the Applicable Margin on the unutilized portion of the revolver.
The Senior Credit Facility also contains a number of financial covenants
which, among other things, require the Company to maintain specified financial
ratios and impose certain limitations on the Company with respect to
investments, additional indebtedness, prepayments of indebtedness, dividends,
distributions, guarantees, sale and leaseback transactions, transactions with
affiliates, liens and encumbrances.
The Senior Credit Facility is guaranteed by each of the domestic
subsidiaries of the Company.
FOREIGN DEBT
The Company's German subsidiary has a term loan in the principal amount of
DM 4.2 million and a working capital line facility with a maximum aggregate
limit of DM 5.5 million. The term loan expires and the working capital line
terminates on December 31, 1999. Interest rates on both the term loan and the
working capital line are based on the Frankfurt Interbank Offer Rate. The term
loan may be prepaid without premium or penalty in minimum multiples of DM
100,000 upon one month's advance notice.
Simonds UK Holdings Ltd., a British subsidiary of the Company, issued a
series of promissory notes in the aggregate principal amount of L1,000,000 (the
"UK Notes") in favor of the former shareholders of Notting as a portion of the
purchase price. The UK Notes, which mature April 30, 1999, bear interest at a
rate of 8.5% per annum. The payment of the UK Notes is guaranteed by the
Company.
The Company's Notting subsidiary has the following outstanding
indebtedness: (i) a business development loan with National Westminster Bank in
the amount of L44,139 as of July 31, 1998 bearing interest at 10% per annum and
maturing June 7, 1999; (ii) a demand note with National Westminster Bank in the
amount of L200,000 bearing interest at 2 1/2% above the bank's base rate and
maturing December 31, 1998; (iii) a revolving line of credit with Wells Fargo
Bank in the amount of $1.2 million bearing interest at 1% above the bank's prime
rate and maturing March 31, 1999; (iv) a credit facility with Banco Sabadell of
Spain in the amount of 26 million pesetas bearing interest at rates ranging from
6.35% to 10%; (v) an overdraft line with Central Hispano Bank of Spain in the
amount of 5 million pesetas bearing interest at a rate of MIBOR (the Madrid
Inter-Bank Offer Rate) plus 1.5%; and (vi) a loan with National Westminster Bank
in the amount of L26,709 for the purchase of fixed assets bearing interest at
2 1/2% above the bank's base rate and maturing August 1, 2000.
40
<PAGE> 45
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under the Indenture. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture may be obtained from the Company
or the Initial Purchasers. The definitions of certain capitalized terms used in
the following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" include only Simonds
Industries Inc. and not its Subsidiaries.
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any Paying Agent and Registrar without notice to
holders of the Exchange Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Exchange Notes at the Trustee's corporate office in
New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
the Holders. Any Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150,000,000, of
which $100,000,000 will be issued on the Issue Date, and will mature on July 1,
2008. Interest on the Notes will accrue at the rate of 10 1/4% per annum and
will be payable semiannually in cash on each January 1 and July 1 commencing on
January 1, 1999, to the persons who are registered Holders at the close of
business on the December 15 and June 15 immediately preceding the applicable
interest payment date. Interest on the Notes will accrue from and including the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Exchange Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after July 1, 2003, upon not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of the principal amount
thereof) if redeemed during the twelve-month period commencing on July 1 of the
applicable year set forth below, plus, in each case, accrued and unpaid
interest, if any, thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 105.125%
2004........................................................ 103.417%
2005........................................................ 101.708%
2006 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from
time to time, on or prior to July 1, 2001, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem up to 35% of the Notes issued at a redemption price equal to 110.250%
of the principal amount thereof plus accrued and unpaid interest, if any,
thereon to the date of redemption; provided that at least 65% of the principal
amount of Notes issued remains outstanding immediately after any such
redemption. In order to effect the foregoing redemption with the proceeds of any
41
<PAGE> 46
Public Equity Offering, the Company shall make such redemption not more than 90
days after the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis
as is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Exchange Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Exchange Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Exchange Note. On
and after the redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption as long as the Company has deposited with
the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Exchange Notes is subordinated in
right of payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due upon all Senior Debt shall first be paid in
full in cash or Cash Equivalents, or such payment duly provided for to the
satisfaction of the holders of Senior Debt, before any payment or distribution
of any kind or character is made on account of any Obligations on the Notes, or
for the acquisition of any of the Notes for cash or property or otherwise. If
any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Debt, no payment of any kind
or character shall be made by or on behalf of the Company or any other Person on
its behalf with respect to any Obligations on the Notes or to acquire any of the
Notes for cash or property or otherwise. In addition, if any other event of
default occurs and is continuing with respect to any Designated Senior Debt, as
such event of default is defined in the instrument creating or evidencing such
Designated Senior Debt, permitting the holders of such Designated Senior Debt
then outstanding to accelerate the maturity thereof and if the Representative
for such Designated Senior Debt gives written notice of the event of default to
the Trustee (a "Default Notice"),then, unless and until all events of default
with respect to such Designated Senior Debt have been cured or waived or have
ceased to exist or the Trustee receives notice from the Representative for such
Designated Senior Debt terminating the Blockage Period (as defined below),
during the 180 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall (x) make
any payment of any kind or character with respect to any Obligations on the
Notes or (y) acquire any of the Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 180 days from the date the Default Notice was delivered to
the Trustee and only one such Blockage Period may be commenced within any 360
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consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Debt shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Debt whether or
not after a period of 360 consecutive days, unless such event of default shall
have been cured or waived or ceased to exist for a period of not less than 90
consecutive days (it being acknowledged that any subsequent action, or any
breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions of the Designated Senior Debt under
which an event of default previously existed or was continuing shall constitute
a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
GUARANTEES
The Exchange Notes will be guaranteed by each of the Company's Domestic
Wholly Owned Restricted Subsidiaries on the Issue Date and by certain of the
Company's Restricted Subsidiaries formed or acquired after the Issue Date. See
"Certain Covenants -- Issuance of Subsidiary Guarantees." The following
subsidiaries of the Company are the current Guarantors of the Notes: Armstrong
Manufacturing Company, Simonds Holding Company, Inc. and Simonds Industries FSC,
Inc. For additional information with respect to the Guarantors, see Note 13 to
the Consolidated Financial Statements. The Guarantee of each Guarantor will be
subordinated to all Guarantor Senior Debt of such Guarantor to the same extent
as the Notes are subordinated to all Senior Debt. In the event all of the
Capital Stock of a Guarantor owned by the Company and the Restricted
Subsidiaries is sold by the Company and/or one or more Restricted Subsidiaries
or all or substantially all of the assets of a Guarantor are sold by such
Guarantor and the sale complies with the provisions set forth under "Certain
Covenants -- Limitation on Asset Sales," such Guarantor's Guarantee will be
released.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Exchange Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued interest, if any, thereon to the date of
purchase. The Indenture defines a Change of Control as the occurrence of one or
more of the following events: (i) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Company to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together with any
Affiliates thereof (whether or not otherwise in compliance with the provisions
of the Indenture); (ii) the approval by the holders of Capital Stock of the
Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); or (iii) any Person or Group (other than the Permitted Holder(s))
shall become the beneficial owner, directly or indirectly, of shares
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under all
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
Credit Agreement and all other Senior Debt to permit the repurchase of the
Exchange Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Exchange Notes pursuant to the provisions described below.
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Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have an Exchange Note purchased pursuant to
a Change of Control Offer will be required to surrender the Exchange Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Exchange Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day prior to the
Change of Control Payment Date.
If a Change of Control Offer is required to be made, there can be no
assurance that the Company will be permitted by the terms of its Senior Debt to
make such a Change of Control Offer or that it have available funds sufficient
to pay the Change of Control purchase price for all the Notes that might be
delivered by Holders seeking to accept the Change of Control Offer. In the event
the Company is required to purchase outstanding Notes pursuant to a Change of
Control Offer, the Company expects that it would seek third party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to require the purchase of Exchange Notes
upon a Change of Control. Restrictions in the Indenture described herein on the
ability of the Company and the Restricted Subsidiaries to incur additional
Indebtedness, to grant liens on its property, to make Restricted Payments and to
make Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require the
purchase of the Exchange Notes, and there can be no assurance that the Company
or the acquiring party will have sufficient financial resources to effect such
purchase. Such restrictions and the restrictions on transactions with Affiliates
may, in certain circumstances, make more difficult or discourage any leveraged
buyout of the Company or any of its Subsidiaries by the management of the
Company. While such restrictions cover a wide variety of arrangements which have
traditionally been used to effect highly leveraged transactions, the Indenture
may not afford the Holders of Exchange Notes protection in all circumstances
from the adverse aspects of a highly leveraged transactions, reorganization,
restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and the
Restricted Subsidiaries may incur Acquired Indebtedness, in each case if on the
date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
No Indebtedness incurred pursuant to the Consolidated Fixed Charge Coverage
Ratio test of the preceding paragraph (including, without limitation,
Indebtedness under the Credit Agreement) shall reduce the amount of Indebtedness
which may be incurred pursuant to any clause of the definition of Permitted
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Indebtedness (including without limitation, Indebtedness under the Credit
Agreement pursuant to clause (ii) of the definition of Permitted Indebtedness).
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of the Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock (including by means of a Person (including an Unrestricted Subsidiary)
making such a payment with the proceeds of an Investment made by the Company or
any Restricted Subsidiary), (b) purchase, redeem or otherwise acquire or retire
for value any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock (including by
means of a Person (including an Unrestricted Subsidiary) making such a payment
with the proceeds of an Investment made by the Company or any Restricted
Subsidiary) or (c) make any Investment (other than Permitted Investments) (each
of the foregoing actions set forth in clauses (a), (b) and (c) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purpose, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of: (w) 50% of the
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned subsequent to
the Issue Date and through the end of the most recent fiscal quarter for which
financial statements are available prior to the date such Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the fair market value of the aggregate net proceeds
received by the Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company or of other securities
converted to Qualified Capital Stock of the Company; plus (y) without
duplication of any amounts included in clause (iii)(x) above, 100% of the fair
market value of the aggregate net proceeds of any contribution to the common
equity capital of the Company received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net proceeds from a Public Equity Offering to the extent used to redeem the
Notes); plus (z) an amount equal to the lesser of (A) the sum of the fair market
value of the Capital Stock of an Unrestricted Subsidiary owned by the Company
and/or the Restricted Subsidiaries and the aggregate amount of all Indebtedness
of such Unrestricted Subsidiary owed to the Company and each Restricted
Subsidiary on the date of Revocation of such Unrestricted Subsidiary as an
Unrestricted Subsidiary in accordance with the covenant described under
"-- Limitation on Designations of Unrestricted Subsidiaries" or (B) the
Designation Amount with respect to such Unrestricted Subsidiary on the date of
the Designation of such Subsidiary as an Unrestricted Subsidiary in accordance
with the covenant described under "-- Limitation on Designations of Unrestricted
Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) the acquisition of any shares of
Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) so long
as no Default or Event of Default shall have occurred and be continuing,
repurchases of Capital Stock (or options therefor) of the Company from officers,
directors, employees or consultants pursuant to equity ownership or compensation
plans or stockholders agreements not to exceed $1.0 million in any year; (4) so
long as no Default or Event of Default shall have occurred and be continuing,
other Restricted Payments in an aggregate amount not to exceed $5.0 million; and
(5) Restricted Payments made on the Issue Date in connection with the
Recapitalization Distribution. In determining the aggregate amount of Restricted
Payments made subsequent
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to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2), (3) and (4) shall be
included in such calculation.
Limitation on Asset Sales. The Company will not, and will not permit any
of the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash, Cash Equivalents and/or
Replacement Assets and is received at the time of such disposition; and (iii)
upon the consummation of an Asset Sale, the Company shall apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 360 days of receipt thereof either (A) to prepay any Senior Debt or
Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior
Debt under any revolving credit facility, effect a permanent reduction in the
availability under such revolving credit facility, (B) to acquire Replacement
Assets, or (C) a combination of prepayment and investment permitted by the
foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or
such earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the
next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 60 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that principal amount of Notes equal to the Net
Proceeds Offer Amount at a price equal to 100% of the principal amount of the
Notes to be purchased, plus accrued and unpaid interest, if any, thereon to the
date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration) or Cash Equivalents, then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. The Company may defer
the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5,000,000 resulting from one or more Asset
Sales or deemed Asset Sales(at which time, the entire unutilized Net Proceeds
Offer Amount, and not just the amount in excess of $5,000,000, shall be applied
as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value (as determined in good faith by the Board of
Directors of the Company) of such properties and assets of the Company or the
Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Exchange Notes in whole or in part in integral multiples
of $1,000 in exchange for cash. To the extent Holders properly tender Exchange
Notes in an amount exceeding the Net Proceeds Offer Amount, Exchange Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection
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with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reasons of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or the properties or assets of the Person so acquired; (5) agreements
existing on the Issue Date to the extent and in the manner such agreements are
in effect on the Issue Date; (6) any other agreement entered into after the
Issue Date which contains encumbrances and restrictions which are not materially
more restrictive with respect to any Restricted Subsidiary than those in effect
with respect to such Restricted Subsidiary pursuant to agreements as in effect
on the Issue Date; (7) any instrument governing Indebtedness of a Foreign
Restricted Subsidiary; provided that after giving effect to the imposition of
such encumbrance or restriction, the Company would be able to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the covenant described under "-- Limitation on Incurrence of Additional
Indebtedness"; (8) customary restrictions on the transfer of any property or
assets arising under a security agreement governing a Lien permitted under the
Indenture; (9) any agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (4), (5) or (7) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
Refinancing Indebtedness are not materially more restrictive than the provisions
relating to such encumbrance or restriction contained in agreements referred to
in such clause (2), (4), (5) or (7); and (10) any agreement governing the sale
or disposition of any Restricted Subsidiary which restricts dividends and
distributions pending such sale or disposition.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit
any of the Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of the Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Senior Debt and Liens securing Guarantor Senior Debt; (C) Liens
securing the Notes and any Guarantees; (D) Liens in favor of the Company or a
Guarantor; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which Refinancing Indebtedness has been secured by a
Lien permitted under the Indenture and which has been incurred in accordance
with the provisions of the Indenture; provided, however, that such Liens do not
extend to or cover any property or assets of the Company or any of the
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
that is senior in right of payment to the Notes or the
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Guarantee of such Guarantor and subordinate in right of payment to any other
Indebtedness of the Company or such Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Restricted Subsidiaries) whether as an entirety or substantially as an entirety
to any Person unless: (i) either (1) the Company shall be the surviving or
continuing corporation or (2) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness"; (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
No Guarantor (other than any Guarantor whose Guarantee is to be released in
accordance with the terms of the Guarantee and Indenture in connection with any
transaction complying with the provisions of the covenant described under
"-- Limitation on Asset Sales") will, and the Company will not cause or permit
any Guarantor to, consolidate with or merge with or into any Person other than
the Company or any other Guarantor unless: (i) the entity formed by or surviving
any such consolidation or merger (if other than the Guarantor) is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Guarantor under the Indenture, such Guarantor's
Guarantee and the Registration Rights Agreement; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; (iv) immediately after giving effect to such transaction and
the use of any net proceeds
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therefrom on a pro forma basis, the Company could satisfy the provisions of
clause (ii) of the first paragraph of this covenant; and (v) the Company shall
have delivered to the Trustee an officers' certificate and opinion of counsel,
each stating that such consolidation or merger and, if a supplemental indenture
is required in connection with such transaction, such supplemental indenture
comply with the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been satisfied.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are not materially less favorable than those that would have
reasonably been expected in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary. All Affiliate Transactions (and each series of related
Affiliate Transactions which are similar or part of a common plan) involving
aggregate payments or other property with a fair market value in excess of $1.0
million shall be approved by the Board of Directors of the Company or such
Restricted Subsidiary, as the case may be, such approval to be evidenced by a
Board Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary enters into an Affiliate Transaction (or series of related
Affiliate Transactions related to a common plan) that involves an aggregate fair
market value of more than $10.0 million, the Company or such Restricted
Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to the Company or the relevant Restricted Subsidiary, as the case
may be, from a financial point of view, from an Independent Financial Advisor
and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
employment, consulting and compensation arrangements and agreements of the
Company or any Restricted Subsidiary consistent with past practice or approved
by a majority of the disinterested members of the Board of Directors (or a
committee comprised of disinterested directors); (ii) reasonable fees and
compensation paid to and indemnity provided on behalf of, officers, directors,
employees, consultants or agents of the Company or any Restricted Subsidiary as
determined in good faith by the Company's Board of Directors or senior
management; (iii) consulting fees paid by the Company consistent with past
practice; (iv) transactions exclusively between or among the Company and any of
the Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; and (v) Restricted Payments or Permitted Investments permitted by the
Indenture.
Issuance of Subsidiary Guarantees. If (a) any Domestic Wholly Owned
Restricted Subsidiary incurs any Indebtedness (other than Indebtedness owing to
the Company or a Restricted Subsidiary) or (b) any Restricted Subsidiary
(including any Foreign Restricted Subsidiary) guarantees any Indebtedness (other
than Indebtedness owing to the Company or a Restricted Subsidiary) of the
Company or any of its Restricted Subsidiaries (other than a Subsidiary of such
Restricted Subsidiary) then, in either case, the Company shall cause such
Domestic Wholly Owned Restricted Subsidiary or such Restricted Subsidiary, as
the case may be, to (i) execute and deliver to the Trustee a supplemental
indenture in form reasonably satisfactory to the Trustee pursuant to which such
Domestic Wholly Owned Restricted Subsidiary or such Restricted Subsidiary, as
the case may be, shall unconditionally guarantee (each, a "Guarantee") all of
the Company's obligations under the Notes and the Indenture on the terms set
forth in the Indenture and (ii) deliver to the Trustee an opinion of counsel
(which may contain customary exceptions) that such supplemental indenture has
been duly authorized, executed and delivered by such Domestic Wholly Owned
Restricted Subsidiary or such Restricted Subsidiary, as the case may be, and
constitutes a legal, valid, binding and enforceable obligation of such Domestic
Wholly Owned Restricted Subsidiary or such Restricted Subsidiary, as the case
may be. Thereafter, such Domestic Wholly Owned Restricted Subsidiary or such
Restricted Subsidiary, as the case may be, shall be a Guarantor for all purposes
of the Indenture. The Company may cause any other Restricted Subsidiary of the
Company to issue a Guarantee and become a Guarantor.
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Conduct of Business. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any businesses which are not either: (i) the
same, similar or related to the businesses in which the Company or any of the
Restricted Subsidiaries are engaged on the Issue Date; (ii) Permitted
Investments; or (iii) businesses acquired through an acquisition after the Issue
Date which are not material to the Company and the Restricted Subsidiaries,
taken as a whole.
Payments for Consent. The Company will not, and will not cause or permit
any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture, the Notes or the Guarantees unless
such consideration is offered to be paid to all Holders of the Notes who so
consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the 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 the sum of
(i) the fair market value of the Capital Stock of such Subsidiary owned by
the Company and/or any of the Restricted Subsidiaries on such date and (ii)
the aggregate amount of Indebtedness of such Subsidiary owed to the Company
and the Restricted Subsidiaries on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment in the Designation Amount
pursuant to the covenant described under "-- Limitation on Restricted Payments"
for all purposes of the Indenture. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including any undertaking agreement
or instrument evidencing such Indebtedness), (y) be directly or indirectly
liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or
indirectly liable for any Indebtedness which provides that the holder thereof
may (upon notice, lapse of time or both) declare a default thereon or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity upon the occurrence of a default with respect to any Indebtedness of
any Unrestricted Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary), except, in the case of clause (x) or (y),
to the extent permitted under the covenant described under "-- Limitation on
Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary ("Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if
(a) no Default shall have occurred and be continuing at the time and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiaries
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by an officers'
certificate of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
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Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Sections 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual and quarterly reports and such information,
documents and other reports specified in Section 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default:"
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provision of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 60 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the covenant
described under "-- Certain Covenants -- Merger, Consolidation and Sale of
Asset," which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(iv) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary),
whether such Indebtedness now exists or is created after the Issue Date,
which default (a) is caused by a failure to pay principal of such
Indebtedness after any applicable grace period provided in such
Indebtedness on the date of such default (a "payment default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity (and such acceleration is not rescinded, or such Indebtedness is
not repaid, within 30 days) and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated (and such acceleration is not rescinded,
or such Indebtedness is not repaid, within 30 days), aggregates $7.5
million;
(v) one or more judgments in an aggregate amount in excess of $7.5
million not covered by adequate insurance shall have been rendered against
the Company or any of the Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and nonappealable;
(vi) certain events of bankruptcy affecting the Company or any of the
Significant Subsidiaries; or
(vii) any Guarantee ceases to be in full force and effect or any
Guarantee is declared to be null and void and unenforceable or any
Guarantee is found to be invalid or any of the Guarantors denies its
liability under its Guarantee (other than by reason of release of a
Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare
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the principal of, premium, if any, and accrued interest on all the Notes to be
due and payable by notice in writing to the Company and (if given by the
Holders) the Trustee specifying the respective Events of Default and that it is
a "notice of acceleration," and the same shall become immediately due and
payable. If an Event of Default specified in clause (vi) above occurs and is
continuing, then all unpaid principal of, premium, if any, and accrued and
unpaid interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the then outstanding Notes may
rescind and cancel such declaration and its consequences (i) if the rescission
would not conflict with any judgment or decree, (ii) if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration, (iii) to the extent the
payment of such interest is lawful, interest on overdue installments of interest
and overdue principal, which has become due otherwise than by such declaration
of acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the then outstanding Notes
may waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon the Company obtaining knowledge of any
Default or Event of Default (provided that the Company shall provide such
certification at least annually whether or not it knows of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
replacing mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payments, (iii) the rights, powers, trust, duties and
immunities of the Trustee and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission or failure to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, reorganization and
insolvency events) described under "-- Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
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In order to exercise Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date of
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior Debt,
including, without limitation, those arising under the Indenture and (B) after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
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MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies and other changes so long as such
change does not, in the opinion of the Trustee, adversely affect the rights of
any of the Holders in any material respect. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel.
Other modifications and amendments of the Indenture may be made with the consent
of the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Notes on or after the stated due date thereof or to bring suit
to enforce such payment, or permitting Holders of a majority in principal amount
of the then outstanding Notes to waive Defaults or Events of Default; (vi)
amend, change or modify in any material respect the obligation of the Company to
make and consummate a Change of Control Offer after the occurrence of a Change
of Control or make and consummate a Net Proceeds Offer with respect to any Asset
Sale that has been consummated or modify any of the provisions or definitions
with respect thereto; (vii) modify or change any provision of the Indenture or
the related definitions affecting the subordination or ranking of the Notes or
any Guarantee in a manner which adversely affects the Holders; (viii) modify the
provisions of "-- Certain Covenants -- Payments for Consent" in any manner
adverse to a Holder of Notes; or (ix) release any Guarantor from any of its
obligations under its Guarantee or the Indenture otherwise than in accordance
with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and any Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed by the Company or any Restricted Subsidiary in
connection
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with the acquisition of assets from such Person and in each case not incurred by
such Person in connection with, or in anticipation or contemplation of, such
Person becoming a Restricted Subsidiary or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer (other than the granting of a Lien in accordance
with the Indenture) for value by the Company or any of the Restricted
Subsidiaries (including any Sale and Leaseback Transaction) to any Person other
than the Company or a Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary; or (b) any other property or assets of the Company or any
Restricted Subsidiary other than in the ordinary course of business; provided,
however, that Asset Sales shall not include (i) a transaction or series of
related transactions for which the Company or the Restricted Subsidiaries
receive aggregate consideration of less than $1.0 million, (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted by the covenant described under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets," or (iii) any Restricted
Payment made in accordance with the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Blockage Period" has the meaning set forth under "-- Subordination."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least
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A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or
bankers' acceptances maturing within one year from the date of acquisition
thereof issued by any bank organized under the laws of the United States of
America or any state thereof or the District of Columbia or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $250,000,000; (v) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications specified
in clause (iv) above; and (vi) investments in money market funds which invest
substantially all their assets in securities of the types described in clauses
(i) through (v) above.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of the Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Company, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
the Company and the Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary or
nonrecurring gains or taxes attributable to Asset Sales outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges, less any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
the Company for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter period and (ii) any
Asset Sales or other dispositions or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (provided that such
Consolidated EBITDA shall be included only to the extent includable pursuant to
the definition of "Consolidated Net Income" attributable to the assets which are
the subject of the Asset Acquisition or Asset Sale or other disposition during
the Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date as if such Asset Sale or Asset Acquisition or other disposition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If the
Company or any of the Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding
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sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if the Company or any Restricted Subsidiary had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on
outstanding Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of the Company, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
and losses from Asset Sales or abandonments or reserves relating thereto, (b)
extraordinary or nonrecurring gains or losses, (c) the net income of any Person
acquired in a "pooling of interests" transaction accrued prior to the date it
becomes a Restricted Subsidiary or is merged or consolidated with the Company or
any Restricted Subsidiary, (d) the net income (but not loss) of any Restricted
Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by a
contract, operation of law or otherwise, (e) the net income of any Person, other
than a Restricted Subsidiary, except to the extent of cash dividends or
distributions paid to the Company or to a Restricted Subsidiary by such Person,
(f) any restoration to income of any contingency reserve, except to the extent
that provision for such reserve was made out of Consolidated Net Income accrued
at any time following the Issue Date or any such restorations which do not
exceed $500,000 in the aggregate in any four fiscal quarter period, (g) income
or loss attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued) and (h) in the case of a successor to the Company by
consolidation or merger or as a transferee of the Company's assets, any earnings
of the successor corporation prior to such consolidation, merger or transfer of
assets.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge which requires an accrual of or a reserve
for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
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"Credit Agreement" means the Credit Agreement dated as of the Issue Date,
among the Company, the Guarantors, the lenders party thereto in their capacities
as lenders thereunder and First Union National Bank, as agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (provided that such
increase in borrowings is permitted by the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness" (including the
definition of Permitted Indebtedness)) or adding Restricted Subsidiaries as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Default Notice" has the meaning set forth under "-- Subordination."
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$10,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily exchangeable for Indebtedness, or is redeemable, or is
exchangeable for Indebtedness, at the sole option of the holder thereof on or
prior to the final maturity date of the Notes.
"Domestic Wholly Owned Restricted Subsidiary" means a Wholly Owned
Restricted Subsidiary incorporated or otherwise organized or existing under the
laws of the United States, any state thereof or any territory or possession of
the United States.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary that is
organized and existing under the laws of a jurisdiction other than the United
States, any State thereof, the District of Columbia or any territory or
possession of the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other
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entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect as of the Issue Date.
"Guarantee" has the meaning set forth under "-- Certain
Covenants -- Issuance of Subsidiary Guarantees."
"Guarantor" means (i) each Domestic Wholly Owned Restricted Subsidiary of
the Company as of the Issue Date and (ii) each other Person that in the future
executes a Guarantee pursuant to the covenant described under "-- Certain
Covenants -- Issuance of Subsidiary Guarantees" or otherwise; provided that any
Person constituting a Guarantor as described above shall cease to constitute a
Guarantor when its Guarantee is released in accordance with the terms of the
Indenture.
"Guarantor Senior Debt" means, with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of such Guarantor,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting the generality of
the foregoing, "Guarantor Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations of every nature of the Company or any Guarantor with respect to the
Credit Agreement, including, without limitation, obligations to pay principal
and interest, reimbursement obligations under letters of credit, fees, expenses
and indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt"
shall not include (i) any Indebtedness of such Guarantor owing to a Subsidiary
of such Guarantor or any Affiliate of such Guarantor or any of such Affiliate's
Subsidiaries, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of such Guarantor or any Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owed or owing by such Guarantor, (vi) Indebtedness incurred in violation
of the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness," (vii) Indebtedness which, when incurred
and without respect to any election under Section 1111(b) of Title 11, United
States Code, is without recourse to such Guarantor and (viii) any Indebtedness
which is, by its express terms, subordinated in right of payment to any other
Indebtedness of such Guarantor.
"incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence on Additional Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness of any other Person referred to in clauses (i) through (v) above
and clause (viii) below, (vii) all Obligations of any other Person of the type
referred to in clauses (i) through (vi) which are secured by any Lien on any
property or asset of such Person, the amount of such Obligation being deemed to
be the lesser of the fair market value of such property or asset or the amount
of the Obligation so secured, (viii) all Obligations under currency agreements
and interest swap
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agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees and Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Initial Purchasers" means Salomon Brothers Inc, First Union Capital
Markets and Schroder & Co. Inc.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, (i) any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
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 (ii) any purchase or acquisition by such Person of any Capital
Stock, bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit by
the Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Capital Stock of any Restricted Subsidiary
(the "Referent Subsidiary") such that, after giving effect to any such sale or
disposition the Referent Subsidiary shall cease to be a Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Capital Stock of the
Referent Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest), received
by the Company or any of the Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
sales commissions and relocation expenses), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements, (c) repayments of
Indebtedness secured by the property or assets subject to such Asset Sale that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts determined by the Company or any Restricted Subsidiary, as the case may
be, as a reserve, in accordance with GAAP, against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-
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employment benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"Net Proceeds Offer" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" had the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means (i) Fleet Venture Resources, Inc., Fleet Equity
Partners VI-B, L.P., Chisholm Partners III, L.P., Kennedy Plaza Partners, Habib
Y. Gorgi, Bernard V. Buonanno III, Ross B. George and Joseph L. Sylvia and (ii)
any Person "controlled" (as defined in the definition of "Affiliate") by one or
more of the Persons identified in clause (i) of this definition.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes, the Indenture and any Guarantees not
to exceed $100,000,000 in aggregate principal amount;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the
greater of (x) $30.0 million and (y) the sum of (A) 85% of the net book
value of the accounts receivable of the Company and the Restricted
Subsidiaries and (B) 50% of the net book value of the inventory of the
Company and the Restricted Subsidiaries less (C) the amount of Indebtedness
outstanding pursuant to clause (xiii) of this definition reduced in the
case of (x) by any required permanent repayments with the proceeds of Asset
Sales (which are accompanied by a corresponding permanent commitment
reduction) thereunder;
(iii) other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any Guarantor and Interest Swap Obligations of any
Restricted Subsidiary covering Indebtedness of such Restricted Subsidiary;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and the Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to
the extent the notional principal amount of such Interest Swap Obligations
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligations relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that
if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
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(vii) Indebtedness of the Company to a Restricted Subsidiary for so
long as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (a) any Indebtedness of the Company to
any Restricted Subsidiary is unsecured and (b) if as of any date any Person
other than a Restricted Subsidiary owns or holds any such Indebtedness or
any Person holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(ix) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) additional Indebtedness of the Company and the Guarantors in an
aggregate principal amount not to exceed $10.0 million at any one time
outstanding;
(xii) Purchase Money Indebtedness and Capitalized Lease Obligations
(and any Indebtedness incurred to Refinance such Purchase Money
Indebtedness or Capitalized Lease Obligations) not to exceed $10.0 million
at any one time outstanding; and
(xiii) Indebtedness of Foreign Restricted Subsidiaries that are not
Guarantors in an aggregate principal amount at any one time outstanding not
to exceed the greater of (a) $25.0 million or (b) the sum of (x) 85% of the
net book value of accounts receivable of the Foreign Restricted
Subsidiaries that are not Guarantors and (y) 50% of the net book value of
the inventory of the Foreign Restricted Subsidiaries that are not
Guarantors.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary; (ii) investments in the Company by any
Restricted Subsidiary; provided that any Indebtedness evidencing such Investment
is unsecured; (iii) investments in cash and Cash Equivalents; (iv) loans and
advances to employees, officers and directors of the Company and the Restricted
Subsidiaries in the ordinary course of business for bona fide business purposes
not in excess of $1.0 million at any time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the
Company's or a Restricted Subsidiary's businesses and otherwise in compliance
with the Indenture; (vi) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers; (vii)
Investments made by the Company or the Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
the covenant described under "-- Certain Covenants -- Limitation on Asset
Sales"; (viii) Investments in Persons, including, without limitation,
Unrestricted Subsidiaries and joint ventures, engaged in a business similar or
related to the businesses in which the Company and the Restricted Subsidiaries
are engaged on the Issue Date not to exceed $10.0 million at any one time
outstanding; and (ix) Investments in the Notes.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or any Restricted Subsidiary shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for
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sums not yet delinquent or being contested in good faith, if such reserve
or other appropriate provision, if any, as shall be required by GAAP shall
have been made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal 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;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not impairing in any
material respect the ordinary conduct of the business of the Company or any
of the Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens securing Indebtedness incurred to finance
property or assets of the Company or any Restricted Subsidiary acquired in
the ordinary course of business, and Liens securing Indebtedness which
Refinances any such Indebtedness; provided, however, that (A) the related
purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed
the cost of such property or assets and shall not be secured by any
property or assets of the Company or any Restricted Subsidiary other than
the property and assets so acquired and (B) the Lien securing the purchase
money Indebtedness shall be created within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness (and any Indebtedness
which Refinances such Acquired Indebtedness) incurred in accordance with
the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness"; provided that (A) such Liens
secured the Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and were not granted in connection with, or in anticipation of
the incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and (B) such Liens do not extend to or cover any property or
assets of the Company or of any of the Restricted Subsidiaries other than
the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary; and
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(xiv) Liens securing Indebtedness of Foreign Restricted Subsidiaries
that are not Guarantors incurred in accordance with the Indenture; provided
that such Liens do not extend to any property or assets other than property
or assets of Foreign Restricted Subsidiaries that are not Guarantors.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" has the meaning set forth under "-- Redemption --
Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the fair market value of such property or such purchase
price or cost.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain Covenants --
Limitation on Restricted Payments."
"Refinance" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (xi), (xii) and (xiii) of the definition of Permitted
Indebtedness), in each case that does not (1) result in an increase in the
aggregate principal amount of any Indebtedness of such Person as of the date of
such proposed Refinancing (plus the amount of any premium reasonably necessary
to Refinance such Indebtedness and plus the amount of reasonable expenses
incurred by the Company in connection with such Refinancing) or (2) create
Indebtedness with (A) a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a
final maturity earlier than the final maturity of the Indebtedness being
Refinanced; provided that if such Indebtedness being Refinanced is Indebtedness
of the Company or a Guarantor, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and/or Guarantors.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date among the Company, the Guarantors and the Initial
Purchasers.
"Replacement Assets" means assets and property that will be used in the
business of the Company and/or its Restricted Subsidiaries as existing on the
Issue Date or in a business the same, similar or reasonably related thereto
(including Capital Stock of a Person which becomes a Restricted Subsidiary if
such Person is engaged in businesses which comply with the covenant described
under "-- Certain Covenants -- Conduct of Business").
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Payment" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
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"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain Covenants -- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Revocation" has the meaning set forth under "-- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Restricted Subsidiary or any
Affiliate of the Company or any of such Affiliate's Subsidiaries, (ii)
Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer
or employee of the Company or any Restricted Subsidiary (including without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed by the
Company, (vi) Indebtedness incurred in violation of the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness,"
(vii) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without recourse to
the Company and (viii) any Indebtedness which is, by its express terms,
subordinated in right of payment to any other Indebtedness of the Company.
"Significant Subsidiary" means, with respect to any Person, any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "-- Certain Covenants --
Merger, Consolidation and Sale of Assets."
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"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date the making of such payment.
"Wholly Owned Restricted Subsidiary" of the Company means any Restricted
Subsidiary of which all the outstanding voting securities (other than in the
case of a Foreign Restricted Subsidiary, directors' qualifying shares or an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law) are owned by the Company or any Wholly Owned Restricted
Subsidiary.
THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the SEC the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Original Notes
for the Exchange Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the holders of Original Notes
who are able to make certain representations the opportunity to exchange their
Original Notes for Exchange Notes. If (i) the Company is not permitted to file
the Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or SEC policy or
(ii) any holder of Original Notes notifies the Company within the specified time
period that (A) due to a change in law or policy it is not entitled to
participate in the Exchange Offer, (B) due to a change in law or policy it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales by
such holder or (C) it is a broker-dealer and owns Original Notes acquired
directly from the Company or an affiliate of the Company, the Company will file
with the SEC the Shelf Registration Statement to cover resales of the Transfer
Restricted Notes (as defined) by the holders thereof. The Company will use
reasonable efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the SEC. For purposes of the foregoing,
"Transfer Restricted Notes" means each Original Note until (i) the date on which
such Original Note has been exchanged by a person other than a broker-dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of an Original Note for an Exchange Note,
the date on which such Exchange Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
said Original Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the date
on which such Original Note is distributed to the public pursuant to Rule 144
under the Securities Act.
Under existing SEC interpretations, the Transfer Restricted Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act will be delivered upon resale by such
broker-dealer in connection with resales of the Exchange Notes. The Company has
agreed, for a period of 180 days after consummation of the Exchange Offer, to
make available a prospectus meeting the requirements of the Securities Act to
any such broker-dealer for use in connection with any resale of any Exchange
Notes acquired in the Exchange Offer. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
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Each holder of the Original Notes who wishes to exchange such Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
has no arrangement with any person to participate in the distribution of the
Exchange Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Company or, if it is an affiliate, it will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or SEC policy, the Company will
file an Exchange Offer Registration Statement with the SEC on or prior to 60
days after the date of original issuance of the Original Notes (the "Closing
Date"), (ii) unless the Exchange Offer would not be permitted by applicable law
or SEC policy, the Company will use its best efforts to have the Exchange Offer
Registration Statement declared effective by the SEC on or prior to 120 days
after the Closing Date, (iii) unless the Exchange Offer would not be permitted
by applicable law or SEC policy, the Company will commence the Exchange Offer
and use reasonable efforts to issue, on or prior to 20 business days after the
date on which the Exchange Offer Registration Statement was declared effective
by the SEC, Exchange Notes in exchange for all Original Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement the Company will file the Shelf Registration Statement
prior to the later of (x) 60 days after the Closing Date or (y) 30 days after
such filing obligation arises, and use its best efforts to cause the Shelf
Registration Statement to be declared effective by the SEC on or prior to the
later of (x) 120 days after the Closing Date and (y) 90 days after such
obligation arises; provided that if the Company has not consummated the Exchange
Offer within 150 days of the Closing Date, then the Company will, upon the
request of any holder of Original Notes, file the Shelf Registration Statement
with the SEC on or prior to the 151st day after the Closing Date. The Company
shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended until the second anniversary of
the Closing Date or such shorter period that will terminate when all the
Transfer Restricted Notes covered by the Shelf Registration Statement have been
sold pursuant thereto. If (a) the Company fails to file any of the registration
statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such registration statements are not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date with respect to the Exchange Offer
Registration Statement") or (c) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter, subject to
certain exceptions, ceases to be effective or usable in connection with the
Exchange Offer or resales of Transfer Restricted Notes, as the case may be,
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (c) above, a "Registration Default"),
then the interest rate on Transfer Restricted Notes will increase ("Additional
Interest"), with respect to the first 90-day period immediately following the
occurrence of such Registration Default by 0.50% per annum and will increase by
an additional 0.50% per annum with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of 1.50%
per annum. Following the cure of all Registration Defaults, the accrual of
Additional Interest will cease and the interest rate will revert to the original
rate.
The summary herein of certain provisions of the Registration Rights
Agreement is a description of the material provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Exchange Offer
Registration Statement.
Except as set forth herein, after consummation of the Exchange Offer,
holders of Original Notes have no registration or exchange rights under the
Registration Agreement. See "--Consequences of Failure to Exchange," and "--
Resales of the Exchange Notes; Plan of Distribution."
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CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Notes which are not exchanged for Exchange Notes pursuant to
an Exchange Offer and are not included in a resale prospectus will remain
Transfer Restricted Notes. Accordingly, such Original Notes may not be offered,
sold or otherwise transferred prior to the date which is two years after the
later of the date of original issue and the last date that the Company or any
affiliate of the Company was the owner of such securities (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to the Company,
(b) pursuant to a registration statement which has been declared effective under
the Securities Act, (c) for so long as the Original Notes are eligible for
resale pursuant to Rule 144A, to a person the owner reasonably believes is a
qualified institutional buyer that purchases for its own account or for the
account of a qualified institutional buyer to whom notice is given that the
transfer is being made in reliance to Rule 144A, (d) to an "accredited investor"
within the meaning of subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule
501 under the Securities Act that is purchasing for his own account or for the
account of such an "accredited investor" in each case in a minimum of Original
Notes with a purchase price of $500,000, or (c) pursuant to any other available
exemption from the registration requirements of the Securities Act, subject in
each of the foregoing cases to any requirement of law that the disposition of
its property or the property of such investor account or accounts be at all
times within its or their control. The foregoing restrictions on resale will not
apply subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Original Notes is proposed to be made pursuant to clause
(d) above prior to the Resale Restriction Termination Date, the transferor shall
deliver a letter from the transferee to the Company and the Trustee, which shall
provide, among other things, that the transferee is an "accredited investor"
within the meaning of subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule
501 under the Securities Act and that it is acquiring such securities for
investment purposes and not for distribution in violation of the Securities Act.
Prior to any offer, sale or other transfer of Original Notes prior to the Resale
Restriction Termination Date pursuant to clauses (d) or (e) above, the issuer
and the Trustee may require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to each of them.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Prospectus
and in the Letter of Transmittal, the form of which is included as Exhibit 99.1
to the Registration Statement of which this Prospectus is a part, the Company
will accept any and all Original Notes validly tendered and not withdrawn prior
to the applicable Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Original Notes accepted in the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer. However, Original Notes may
be tendered only in integral multiples of $1,000 principal amount.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that (i) the Exchange Notes have been registered
under the Securities Act and therefore will not bear legends restricting their
transfer pursuant to the Securities Act, and (ii) the holders of Exchange Notes
will not be entitled to rights under the Registration Rights Agreement (except
under certain limited circumstances). The Exchange Notes will evidence the same
debt as the Original Notes (which they replace), and will be issued under, and
be entitled to the benefits of, the Indenture.
Solely for reasons of administration (and for no other purpose) the Company
has fixed the close of business on , 1998 as the record date
for the Exchange Offer for purposes of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially. Only a
registered holder of Original Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Original Notes entitled to participate in
the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or under the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the SEC thereunder.
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The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if it has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of the Original Notes for purposes of receiving the Exchange Notes.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be returned
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of the
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Company extends the Exchange Offer, in which case
the term "Expiration Date" shall mean the latest date and time to which such
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, prior to 9:00 a.m., New York City time, on the next
Business Day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) extend the Exchange Offer, (iii) if the
condition set forth below under "--Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, it will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Original Notes and the Exchange
Offer will be extended for a period of five to ten business days, as required by
law, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of its Exchange
Offer, the Company shall not have an obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, have the signatures thereon guaranteed
if required by such Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal to the Exchange Agent at the address set forth below under
"--Exchange Agent" for receipt prior to the applicable Expiration Date. In
addition, either (i) certificates for such Original 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
Original Notes 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, must be received by the Exchange Agent prior to the
applicable Expiration Date, or (iii) the Holder must comply with the guaranteed
delivery procedures described below. To be tendered effectively, the Letter of
Transmittal and all other required documents must be received by the Exchange
Agent at the address set forth below under "--Exchange Agent" prior to the
applicable Expiration Date.
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The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal applicable to such Exchange Offer.
THE METHOD OF DELIVERY OF THE ORIGINAL NOTES AND THE APPLICABLE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
APPLICABLE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must, prior
to completing and executing the Letter of Transmittal and delivering such
owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal designated for such Original Discount
Notes, or (ii) for the account of an Eligible Institution. 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 guarantee must be by a participant in a
recognized signature guarantee program within the meaning of Rule 17Ad-15 under
the Exchange Act (an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Original
Notes, with signature guaranteed by an Eligible Institution.
If a Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company, as applicable, of their authority to so act must be submitted with the
Letter of Transmittal designated for such Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes the issuer's
acceptance of which would, in the opinion of counsel for such issuer, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) by the Company will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Original Notes issued by
it, neither the Company, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Original Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Original Notes received by the Exchange Agent that are not
validly tendered and as to which the defects or irregularities have not been
cured or waived, or if Original Notes are submitted in a principal amount
greater than the principal amount of Original Notes being tendered by such
tendering holder, such unaccepted
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or non-exchanged Original Notes will be returned by the Exchange Agent to the
tendering holders (or, in the case of Original 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 below, such unaccepted
or non-exchanged Original Notes will be credited to an account maintained with
such Book-Entry Transfer Facility), unless otherwise provided in the Letter of
Transmittal designated for such Original Notes, as soon as practicable following
the applicable Expiration Date.
By tendering Original Notes in the Exchange Offer, each registered holder
will represent to the issuer of such Original Notes that, among other things,
(i) the Exchange Notes to be acquired by the holder and any beneficial owner(s)
of such Original Notes ("Beneficial Owner(s)") in connection with the Exchange
Offer are being acquired by the holder and any Beneficial Owner(s) in the
ordinary course of business of the holder and any Beneficial Owner(s) for such
holder's own account, for investment and not with a view to or for sale in
connection with any distribution of the Exchange Notes, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in a
distribution of the Exchange Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that (x) any person participating in an Exchange Offer for
the purpose of distributing the Exchange Notes must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction with respect to the Exchange Notes acquired by such
person and cannot rely on the position of the staff of the SEC set forth in
no-action letters that are discussed herein under "-- Resales of the Exchange
Notes," and (y) any broker-dealer that receives Exchange Notes for its own
account in exchange for Original Notes pursuant to an Exchange Offer, where such
Original Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must deliver a prospectus in connection
with any resale of such Exchange Notes (see "Plan of Distribution") but by so
acknowledging, the holder shall not be deemed to admit that, by delivering a
prospectus, it is an "underwriter" within the meaning of the Securities Act,
(iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined
in Rule 405 under the Securities Act, of the Company except as otherwise
disclosed to the Company in writing, and (v) the holder and each Beneficial
Owner understands that a secondary resale transaction described in clause (iii)
above should be covered by an effective registration statement containing the
selling securityholder information required by Item 507 of Regulation S-K of the
SEC.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original 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 system may make book-entry delivery of Original Notes by causing the
Book-Entry Transfer Facility to transfer such Original 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 Original Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the applicable Letter of Transmittal, with any
required signature guarantees and any other documents, must be transmitted to
and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the applicable Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available, or (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the applicable Expiration Date, may effect a tender if:
(1) The tender is made through an Eligible Institution;
(2) Prior to the applicable Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by mail, hand delivery or facsimile
transmission) setting forth the name and address of the Holder, the
certificate number(s) of such Original Notes and the principal amount of
the Original Notes being tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the
applicable
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<PAGE> 76
Expiration Date, the applicable Letter of Transmittal together with the
certificate(s) representing the Original Notes (or a Book-Entry
Confirmation) and any other documents required by the applicable Letter of
Transmittal will be delivered by the Eligible Institution to the Exchange
Agent; and
(3) Such properly completed and executed Letter of Transmittal, as
well as the certificate(s) representing all tendered Original Notes in
proper form for transfer (or a Book-Entry Confirmation) and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the applicable Expiration
Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes pursuant to
an Exchange Offer may be withdrawn, unless theretofore accepted for exchange as
provided in the applicable Exchange Offer, at any time prior to the Expiration
Date of that Exchange Offer.
To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn (including the
certificate number or numbers and aggregate principal amount of such Original
Notes), and (iii) be signed by the holder in the same manner as the original
signature on the applicable Letter of Transmittal (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole respective discretion, which determination shall be final and binding
on all parties. Any Original Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Original Notes so withdrawn are
retendered. Properly withdrawn Original Notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering" at any time
prior to the applicable Expiration Date.
Any Original Notes which have been tendered but which are not accepted for
exchange due to the rejection of the tender due to uncured defects or the prior
termination of the applicable Exchange Offer, or which have been validly
withdrawn, will be returned to the holder thereof (unless otherwise provided in
the Letter of Transmittal), as soon as practicable following the applicable
Expiration Date or, if so requested in the notice of withdrawal, promptly after
receipt by the issuer of the Original Notes of notice of withdrawal without cost
to such holder.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is subject to the condition that the Exchange Offer, or
the making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the SEC. If there has been a change in
SEC policy such that there is a substantial question whether the Exchange Offer
is permitted by applicable federal law, the Company has agreed to seek a
no-action letter or other favorable decision from the SEC allowing the Company
to consummate the Exchange Offer.
If the Company determines that the Exchange Offer is not permitted by
applicable Federal law, it may terminate the Exchange Offer. In connection
therewith the Company may (i) refuse to accept any Original Notes and return any
Original Notes that have been tendered by the holders thereof, (ii) extend the
Exchange Offer and retain all Original Notes tendered prior to the Expiration of
the Exchange Offer, subject to the rights of such holders of tendered Original
Notes to withdraw their tendered Original Notes, or (iii) waive such termination
event with respect to the Exchange Offer and accept all properly tendered
Original Notes that have not been withdrawn. If such waiver constitutes a
material change in the Exchange Offer, the Company will disclose such change by
means of a supplement to this Prospectus that will be distributed to each
registered holder of Original Notes, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders of the
Original Notes, if the Exchange Offer would otherwise expire during such period.
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<PAGE> 77
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as "Exchange Agent"
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of the Prospectus or of the Letter of Transmittal and other
documents should be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail or Hand or Overnight Delivery:
State Street Bank and Trust Company
Two International Place
Fourth Floor
Boston, MA 02110
Attention: Kellie Mullen, Corporate Trust Department
Facsimile Transmissions: 617-664-3290
Confirm by Telephone: 617-664-5587
(ELIGIBLE INSTITUTIONS ONLY)
Delivery to other than the above addresses or facsimile numbers will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting acceptance
of the Exchange Offer. However, reasonable and customary fees will be paid to
the Exchange Agent for its service and it will be reimbursed for its reasonable
out-of-pocket expenses in connection therewith.
The 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 approximately
$ . Such expenses include fees and expenses of the Exchange Agent and the
Trustee under the Indenture, accounting and legal fees and printing costs, among
others. The Company will pay all transfer taxes, if any, applicable to the
exchange of the Original Notes pursuant to the Exchange Offer. If, however, a
transfer tax is imposed for any reason other than the exchange of the Original
Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The carrying values of the Original Notes are not expected to be materially
different from the fair value of the Exchange Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the Exchange
Notes.
RESALES OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the SEC to third parties,
the Company believes the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Original Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who purchased
such Original Notes directly from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person that 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 the holder is acquiring the
Exchange Notes in its ordinary course of business and is not participating, and
has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes. Holders of Original Notes wishing to accept
the Exchange Offer must represent to the Company that such conditions have been
met. In the event that the Company's belief is inaccurate, holders of Exchange
Notes who transfer Exchange Notes in violation of the prospectus delivery
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<PAGE> 78
provisions of the Securities Act and without an exemption from registration
thereunder may incur liability under the Securities Act. The Company does not
assume or indemnify holders against such liability.
All resales must be made in compliance with applicable state securities or
"blue sky" laws. Such compliance may require that the Exchange Notes be
registered or qualified in a particular state or that the resales be made by or
through a licensed broker-dealer, unless exemptions from these requirements are
available. The Company assumes no responsibility with regard to compliance with
such requirements.
Each affiliate of the Company must acknowledge that such person will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable. Each broker-dealer that receives Exchange Notes in
exchange for Original Notes held for its own account, as a result of market-
making or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. Although a
broker-dealer may be an "underwriter" within the meaning of the Securities Act,
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 Exchange Notes received in exchange for Original
Notes.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the federal income tax consequences
associated with the acquisition, ownership, and disposition of the Exchange
Notes by holders who exchange Original Notes for the Exchange Notes. The
following summary assumes that the issue price of the Exchange Notes is equal to
the principal amount. The summary does not discuss all of the aspects of federal
income taxation that may be relevant to a prospective holder of the Exchange
Notes in light of his or her particular circumstances, or to certain types of
holders (including dealers in securities, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, S corporations, and
persons who hold the Notes as part of a hedge, straddle, "synthetic security" or
other integrated investment) which are subject to special treatment under the
federal income tax laws. This discussion also does not address the tax
consequences to nonresident aliens, foreign corporations, foreign partnerships
or foreign trusts that are subject to United States federal income tax on a net
basis on income with respect to an Exchange Note because such income is
effectively connected with the conduct of a U.S. trade or business. Such holders
generally are taxed in a similar manner to U. S. Holders (as defined below);
however, certain special rules apply. In addition, this discussion is limited to
holders who hold the Exchange Notes as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This
summary also does not describe any tax consequences under state, local, or
foreign tax laws.
The discussion is based upon the Code, Treasury Regulations, Internal
Revenue Service ("IRS") rulings and pronouncements, and judicial decisions all
in effect as of the date hereof, all of which are subject to change at any time
by legislative, judicial or administrative action. Any such changes may be
applied retroactively in a manner that could adversely affect a holder of the
Exchange Notes. The Company has not sought and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the purchase, ownership or disposition of the Exchange Notes
which are different from those discussed herein.
HOLDERS WHO EXCHANGE ORIGINAL NOTES FOR EXCHANGE NOTES SHOULD CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT
MAY APPLY TO THEM, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS.
EXCHANGE OF ORIGINAL NOTES FOR EXCHANGE NOTES
The exchange of an Original Note by a holder for an Exchange Note should
not constitute a taxable exchange of the Original Note. As a result, a holder
will not recognize taxable gain or loss upon receipt of an Exchange Note, such
holder's holding period for an Exchange Note will include the holding period for
the
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<PAGE> 79
Original Note so exchanged and such holder's adjusted tax basis in an Exchange
Note will be the same as such holder's adjusted tax basis in the Original Note
so exchanged.
FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
In general, a U.S. Holder is: (i) a citizen or resident (as defined for
United States federal income tax purposes) of the United States; (ii) a
corporation or partnership organized in or under the laws of the United States
or a political subdivision thereof; (iii) an estate the income of which is
subject to United States federal taxation regardless of its source; or (iv) a
trust if and only if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust and (B) one or more
United States trustees have the authority to control all substantial decisions
of the trust.
Taxation of Stated Interest. In general, U.S. Holders of the Exchange
Notes will be required to include interest received thereon in taxable income as
ordinary income at the time it accrues or is received, in accordance with the
holder's regular method of accounting for federal income tax purposes.
Sale or Other Taxable Disposition of the Exchange Notes. The sale,
exchange, redemption, retirement or other taxable disposition of an Exchange
Note will in general result in the recognition of gain or loss to a U.S. Holder
in an amount equal to the difference between (a) the amount of cash and fair
market value of property received in exchange therefor (except to the extent
attributable to the payment of accrued but unpaid stated interest) and (b) the
holder's adjusted tax basis in such Exchange Note.
Any gain or loss on the sale or other taxable disposition of an Exchange
Note generally will be capital gain or loss and will be long-term capital gain
or loss if the Exchange Note had been held for more than one year and otherwise
will be short-term capital gain or loss. Payments on such disposition for
accrued interest not previously included in income will be treated as ordinary
interest income.
Backup Withholding. In October 1997, the Treasury Department issued final
regulations relating to information and back-up withholding that unify current
certification procedures and forms and clarify reliance standards. These new
regulations will be effective on January 1, 1999. The following description of
the backup withholding rules are applicable to payments made before January 1,
1999.
The backup withholding rules require a payor to deduct and withhold a tax
if (i) the payee fails to furnish a taxpayer identification number ("TIN") in
the prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of "reportable payments" and the IRS has notified the payor that
withholding is required, or (iv) the payee fails to certify under the penalty of
perjury that such payee is not subject to backup withholding. If any one of the
events discussed above occurs with respect to a holder of Exchange Notes, the
Company, its paying agent or other withholding agent will be required to
withhold a tax equal to 31% of any "reportable payment" made in connection with
the Exchange Notes of such holder. A "reportable payment" includes, among other
things, amounts paid in respect of interest or original issue discount on an
Exchange Note. Any amounts withheld from a payment to a holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
federal income tax, provided that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are not subject to backup withholding.
U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section discusses special rules applicable to a Non-U.S. Holder of
Exchange Notes. This summary does not address the tax consequences to
stockholders, partners or beneficiaries in a Non-U.S. Holder or the tax
consequences to Non-U.S. Holders that are subject to United States federal
income tax on a net basis on income with respect to an Exchange Note because
such income is effectively connected with the conduct of a U.S. trade or
business. For purposes hereof, a "Non-U.S. Holder" is any person that is not a
U.S. Holder.
Interest. Interest that is paid to a Non-U.S. Holder on an Exchange Note
will not be subject to U.S. income or withholding tax if the interest qualified
as "portfolio interest." Generally, interest on the Exchange Notes that is paid
by the Company will qualify as portfolio interest if (i) the Non-U.S. Holder
does not own,
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actually or constructively, 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote, (ii) the Non-U.S. Holder
is not a controlled foreign corporation that is related to the Company actually
or constructively through stock ownership for U.S. federal income tax purposes,
(iii) the Non-U.S. Holder is not a bank receiving interest on a loan entered
into in the ordinary course of business, and (iv) either (x) the beneficial
owner of the Exchange Note provides the Company or its paying agent with a
properly executed certification on IRS Form W-8 (or a suitable substitute form)
signed under penalties of perjury that the beneficial owner is not a "U.S.
person" for U.S. federal income tax purposes and that provides the beneficial
owner's name and address, or (y) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its business holds the Exchange Note and certifies to the Company or
its agent under penalties of perjury that the IRS Form W-8 (or a suitable
substitute) has been received by it from the beneficial owner of the Exchange
Note or a qualifying intermediary and furnishes the payor a copy thereof.
Payments of interest to a Non-U.S. Holder that do not qualify for the
portfolio interest exception discussed above will be subject to withholding of
U.S. federal income tax at a rate of 30% unless a U.S. income tax treaty applies
to reduce the rate of withholding. To claim a treaty reduced rate, the Non-U.S.
Holder must provide a properly executed Form 1001.
Sale, Exchange or Retirement of Exchange Notes. Any gain realized by a
Non-U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will
generally not be subject to U.S. federal income tax or withholding unless (i)
the Non-U.S. Holder is an individual who was present in the U.S. for 183 days or
more in the taxable year of the disposition and meets certain other
requirements, or (ii) the Non-U.S. Holder is subject to tax pursuant to certain
provisions of the Code applicable to certain individuals who renounce their U.S.
citizenship or terminate long-term U.S. residency. If a Non-U.S. Holder falls
under (i) above, the holder generally will be subject to U.S. federal income tax
at a rate of 30% on the gain derived from the sale (or reduced treaty rate) and
may be subject to withholding in certain circumstances. If a Non-U.S. Holder
falls under (ii) above, the holder will be taxed on the net gain derived from
the sale under the graduated U.S. federal income tax rates that are applicable
to U.S. citizens, resident aliens, and domestic corporations, as the case may
be, and may be subject to withholding under certain circumstances.
U.S. Information Reporting and Backup Withholding Tax. Back-up withholding
and information reporting generally will not apply to an Exchange Note issued in
registered form that is beneficially owned by a Non-U.S. Holder if the
certification of Non-U.S. Holder status is provided to the Company or its agent
as described above in " -- Certain Federal Income Tax Consequences to Non-U.S.
Holders -- Interest," provided that the payor does not have actual knowledge
that the holder is a U.S. person. The Company may be required to report annually
on Form 1042-S to the IRS and to each Non-U.S. Holder the amount of interest
paid to, and the tax withheld, if any, with respect to each Non-U.S. Holder.
If payments of principal and interest are made to the beneficial owner of
an Exchange Note by or through the foreign office of a custodian, nominee or
other agent of such beneficial owner, or if the proceeds of the sale of Exchange
Notes are made to the beneficial owner of an Exchange Note through a foreign
office of a "broker" (as defined in the pertinent Treasury Regulations), the
proceeds will not be subject to backup withholding (absent actual knowledge that
the payee is a U.S. person). Information reporting (but not backup withholding)
will apply, however, to a payment by a foreign office of a custodian, nominee,
agent or broker that is (i) a U.S. person, (ii) a controlled foreign corporation
for U.S. federal income tax purposes, or (iii) derives 50% or more of its gross
income from the conduct of a U.S. trade or business for a specified three-year
period; unless the broker has in its records documentary evidence that the
holder is not a Non-U.S. Holder and certain conditions are met (including that
the broker has no actual knowledge that the holder is a U.S. Holder) or the
holder otherwise establishes an exemption. Payment through the U.S. office of a
custodian, nominee, agent or broker is subject to both backup withholding at a
rate of 31% and information reporting, unless the holder certifies that it is a
Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. Any amount withheld under the backup withholding rules from a payment
to a Non-U.S. Holder will be allowed as a credit against, or refund of, such
holder's U.S. federal income tax liability, provided that certain information is
provided by the holder to the IRS.
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The IRS released Treasury Regulations in October 1997 that revise the
procedures for withholding tax, and the associated backup withholding and
information reporting rules described above for payments of interest and gross
proceeds made after December 31, 1998. By Notice 98-16, the IRS delayed
effectiveness of these regulations to payments made after December 31, 1999. The
regulations modify the requirements imposed on a Non-U.S. Holder or certain
intermediaries for establishing the recipient's status as a Non-U.S. Holder
eligible for exemption from withholding and backup withholding. In particular,
the regulations impose more stringent conditions on the ability of financial
intermediaries acting for a Non-U.S. Holder to provide certifications on behalf
of the Non-U.S. Holder, which may include entering into an agreement with the
IRS to audit certain documentation with respect to such certifications. Non-U.S.
Holders should consult their tax advisors to determine how the regulations will
affect their particular circumstances.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange 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 Exchange 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 Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on the
ninetieth day after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 1998, all dealers
effecting transactions in the Exchange Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange 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 Exchange 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 Exchange Notes. Any
broker-dealer that resells Exchange 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 Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange 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 this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any broker or
dealers and will indemnify the Holders of the Notes (including any broker-
dealer) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
have been passed upon for the Company by Wellesley Law Associates, Wellesley
Hills, Massachusetts, and Edwards & Angell, LLP, Providence, Rhode Island,
counsel for the Company.
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EXPERTS
The audited consolidated financial statements of Simonds Industries Inc.
and its subsidiaries as of December 28, 1996 and December 27, 1997, and for the
five months ended May 26, 1995 and seven months ended December 30, 1995 and the
years ended December 28, 1996 and December 27, 1997 included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 28, 1996,
December 27, 1997 and June 27, 1998 (unaudited)........... F-3
Consolidated Statements of Operations for each of the
periods -- Five Months ended May 26, 1995, Seven Months
ended December 30, 1995, Years ended December 28, 1996 and
December 27, 1997, and the Six Months ended June 28, 1997
(unaudited) and June 27, 1998 (unaudited)................. F-4
Consolidated Statements of Cash Flows for each of the
periods -- Five Months ended May 26, 1995, Seven Months
ended December 30, 1995, Years ended December 28, 1996 and
December 27, 1997, and the Six Months ended June 28, 1997
(unaudited) and June 27, 1998 (unaudited)................. F-5
Consolidated Statements of Shareholders' Equity for each of
the periods -- Five Months ended May 26, 1995, Seven
Months ended December 30, 1995, Fiscal Years ended
December 28, 1996 and December 27, 1997, and the Six
Months ended June 27, 1998 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simonds Industries Inc:
We have audited the consolidated balance sheets of Simonds Industries Inc.
(the Company), formerly known as SI Holding Corporation, as of December 28, 1996
and December 27, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the seven months ended December 30,
1995, and each of the two years ended December 27, 1997. We have also audited
the consolidated statements of operations, shareholders' equity and cash flows
of Simonds Industries Inc. (Predecessor Company) for the five months ended May
26, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simonds Industries Inc. at December 28, 1996 and December 27, 1997, and the
consolidated results of its operations and cash flows for the seven months ended
December 30, 1995, and each of the two years ended December 27, 1997, and the
consolidated results of operations and cash flows of the Predecessor Company for
the five months ended May 26, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 11, 1998
F-2
<PAGE> 85
SIMONDS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------ JUNE 27,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,255 $ 1,255 $ 835
Accounts receivable, net of reserves of $798, $806 and
$866.................................................... 14,113 16,185 18,842
Inventories............................................... 23,235 22,576 28,697
Other current assets...................................... 3,260 3,160 3,467
Refundable income taxes................................... 141 101 101
------- ------- --------
Total current assets................................ 42,004 43,277 51,942
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 2,029 2,324 2,315
Buildings and improvements................................ 9,669 10,557 11,747
Machinery and equipment................................... 15,283 21,735 23,658
Construction-in-progress.................................. 1,675 348 1,891
------- ------- --------
28,656 34,964 39,611
Less -- Accumulated depreciation.......................... 2,999 5,308 6,655
------- ------- --------
Net property, plant and equipment..................... 25,657 29,656 32,956
OTHER ASSETS:
Goodwill, net of accumulated amortization of $537, $1,026
and $1,152.............................................. 13,714 20,613 22,065
Deferred financing costs, net of accumulated amortization
of $553,
$909 and $988........................................... 1,099 880 722
Other..................................................... 146 917 909
------- ------- --------
Total other assets.................................. 14,959 22,410 23,696
------- ------- --------
Total assets........................................ $82,620 $95,343 $108,594
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Overdraft facilities...................................... $ 788 $ 249 $ 150
Notes payable............................................. 2,390 1,481 5,802
Current portion of long-term debt......................... 4,197 4,925 5,255
Accounts payable.......................................... 4,930 4,797 6,578
Accrued payroll and employee benefits..................... 3,287 4,827 3,693
Other accrued liabilities................................. 1,445 2,691 4,088
Currently deferred income taxes........................... 2,758 2,656 2,650
------- ------- --------
Total current liabilities........................... 19,795 21,626 28,216
LONG-TERM DEBT, net of current portion...................... 39,588 45,286 48,825
DEFERRED INCOME TAXES....................................... 3,320 4,321 4,386
ACCRUED PENSION LIABILITY................................... 1,735 1,550 1,530
OTHER NONCURRENT LIABILITIES................................ 984 945 933
COMMITMENTS AND CONTINGENCIES (NOTE 7)...................... -- -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value -- Authorized -- 200,000
shares Issued and outstanding -- 148,037, 148,371 and
148,371................................................. 1 1 1
Capital in excess of par value............................ 10,520 10,553 10,553
Retained earnings......................................... 6,858 11,859 15,173
Cumulative translation adjustment......................... (181) (798) (976)
Treasury stock, at cost................................... (47)
------- ------- --------
Total shareholders' equity.......................... 17,198 21,615 24,704
------- ------- --------
Total liabilities and shareholders' equity.......... $82,620 $95,343 $108,594
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 86
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR ----------------------------------------------------------------
----------- SIX MONTHS
5 MONTHS 7 MONTHS YEAR YEAR -------------------
ENDED ENDED ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1995 1995 1996 1997 1997 1998
----------- ------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $42,212 $58,932 $98,661 $114,182 $55,376 $62,641
Cost of goods sold.............. 30,102 41,353 69,828 78,798 38,247 42,281
------- ------- ------- -------- ------- -------
Gross profit.......... 12,110 17,579 28,833 35,384 17,129 20,360
Selling, general and
administrative expense........ 15,338 10,176 17,135 21,149 9,944 11,961
------- ------- ------- -------- ------- -------
Operating income
(loss).............. (3,228) 7,403 11,698 14,235 7,185 8,399
Other expenses (income):
Interest expense.............. 650 2,880 4,399 4,963 2,394 2,477
Other, net.................... (276) (208) 245 520 172 167
------- ------- ------- -------- ------- -------
Income (loss) before
income taxes........ (3,602) 4,731 7,054 8,752 4,619 5,755
Provision (benefit) for income
taxes......................... (1,387) 1,856 3,071 3,751 1,971 2,441
------- ------- ------- -------- ------- -------
Net income (loss)..... $(2,215) $ 2,875 $ 3,983 $ 5,001 $ 2,648 $ 3,314
======= ======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 87
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR ----------------------------------------------------------------
----------- SIX MONTHS
FIVE MONTHS SEVEN MONTHS YEAR YEAR -------------------
ENDED ENDED ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1995 1995 1996 1997 1997 1998
----------- ------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss).............................. $(2,215) $ 2,875 $ 3,983 $ 5,001 $ 2,648 $ 3,314
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 1,498 1,500 2,712 3,459 1,552 2,023
Bonus paid in common stock................... 1,449 -- -- -- -- --
Gain on asset sales.......................... (41) (9) (11) (16) (5) (33)
Provision (benefit) for deferred income
taxes...................................... (104) 1,612 1,322 258 990 754
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable........................ (878) 1,560 (350) (927) (1,221) 100
Inventories................................ (3,088) 3,030 686 2,902 (145) (2,423)
Income tax refunds receivable.............. -- -- -- 40 40 --
Other current and non-current assets....... (2,329) 2,104 (818) 602 298 (134)
Accounts payable........................... 1,793 (1,711) 168 (346) 284 150
Accrued expenses........................... 5,396 (4,743) (979) 2,297 717 (1,019)
Other non-current liabilities.............. (28) (574) (48) (224) (182) (32)
------- -------- ------- -------- ------- -------
Net cash provided by operating activities.... 1,453 5,644 6,665 13,046 4,976 2,700
------- -------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment... 45 22 35 107 38 57
Purchases of equipment......................... (745) (1,895) (3,638) (3,708) (1,542) (2,085)
Acquisition of Simonds, net of cash acquired... -- (44,620) -- -- -- --
Acquisition of Pacific Hoe Company assets...... -- -- -- (5,578) (5,578) --
Acquisition of Strongridge Limited............. -- -- (1,185) -- -- --
Acquisition of Armstrong Manufacturing, net of
cash acquired................................ -- -- -- (8,125) -- --
Acquisition of W. Notting Ltd., net of cash
$51.......................................... -- -- -- -- -- (6,781)
------- -------- ------- -------- ------- -------
Net cash used by investing activities........ (700) (46,493) (4,788) (17,304) (7,082) (8,809)
------- -------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in overdrafts....................... 149 124 319 (539) (290) (99)
Net proceeds under revolving credit............ (247) 5,053 (197) (1,445) (585) 6,802
Proceeds from issuance of long-term debt....... -- 35,800 -- 7,700 6,000 --
Principal payments of long-term debt........... (1,132) (8,777) (2,530) (1,312) (3,362) (2,316)
Proceeds from issuance of notes payable........ -- -- -- -- -- 1,474
Issuance of common stock....................... -- 11,000 -- 33 33 --
Fees paid for debt financing................... -- (1,534) (118) (138) (32) --
Expenses of capitalization..................... -- (63) -- -- -- --
Purchase of treasury stock..................... -- -- -- -- -- (47)
------- -------- ------- -------- ------- -------
Net cash (used in) provided by financing
activities................................. (1,230) 41,603 (2,526) 4,299 1,764 5,814
------- -------- ------- -------- ------- -------
EFFECT OF EXCHANGE RATE.......................... (189) 8 360 (41) (33) (125)
------- -------- ------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH.................. (666) 762 (289) -- (375) (420)
CASH AT BEGINNING OF PERIOD...................... 1,448 782 1,544 1,255 1,255 1,255
------- -------- ------- -------- ------- -------
CASH AT END OF PERIOD............................ $ 782 $ 1,544 $ 1,255 $ 1,255 $ 880 $ 835
======= ======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 88
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE TOTAL
COMMON COMMON EXCESS RETAINED TRANSLATION TREASURY SHAREHOLDERS' COMPREHENSIVE
SHARES STOCK OF PAR VALUE EARNINGS ADJUSTMENT STOCK EQUITY INCOME(LOSS)
--------- ------ ------------ -------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIMONDS INDUSTRIES INC.
(Predecessor)
Balance at December 31,
1994.................... 3,461,777 $35 $ 6,574 $19,267 $(651) $ (239) $24,986 $ --
Net loss................ -- -- -- (2,215) -- -- (2,215) (2,215)
Foreign currency
translation
adjustment............ -- -- -- -- 386 -- 386 386
Stock bonus............. 125,732 2 1,447 -- -- -- 1,449 --
--------- --- ------- ------- ----- ------- ------- -------
Balance at May 26, 1995... 3,587,509 $37 $ 8,021 $17,052 $(265) $ (239) $24,606 $(1,829)
========= === ======= ======= ===== ======= ======= =======
SIMONDS INDUSTRIES INC.
Balance at May 26, 1995... -- $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash.............. 110,000 1 10,999 -- -- -- 11,000 --
Issuance of common stock
in exchange for stock
of Predecessor........ 38,037 -- 1,252 -- -- -- 1,252 --
Cash distribution to
shareholders.......... -- -- (2,001) -- -- -- (2,001) --
Issuance of common stock
warrants.............. -- -- 270 -- -- -- 270 --
Net income.............. -- -- -- 2,875 -- -- 2,875 2,875
Foreign currency
translation
adjustment............ -- -- -- -- (211) -- (211) (211)
--------- --- ------- ------- ----- ------- ------- -------
Balance at December 30,
1995.................... 148,037 1 10,520 2,875 (211) -- 13,185 2,664
=======
Net income.............. -- -- -- 3,983 -- -- 3,983 3,983
Foreign currency
translation
adjustment............ -- -- -- -- 30 -- 30 30
--------- --- ------- ------- ----- ------- ------- -------
Balance at December 28,
1996.................... 148,037 1 10,520 6,858 (181) -- 17,198 4,013
=======
Net income.............. -- -- -- 5,001 -- -- 5,001 5,001
Foreign currency
translation
adjustment............ -- -- -- -- (617) -- (617) (617)
Stock options
exercised............. 334 -- 33 -- -- -- 33 --
--------- --- ------- ------- ----- ------- ------- -------
Balance at December 27,
1997.................... 148,371 1 10,553 11,859 (798) -- 21,615 4,384
=======
Net income.............. -- -- -- 3,314 -- -- 3,314 3,314
Foreign currency
translation
adjustment............ -- -- -- -- (178) -- (178) (178)
Acquisition of treasury
stock................. -- -- -- -- -- (47) (47) --
--------- --- ------- ------- ----- ------- ------- -------
Balance at June 27, 1998
(unaudited)............. 148,371 $ 1 $10,553 $15,173 $(976)) $ (47) $24,704 $ 3,136
========= === ======= ======= ===== ======= ======= =======
</TABLE>
Comprehensive income for the six months ended June 28, 1997 was $2,139.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 89
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective June 11, 1998, SI Holding Corporation changed its name to Simonds
Industries Inc., and merged with its wholly owned operating subsidiary. Simonds
Industries Inc. (Simonds or the Company), a Delaware corporation, manufactures
and is a worldwide distributor of industrial cutting tools. The primary products
manufactured by Simonds include metal band and wood saws, industrial knives and
rule, files and band saw equipment. Simonds' principal manufacturing operations
are located in Fitchburg, Massachusetts; Newcomerstown, Ohio; Big Rapids,
Michigan; Portland and Springfield, Oregon; and Spangenberg, Germany. Simonds
also has sales subsidiaries in the United Kingdom and Canada.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Simonds Industries Inc. and its subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value because of their short-term nature. The fair value of
long-term indebtedness approximate the amount on the Company's consolidated
balance sheets because the vast majority of the debt has variable interest
rates.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(d) Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. As a
result, the fiscal period for the five months ended May 26, 1995, seven months
ended December 30, 1995, and years ended December 28, 1996 and December 27, 1995
include 21, 31, 52, and 52 weeks, respectively. The six months ended June 28,
1997 and June 27, 1998 each include 26 weeks.
(e) Inventories
Approximately 67% and 62% of inventories at December 28, 1996 and December
27, 1997, respectively, are valued at the lower of cost (last-in, first-out
(LIFO) method) or market. All other inventories are valued at the lower of cost
(first-in, first-out (FIFO) method) or market. Inventory costs include labor and
manufacturing overhead. Obsolete, damaged and excess inventories are carried at
net realizable value, with consideration given to obsolescence risks for excess
stock. Writedowns are charged to expense in the period in which the conditions
giving rise to writedowns are first recognized. The Company and the Predecessor
did not incur material writedowns in any of the periods presented in the
accompanying financial statements.
F-7
<PAGE> 90
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Property, Plant and Equipment
Depreciation is computed using the straight-line method based on the
following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Buildings and improvements.................................. 20-40 years
Machinery and equipment..................................... 3-12 years
Furniture and fixtures...................................... 8 years
</TABLE>
Maintenance and repairs are expensed as incurred.
(g) Goodwill
Goodwill represents the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is being amortized on a
straight-line method over 40 years. Amortization charged to operations amounted
to $10, $202, $335 and $489 for the five months ended May 26, 1995, seven months
ended December 30, 1995, and fiscal years ended 1996 and 1997, respectively. At
each balance sheet date, the Company evaluated the realizability of goodwill
based on expectations of non-discounted cash flows and operating income for each
subsidiary having a material goodwill balance. Based on its most recent
analysis, the Company believes that no material impairment of goodwill exists at
December 27, 1997.
(h) Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated at year-end rates of exchange, and statement of operations accounts
are translated at weighted average rates of exchange. The resulting translation
adjustments are excluded from net income and are accumulated as a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are included in income or expense in the period in which the transaction occurs.
The effect of foreign currency transaction gains or losses included in the
determination of results for the periods ended May 26, 1995, December 30, 1995,
December 28, 1996 and December 27, 1997 have not been material.
(i) Sales Recognition
The Company recognizes sales upon the shipment of its products net of
applicable discounts and allowances. Estimated future warranty obligations
related to certain products are provided by charges to operations in the period
in which the related revenue is recognized. The Company and the Predecessor did
not incur material warranty costs in any of the periods presented in the
accompanying financial statements.
(j) Income Taxes
The Company accounts for its income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
SFAS No. 109 utilizes the liability method, and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities at currently enacted tax laws
and rates.
(k) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued No.
131, Disclosures About Segments of an Enterprise and Related Information which
will be effective for the Company's financial statements for the 1998 fiscal
year. This statement established standards for reporting information about
segments in annual and interim financial statements. This statement introduces a
new model for segment reporting, called the "management approach." The
management approach is based on the way the chief
F-8
<PAGE> 91
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure and management structure. The
Company has not completed its analysis of the effect of adoption of SFAS No. 131
on its financial statement disclosure; however, the adoption of SFAS No. 131
will not affect results of operations or financial position.
(2) ORGANIZATION AND ACQUISITIONS
In May 1995, Fleet Equity Partners VI, L.P., Fleet Venture Resources, Inc.,
and other affiliated entities (Fleet) and certain officers of Simonds Industries
Inc. (Predecessor) formed SI Holding Corporation for the purpose of acquiring
100% of the Predecessor's outstanding stock and warrants. The Company received
cash proceeds through the issuance of 110,000 shares of common stock to Fleet of
$11,000 and debt proceeds amounting to $46,033 (see Note 6). In addition, as
discussed below, certain members of management exchanged $3,803 aggregate fair
value of options and stock awards for 38,037 shares of the Company's common
stock. In connection therewith, the Company incurred $63 of organizational
costs, which are being amortized over a five-year period, and approximately
$1,534 in professional fees related to the debt financing, which are being
amortized over the lives of the underlying respective debt agreements using the
effective interest rate method. These amounts are included in other assets in
the accompanying consolidated balance sheets, net of accumulated amortization at
December 28, 1996 and December 27, 1997 of approximately $20 and $33,
respectively, for the organizational costs and $553 and $909, respectively, for
the debt financing costs.
On May 26, 1995, the Company purchased the outstanding common stock and
warrants of the Predecessor for $44,620, including acquisition expenses of $436.
Of this amount, $3,250 was placed into an escrow account to satisfy certain
environmental and other contingent liabilities in accordance with the escrow
agreement.
Prior to the acquisition, the Predecessor granted stock awards with a fair
value of approximately $1,449 to certain officers and purchased the
Predecessor's outstanding stock options for $2,354, representing the difference
between the fair value of the underlying stock and the exercise price of the
options. In connection with the acquisition, the officers exchanged the $3,803
aggregate fair value of these awards and option payments for 38,037 shares of
the Company's common stock. The exchange was recorded at $1,252, an amount equal
to the officers' basis in the Predecessor prior to the acquisition (i.e., the
carryover basis). Cash of $2,001 paid to these officers to purchase other shares
of the Predecessor's stock held by them was recorded as a cash distribution to
shareholders. The transactions and the acquisition were accounted for as a
purchase in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 16, Business Combinations, and Emerging Issues Task Force Issue No.
88-16, Basis in Leveraged Buyout Transactions.
The stock awards and purchase of stock options discussed in the preceding
paragraph resulted in a compensation charge to the Predecessor's selling,
general and administrative expense of $3,803 for the 5 months ended May 26,
1995. The Predecessor also accrued additional compensation costs of $4,117 for
the five months ended May 26, 1995 representing certain bonuses to the
Predecessor's management and the buyout of stock options held by management that
terminated employment on the closing date. Accordingly, the Predecessor's
selling, general and administrative expense includes approximately $7,920 of
unusual compensation costs.
For financial reporting purposes, the purchase price was allocated to
assets acquired and liabilities assumed based on the fair market value at the
date of acquisition, except for the portion (25.7%) of assets and liabilities in
which ownership in the Company was retained by the Predecessor's management.
This portion was recorded using Simonds' predecessor/carryover basis. The excess
of purchase price over fair market value of net assets acquired (as adjusted for
the predecessor basis) is reflected in the accompanying consolidated balance
sheets as goodwill.
F-9
<PAGE> 92
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For income tax purposes, the transaction was treated as an acquisition of
stock. As a result, the tax bases of assets and liabilities carry over from
amounts previously reported for income tax purposes. Deferred taxes have been
provided in the accompanying consolidated balance sheets for the temporary
differences between the tax and financial reporting bases of the assets acquired
and liabilities assumed.
On October 1, 1996, the Company's wholly owned Canadian subsidiary acquired
100% of the outstanding stock of Strongridge Limited (a Canadian company) for
approximately $1,185. The acquisition has been accounted for as a purchase, with
the purchase price in excess of the fair value of net assets acquired, $932,
being amortized on a straight-line basis over 40 years. Results of operations of
Strongridge Limited are included in the accompanying consolidated financial
statements subsequent to October 1, 1996.
On January 27, 1997, the Company purchased certain assets, mainly inventory
and equipment, for $5,578 from Pacific Hoe Company. Purchase price in excess of
fair value of assets acquired, $3,831, is being amortized on a straight-line
basis over 40 years.
On August 1, 1997, the Company acquired 100% of the outstanding stock of
Armstrong Manufacturing Company (Armstrong) for $9,000, which includes cash
acquired of $875. The acquisition has been accounted for as a purchase, with the
purchase price in excess of the fair value of net assets acquired, $3,601, being
amortized on a straight-line basis over 40 years. To fund the acquisition, the
Company amended its credit agreement with Heller Financial Inc. (Note 6).
Results of operations of Armstrong are included in the accompanying consolidated
financial statements subsequent to August 1, 1997.
Pro forma results for 1996 and 1997 have not been reported because they
would not be materially different from the financial statements presented.
(3) INVENTORIES
Inventories at December 28, 1996 and December 27, 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials............................................ $ 4,526 $ 4,176
Work-in-process.......................................... 6,108 6,740
Finished goods........................................... 12,601 11,660
------- -------
Total inventories.............................. $23,235 $22,576
======= =======
</TABLE>
U.S. inventories of $15,497 and $14,190 at December 28, 1996 and December
27, 1997, respectively, were valued using the LIFO method. The replacement cost
of these inventories would have been higher by approximately $1,053 and $704 in
1996 and 1997, respectively.
(4) WARRANTS
In connection with the 1995 issuance of a $3,300 secured subordinated note
(see Note 6), the Company issued detachable warrants to purchase, for $46.56 per
share, 5,052 shares of the Company's common stock. The difference between the
$100 fair value per common share at the grant date and the exercise price has
been credited to capital in excess of par value.
(5) RETIREMENT PLANS
The Company has a combined defined-contribution profit sharing and 401(k)
retirement plan covering all domestic salaried and certain hourly employees.
Contributions to the profit sharing plan are determined by the Board of
Directors. The profit sharing cost of this plan was approximately $157, $231,
$390 and $399 for the five months ended May 26, 1995, seven months ended
December 30, 1995, and fiscal years ended
F-10
<PAGE> 93
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 1996 and December 27, 1997, respectively. In the 401(k) portion of
the plan, the Company matches at a rate of 50% on the first 6% of an employee's
salary contribution. Company 401(k) matching contributions amounted to
approximately $141, $183, $283 and $302 for the five months ended May 26, 1995,
seven months ended December 30, 1995, and fiscal years ended December 28, 1996
and December 27, 1997, respectively.
Certain of the Company's hourly employees participate in a union-sponsored,
multiemployer defined-benefit retirement plan. The cost of this plan was
approximately $151, $213, $378 and $392 for the five months ended May 26, 1995,
seven months ended December 30, 1995, and fiscal years ended December 28, 1996
and December 27, 1997, respectively. Contributions are based on wages earned and
are paid monthly to the pension administrator.
All other domestic hourly employees are covered by a defined-contribution
plan. Contributions are based on a union contract as a percentage of wages
earned and are paid annually. The cost of this plan was approximately $52, $85,
$140 and $151 for the five months ended May 26, 1995, seven months ended
December 30, 1995, and fiscal years ended December 28, 1996 and December 27,
1997, respectively.
In connection with the acquisition of Armstrong, the Company acquired a
defined benefit plan to cover all employees of Armstrong. The defined benefit
plan was frozen as of December 27, 1997. The fair value of plan assets exceeded
the projected benefit obligation for services rendered as of December 27, 1997.
The plan officially will terminate in 1998, at which time all plan assets will
be fully distributed to plan participants. All Participants of this plan were
eligible to participate in the Company's 401(k) retirement plan, effective
January 1, 1998 and based on eligibility, as defined.
In addition to the defined benefit plan, employees of Armstrong are also
covered under a profit sharing plan. The plan merged with the Company's 401(k)
retirement plan effective January 1, 1998. Contributions to the Armstrong profit
sharing plan are determined by the Board of Directors. The profit sharing cost
of this plan was approximately $260 in 1997.
Certain foreign employees are covered under defined-contribution plans.
Total costs for these plans amounted to approximately $53, $88, $136 and $148
for the five months ended May 26, 1995, seven months ended December 30, 1995,
and fiscal years ended December 28, 1996 and December 27, 1997, respectively.
Certain employees of one of Simonds' subsidiaries, Wespa
Metallsagenfabrik -- Simonds Industries GmbH (Wespa), are covered by an unfunded
defined-benefit plan. The following table sets forth the plan's funded status
and the amount recognized in the Company's accompanying consolidated balance
sheets at December 28, 1996 and December 27, 1997:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Actuarial present value of accumulated plan benefits --
Vested................................................... $1,430 $1,259
Nonvested................................................ 26 4
------ ------
Accumulated benefit obligation................... 1,456 1,263
Effect of projected future compensation increases.......... 280 287
------ ------
Projected benefit obligation for service rendered
to date........................................ 1,736 1,550
------ ------
Plan assets at fair value.................................. -- --
------ ------
Accrued pension liability........................ $1,736 $1,550
====== ======
</TABLE>
F-11
<PAGE> 94
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension expense for the year ended December 28, 1996 and
December 27, 1997 includes the following components:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------- --------------------------------------------
5 MONTHS 7 MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1995 1996 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service costs (benefits earned
during the period)............... $12 $16 $ 23 $ 18
Interest cost on projected benefit
obligation....................... 53 74 102 84
--- --- ---- ----
Net periodic pension
expense..................... $65 $90 $125 $102
=== === ==== ====
</TABLE>
The discount rate and rate of increase in future compensation levels used
in determining the projected benefit obligation were 7.0% and 4.0%,
respectively, for the five months ended May 26, 1995 and seven months ended
December 30, 1995. The discount rate and rate of increase used for the years
ended December 28, 1996 and December 27, 1997, were 7.0% and 6.5%, respectively.
(6) DEBT
Debt consists of the following at December 28, 1996 and December 27, 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revolving credit facility loan......................... $10,743 $12,945
Term notes payable..................................... 28,600 33,375
Line-of-credit facility for German subsidiary.......... 2,390 1,481
Term loan payable by German subsidiary................. 1,351 761
Subordinated notes payable............................. 3,091 3,130
------- -------
46,175 51,692
Less -- Current maturities............................. 6,587 6,406
------- -------
$39,588 $45,286
======= =======
</TABLE>
(a) Revolving Credit and Term Loans
The Company has a credit agreement (the Agreement) with a syndicate of
lenders, including Heller Financial Inc., which is also the agent for the
lenders. The Agreement provides for secured borrowings consisting of a revolving
credit facility up to $20,000 and term loans of $34,500. The Agreement provides
that the Company may borrow amounts under the revolving credit line up to the
sum of 85% of eligible accounts receivable plus 60% of eligible inventory, less
any outstanding letters of credit issued by the lenders on behalf of the
Company. At December 27, 1997, approximately $18,316 is available under the
formula, of which $12,945 is borrowed and outstanding. Outstanding letters of
credit issued by the lenders amount to approximately $100 at December 27, 1997.
Principal payments are due in full on June 30, 2003, the termination date of the
Agreement. Mandatory principal prepayments are required upon the occurrence of
certain transactions resulting in cash proceeds to the Company, including asset
dispositions greater than $250 and issuance of capital stock.
Beginning on September 30, 1997 and continuing through June 30, 2003,
principal repayments on the term loans are due on the last day of each
September, December, March and June. The payments per quarter are in varying
amounts set forth in the respective underlying promissory notes.
F-12
<PAGE> 95
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the Senior Debt are secured by substantially all of the
assets of the Company. During the period ended December 27, 1997, and at the
option of the Company, term and revolver advances bear interest at either the
prime rate (8.5% at December 27, 1997) plus 1% or the LIBOR rate (5.97% at
December 27, 1997) plus 2.5%. Subsequent to December 27, 1997, loans will bear
interest at one of the above rates based on the ratio of the total outstanding
amount of Senior Debt to the Company's operating cash flow. Interest on the
prime-based loans is payable quarterly in arrears on the first day of each June,
September, December and March. Interest on the LIBOR-based loans is payable at
the end of each respective loan period, except for those loans with periods in
excess of three months, which require interest payments in arrears on the last
day of each three-month interval. The average daily unused line bears a
commitment fee of .5% per annum payable quarterly.
The Company is required to comply with a number of affirmative and negative
covenants under the Agreement. Among other things, the Company is required to
satisfy certain financial tests and ratios (including debt service coverage,
leverage ratio and minimum net worth) and is restricted as to additional
borrowings, the payment of cash dividends and the retirement of outstanding
common stock or warrants. The Company is in compliance with these covenants at
December 27, 1997.
(b) German Subsidiary Debt
Wespa, the Company's German subsidiary, has a line of credit with a bank
for approximately $3,100. The line-of-credit agreement bears interest at varying
rates (Best Offered Overdraft Rate (BOOR) plus .25% or .50% or LIBOR plus 1.50%,
depending on outstanding balance) and is due on demand by the bank. The $1,481
outstanding principal at December 27, 1997 is reflected as a short-term
revolving credit loan in the accompanying consolidated balance sheets.
Wespa has a term loan payable to a bank with an outstanding balance at
December 28, 1996 and December 27, 1997 of $1,351 and $761, respectively.
Principal payments are due in equal quarterly installments of approximately $85,
with a final payment due on December 31, 1999. The loan bears interest at the
French Interbank Offering Rate (FIBOR) (3.7% at December 27, 1997) plus 2.5% and
is secured by substantially all assets of Wespa and a guarantee by the Company.
(c) Subordinated Debt
On May 26, 1995, the Company entered into a Note and Warranty Purchase
Agreement (the Subordinated Agreement) with Massachusetts Capital Resource
Company (MCRC), under which MCRC provided cash of $3,300 in exchange for a
$3,300 subordinated note and warrants to purchase 5,052 shares of common stock.
The proceeds were used in combination with the Senior Debt to fund the
acquisition described in Note 2. This debt is subordinate to the Senior Debt and
bears interest at a rate of 12% per annum. Interest is payable quarterly in
arrears. Principal payments of $412.5 are due on each of September 30, December
31, March 31 and June 30 beginning on September 30, 2000 and continuing through
June 30, 2002. Upon full satisfaction of the Senior Debt, the Company may make
optional prepayments in the amount of $330 for each of the years ending June 30,
1999 through June 30, 2001 without penalty. Principal payments occurring prior
to the year ending June 30, 1999, or in amounts in excess of the optional and
mandatory payments discussed above, will be subject to a penalty ranging from 2%
to 12% of the principal amount being redeemed. The $33 fee charged by MCRC in
connection with the issuance of this loan to the Company is included in other
assets in the accompanying consolidated balance sheets and is being amortized
over the life of the loan.
The warrants to purchase 5,052 shares of the Company's common stock are
exercisable at $46.56 per share. The difference between the $100 fair value per
share at the grant date and the exercise price has been credited to capital in
excess of par value. At December 27, 1997, approximately $170, net of $99
accumulated amortization, is treated as a debt discount and is reflected as a
reduction of the debt in the accompanying
F-13
<PAGE> 96
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated balance sheets. This discount is being amortized using the
effective interest method over the life of the Subordinated Debt, which results
in an effective per annum interest rate of 14.02%.
The Subordinated Agreement contains certain covenants that, among other
things, require the Company to satisfy certain financial tests and ratios
(including debt service coverage and leverage ratio) and is restrictive as to
additional borrowings. The Company is in compliance with these covenants at
December 27, 1997.
The following is a summary of maturities of all of the Company's debt
obligations due after December 27, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- -------
<S> <C>
1998............................................. $ 6,406
1999............................................. 5,551
2000............................................. 6,621
2001............................................. 7,861
2002............................................. 7,559
Thereafter....................................... 17,694
-------
$51,692
=======
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(a) Commitments under Operating Leases
Certain of the Company's operations are conducted from facilities rented
under operating leases that expire over the next 10 years. The Company also has
operating leases covering certain office equipment. Substantially all leases
provide for the Company to pay operating expenses in addition to basic rent.
Rent expense was approximately $307, $375, $676 and $710 for the five months
ended May 26, 1995, seven months ended December 30, 1995, and fiscal years ended
December 28, 1996, and December 27, 1997, respectively.
Future minimum annual rentals on noncancelable leases in effect at December
27, 1997, which have initial or remaining terms of more than one year, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- ------
<S> <C>
1998................................................ $226
1999................................................ 130
2000................................................ 119
2001................................................ 88
2002................................................ 73
Thereafter.......................................... 66
----
$702
====
</TABLE>
(b) Commitments under Joint Venture
The Company owns 50% of a domestic joint venture that has a 50% investment
in a file manufacturing facility in the People's Republic of China. Previously,
the Company had committed to purchase from the file manufacturing facility all
of the Company's requirements for certain types of files. However, the
manufacturing facility in China is no longer in operation. The Company has
secured alternative sources for these products.
F-14
<PAGE> 97
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Litigation
The Company is party to a lawsuit that was litigated in China involving the
Chinese joint venture established by the Company's predecessor. This case was
filed by a Chinese joint venture company against Household and the Company,
alleging breach of a 1984 Sales Agreement. Judgment was entered against the
Company in the approximate amount of US$410. The plaintiff has made no effort to
enforce its foreign judgment in the United States. If and when it does so, the
Company will interpose defenses of denial of due process in the Chinese court,
as well as other substantive defenses under the Massachusetts General Laws.
Company management believes the lawsuit to be without merit. In addition, the
Company is a party to other lawsuits that arose in the normal course of
business. In the opinion of management, the final resolutions of these lawsuits
are not expected to materially affect the financial condition or results of
operations of the Company.
(d) Letters of Credit
In the normal course of its business activities, the Company is required
under certain contracts to provide letters of credit that may be drawn down in
the event that the Company fails to perform under the contracts. As of December
27, 1997, the Company has issued or agreed to issue letters of credit totaling
approximately $100.
(e) Employment Contracts
In connection with the acquisition (discussed in Note 2) on May 26, 1995,
the Company entered into employment and noncompetition agreements with two key
officers. The employment agreements provide for an employment term through May
26, 2000. Should employment be terminated by the Company for any reason other
than cause (as defined in the employment agreement), the officers shall be
entitled to receive all salary and bonuses earned through the termination date,
plus the remaining base salary for the period, through the expiration of the
agreement.
(8) INCOME TAXES
Components of Income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------ --------------------------------------------
FIVE MONTHS SEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic................. $(4,517) $3,493 $5,254 $6,441
Foreign.................. 915 1,238 1,800 2,311
------- ------ ------ ------
Total.......... $(3,602) $4,731 $7,054 $8,752
======= ====== ====== ======
</TABLE>
F-15
<PAGE> 98
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes consists of the following
components for the periods ended:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------------ -----------------------------
FIVE MONTHS ENDED SEVEN MONTHS ENDED
MAY 26, 1995 DECEMBER 30, 1995
------------------------------ -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic --
Federal.................. $(1,476) $ 102 $(1,374) $ -- $1,107 $1,107
State.................... (413) 29 (384) (54) 214 160
Foreign.................... 606 (235) 371 298 291 589
------- ----- ------- ---- ------ ------
Total............ $(1,283) $(104) $(1,387) $244 $1,612 $1,856
======= ===== ======= ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 28, 1996 DECEMBER 27, 1997
------------------------------- -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- ---------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic --
Federal.................. $ 889 $ 876 $1,765 $2,153 $ 57 $2,210
State.................... 129 273 402 487 18 505
Foreign.................... 731 173 904 853 183 1,036
------ ------ ------ ------ ---- ------
Total............ $1,749 $1,322 $3,071 $3,493 $258 $3,751
====== ====== ====== ====== ==== ======
</TABLE>
An income tax rate reconciliation of the difference between actual and
statutory effective tax rates is as follows:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------ ---------------------------------------------
FIVE MONTHS SEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1995 1996 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Provision (benefit) for income
taxes at the federal statutory
rate.......................... $(1,225) $1,608 $2,398 $2,976
State taxes, net of federal tax
effect........................ (227) 298 445 552
Goodwill amortization not
deductible for tax purposes... 30 114 156 166
Higher foreign tax rates........ 15 70 70 89
Other, net...................... 20 (234) 2 (32)
------- ------ ------ ------
Recorded provision (benefit).... $(1,387) $1,856 $3,071 $3,751
======= ====== ====== ======
</TABLE>
F-16
<PAGE> 99
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are recorded based on the differences between the financial
statement and tax bases of assets and liabilities. The tax effect of the
temporary differences that give rise to a significant portion of deferred tax
liabilities is as follows at December 28, 1996 and December 27, 1997:
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Tax assets --
Reserves and accruals not yet deductible for tax
purposes............................................... $ (948) $(1,383)
Other..................................................... (35) --
------ -------
Total tax assets.................................. (983) (1,383)
------ -------
Tax liabilities --
Property-basis differences................................ 3,576 4,523
Inventory-basis differences............................... 2,480 2,671
Other current assets-basis differences.................... 1,005 863
Other..................................................... -- 303
------ -------
Total tax liabilities............................. 7,061 8,360
------ -------
Net tax liabilities............................... $6,078 $ 6,977
====== =======
</TABLE>
Net deferred tax liabilities are included in the accompanying consolidated
balance sheets in deferred income taxes and currently deferred income taxes.
(9) STOCK OPTION PLANS
Predecessor:
On January 17, 1989, the Board of Directors approved a nonstatutory stock
option plan (the Plan) for management and executive personnel, officers,
directors, employees, agents and consultants of the Company. The Company had
reserved 540,030 shares of the Company's common stock for issuance under the
Plan. Options granted under the Plan were issued at the fair market value at the
date of grant as determined by the Board of Directors. Option prices range from
$2.47 per share to $4.80 per share. The following table summarizes option
activity from December 31, 1994 through May 26, 1995.
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Options Outstanding at December 31, 1994.................... 436,675
Granted................................................... --
Exercised................................................. --
Redeemed for Cash......................................... (150,000)
Redeemed for New Company Stock............................ (286,675)
--------
Options Outstanding at May 26, 1995......................... --
========
Options Exercisable at May 26, 1995......................... --
========
</TABLE>
As of May 26, 1995 all stock options under this plan had been redeemed and
the plan was terminated.
The Company:
On July 25, 1995, the Board of Directors of the Company approved the Stock
Incentive Plan (the Plan) for key executives, management and employees. The
Company has reserved 9,568 shares of the Company's common stock for issuance
under the Plan. Shares issued under the Plan may be either nonqualified stock
options or incentive stock options. Nonqualified options granted under the Plan
are exercisable at a price equal
F-17
<PAGE> 100
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the greater of $100 or the net book value per share at the time of grant.
Incentive stock options are issued at the fair market value at the date of grant
as determined by the Board of Directors. The exercise period for options granted
under the Plan are determined by the Board of Directors, but in the case of
incentive stock options, the period may not exceed 10 years from the grant date.
For incentive stock options granted to those employees owning more than 10% of
the Company's common shares at the grant date, the exercise price is at least
100% of the fair market value at the date of grant, and the option expires five
years from the grant date. At the discretion of the Board of Directors, the
options may be exercisable in installments based on the completion of a
specified service requirement by the optionholder.
Also on July 25, 1995 the Board of Directors approved the Senior Management
Stock Option Plan (the Senior Plan). The Senior Plan is a nonstatutory stock
option plan for senior management and executives of the Company. Options are
100% vested at the grant date and are exercisable into shares of the Company's
common stock at a price of $400 per share. The options expire upon the earliest
of the termination of the optionholder's employment with the Company, the
one-year anniversary of the optionholder's death, or the seventh-year
anniversary of the date of grant. The Company has reserved 28,704.19 shares of
the Company's common stock for issuance under the Senior Plan, and at December
27, 1997, options for all of the shares had been granted.
Stock option activity for the period May 26,1995 through December 27, 1997
is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE FAIR
AVERAGE VALUE OF
TOTAL SHARES EXERCISE PRICE OPTIONS GRANTED
------------ -------------- ---------------
<S> <C> <C> <C>
Outstanding, May 26, 1995................... -- $ --
Granted................................... 36,904.19 333.34
--------- -------
Outstanding, December 30, 1995.............. 36,904.19 333.34
Granted................................... 200.00 100.00 $56.84
--------- -------
Outstanding, December 28, 1996.............. 37,104.19 332.08
Granted................................... 500.00 113.28 $59.06
Canceled.................................. (366.00) 100.00
Exercised................................. (334.00) 100.00
--------- -------
Outstanding, December 27, 1997.............. 36,904.19 $333.52
========= =======
Options exercisable......................... 36,504.19
=========
Shares reserved for future grants........... 1,034.06
=========
</TABLE>
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair-value-based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
costs for those plans using the method of accounting prescribed by APB Opinion
25. Entities electing to remain with the accounting in APB Opinion 25 must make
pro forma disclosures of net income as if the fair-value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25. No accounting recognition is given to stock options with
exercise prices equal to fair market value on the grant date until the options
are exercised, at which time the proceeds are credited to the shareholders'
equity accounts. For options with an exercise price less than fair market value
on the grant date, the amount that the fair market value exceeds the exercise
price is charged to compensation expense over the period the options
F-18
<PAGE> 101
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vest. Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income would not have been materially different from
amounts reported. Because the SFAS No. 123, method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation costs may not be representative of those to be expected in future
years.
Set forth below is a summary of options outstanding at December 27, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
OUTSTANDING WEIGHTED WEIGHTED FOR CURRENTLY
RANGE OF NUMBER OF AVERAGE AVERAGE OPTIONS EXERCISABLE
EXERCISE PRICE OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE OPTIONS
- -------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$100 -- $113.28............ 8,200.00 $100.81 7.56 years 7,800.00 $100.28
400...................... 28,704.19 400.00 7.42 years 28,704.19 400.00
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for the grants: Risk-free interest rate of 6.62%, expected
dividend yield at zero, expected lives of 10 years and expected volatility of
zero.
(10) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest and income taxes and certain noncash
transactions were as follows for the following periods:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------- --------------------------------------------
FIVE SEVEN
MONTHS MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 26, DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1995 1996 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest paid..................... $ 538 $ 2,689 $3,914 $4,429
Income taxes paid................. 1,435 756 1,876 2,733
Liabilities assumed in
acquisitions.................... -- 37,805 2,830 7,879
Issuance of 38,037 shares of
common stock in exchange for the
Predecessor's stock at carryover
basis (Note 2).................. -- 1,252 -- --
</TABLE>
(11) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes unaudited quarterly financial data for the years
ended December 28, 1996 and December 27, 1997:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
FOR THE QUARTERS ENDED
--------------------------------------------------
MARCH 30 JUNE 29 SEPTEMBER 28 DECEMBER 28
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales..................... $25,582 $24,651 $22,689 $25,658
Gross Profit.................. 7,661 7,406 6,364 7,056
Net Income.................... 1,272 1,103 761 874
</TABLE>
F-19
<PAGE> 102
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997
--------------------------------------------------
FOR THE QUARTERS ENDED
--------------------------------------------------
MARCH 29 JUNE 28 SEPTEMBER 27 DECEMBER 27
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales..................... $27,174 $28,202 $27,950 $30,856
Gross Profit.................. 8,219 8,689 8,611 9,457
Net Income.................... 1,151 1,066 1,066 1,285
</TABLE>
(12) OPERATING AND GEOGRAPHIC SEGMENT INFORMATION AND CONCENTRATION OF CREDIT
RISK
The Company operates in one industry segment, industrial cutting tools and
related machinery. No single customer accounts for 10% or more of consolidated
net sales. Transfers between geographic areas are accounted for at values based
on market prices. The following information by geographic area is presented for
the periods presented in the accompanying financial statements.
For the five months ended May 27, 1995:
<TABLE>
<CAPTION>
TRANSFERS INCOME
NET SALES TO BETWEEN BEFORE
UNAFFILIATED GEOGRAPHIC INCOME IDENTIFIABLE
CUSTOMERS AREAS TAXES ASSETS
------------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations.......... $28,328 $ 5,185 $(4,302) $42,571
Canadian Operations.......... 4,273 11 268 2,919
European Operations.......... 9,611 198 806 16,923
------- ------- ------- -------
42,212 5,394 (3,228) 62,413
Unallocated.................. -- (5,394) 274 --
Interest Expense............. -- -- (650) --
Interest Income.............. -- -- 2 --
------- ------- ------- -------
Consolidated Totals............ $42,212 $ -- $(3,602) $62,413
======= ======= ======= =======
</TABLE>
For the seven months ended December 30, 1995:
<TABLE>
<CAPTION>
TRANSFERS INCOME
NET SALES TO BETWEEN BEFORE
UNAFFILIATED GEOGRAPHIC INCOME IDENTIFIABLE
CUSTOMERS AREAS TAXES ASSETS
------------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations.......... $40,075 $ 6,790 $ 5,934 $59,453
Canadian Operations.......... 5,629 60 311 2,885
European Operations.......... 13,228 403 1,158 15,391
------- ------- ------- -------
58,932 7,253 7,403 77,729
Unallocated.................. -- (7,253) 195 --
Interest Expense............. -- -- (2,880) --
Interest Income.............. -- -- 13 --
------- ------- ------- -------
Consolidated Totals............ $58,932 $ -- $ 4,731 $77,729
======= ======= ======= =======
</TABLE>
F-20
<PAGE> 103
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 28, 1996:
<TABLE>
<CAPTION>
TRANSFERS INCOME
NET SALES TO BETWEEN BEFORE
UNAFFILIATED GEOGRAPHIC INCOME IDENTIFIABLE
CUSTOMERS AREAS TAXES ASSETS
------------ ---------- ------- ------------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations............. $65,824 $ 11,133 $ 9,483 $60,812
Canadian Operations............. 10,520 206 625 6,399
European Operations............. 22,317 472 1,590 15,409
------- -------- ------- -------
98,661 11,811 11,698 82,620
Unallocated..................... -- (11,811) (258) --
Interest Expense................ -- -- (4,399) --
Interest Income................. -- -- 13 --
------- -------- ------- -------
Consolidated Totals............... $98,661 $ -- $ 7,054 $82,620
======= ======== ======= =======
</TABLE>
For the year ended December 27, 1997:
<TABLE>
<CAPTION>
TRANSFERS INCOME
NET SALES TO BETWEEN BEFORE
UNAFFILIATED GEOGRAPHIC INCOME IDENTIFIABLE
CUSTOMERS AREAS TAXES ASSETS
------------ ---------- ------- ------------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations............. $ 75,903 $ 13,954 $11,538 $74,440
Canadian Operations............. 17,172 74 1,151 6,652
European Operations............. 21,107 557 1,546 14,251
-------- -------- ------- -------
114,182 14,585 14,235 95,343
Unallocated..................... -- (14,585) (544) --
Interest Expense................ -- -- (4,963) --
Interest Income................. -- -- 24 --
-------- -------- ------- -------
Consolidated Totals............... $114,182 $ -- $ 8,752 $95,343
======== ======== ======= =======
</TABLE>
F-21
<PAGE> 104
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS, AND
NON-GUARANTORS
In connection with the Offering of Notes, the Company's wholly-owned
domestic subsidiaries will guarantee, on a senior subordinated basis, the Notes,
jointly and severally. The guarantor subsidiaries include combining financial
statements of Armstrong, which was acquired in August 1997, and Simonds Holding
Company. The non-guarantor subsidiaries include combining financial statements
of Wespa, Simonds UK, and Simonds Canada. Separate financial statements of the
guarantor subsidiaries have not been presented because management believes that
such financial statements are not material to investors. In addition, the Senior
Credit Facility is guaranteed on a full and unconditional basis by all
guarantors. The following financial data summarizes the consolidating Company on
the equity method of accounting for the following periods presented:
<TABLE>
<CAPTION>
AS OF DECEMBER 28, 1996
---------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................ $ 698 $ 3 $ 554 -- $ 1,255
Accounts receivable............. 7,556 -- 6,557 -- 14,113
Interdivision accounts
receivable.................... 20,850 -- -- (20,850) 0
Inventories:
Raw materials................. 3,436 -- 1,090 -- 4,526
Work in progress.............. 5,372 -- 736 -- 6,108
Finished goods................ 6,689 -- 6,169 (257) 12,601
Other current assets............ 2,894 4 503 -- 3,401
-------- ------- ------- -------- -------
Total current assets....... 47,495 7 15,609 (21,107) 42,004
-------- ------- ------- -------- -------
NET PROPERTY, PLANT AND EQUIPMENT.... 20,197 -- 5,460 -- 25,657
-------- ------- ------- -------- -------
OTHER ASSETS:
Investment in subsidiaries...... 27,197 6,629 -- (33,826) --
Intercompany loan............... -- 17,503 -- (17,503) --
Other assets.................... 13,963 -- 996 -- 14,959
-------- ------- ------- -------- -------
Total assets............... $108,852 $24,139 $22,065 $(72,436) $82,620
======== ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES.................. $ 34,722 $ 10 $ 5,908 $(20,845) $19,795
LONG-TERM DEBT, net of current
portion............................ 38,623 -- 965 -- 39,588
INTERDIVISION LONG-TERM DEBT......... 15,145 -- 2,358 (17,503) --
OTHER NONCURRENT LIABILITIES......... 3,164 -- 2,875 -- 6,039
TOTAL SHAREHOLDERS' EQUITY........... 17,198 24,129 9,959 (34,088) 17,198
-------- ------- ------- -------- -------
Total liabilities and
shareholders' equity..... $108,852 $24,139 $22,065 $(72,436) $82,620
======== ======= ======= ======== =======
</TABLE>
F-22
<PAGE> 105
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 27, 1997
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................. $ 25 $ 188 $ 1,042 -- $ 1,255
Accounts receivable.............. 8,896 872 6,417 -- 16,185
Intercompany accounts
receivable.................... 20,929 285 -- (21,214) --
Inventories:
Raw materials................. 3,099 310 767 -- 4,176
Work in progress.............. 5,527 421 792 -- 6,740
Finished goods................ 5,564 576 5,825 (305) 11,660
Other current assets............. 2,416 326 519 -- 3,261
-------- ------- ------- -------- -------
Total current assets.......... 46,456 2,978 15,362 (21,519) 43,277
-------- ------- ------- -------- -------
NET PROPERTY, PLANT AND
EQUIPMENT........................ 22,098 2,582 4,976 -- 29,656
OTHER ASSETS:
Investment in subsidiaries....... 35,736 7,894 -- (43,630) --
Intercompany loan receivable..... -- 17,051 -- (17,051) --
Other assets..................... 17,130 4,366 913 1 22,410
-------- ------- ------- -------- -------
Total assets.................. $121,420 $34,871 $21,251 $(82,199) $95,343
======== ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES................ $ 36,202 $ 888 $ 5,751 $(21,215) $21,626
LONG-TERM DEBT, net of current
portion.......................... 44,863 -- 423 -- 45,286
INTERDIVISION LONG-TERM DEBT....... 15,145 0 1,906 (17,051) --
OTHER NONCURRENT LIABILITIES....... 3,595 638 2,583 -- 6,816
SHAREHOLDERS' EQUITY............... 21,615 33,345 10,588 (43,933) 21,615
-------- ------- ------- -------- -------
Total liabilities and
shareholders' equity........ $121,420 $34,871 $21,251 $(82,199) $95,343
======== ======= ======= ======== =======
</TABLE>
F-23
<PAGE> 106
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF JUNE 27, 1998
--------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................. $ 26 $ 265 $ 544 $ -- $ 835
Accounts receivable, net of
reserves.......................... 8,735 1,040 9,067 -- 18,842
Intercompany accounts receivable..... 997 101 1,320 (2,418) --
Inventories:
Raw materials..................... 3,539 344 1,481 -- 5,364
Work in progress.................. 5,978 332 1,019 -- 7,329
Finished goods.................... 6,545 626 9,138 (305) 16,004
Other current assets................. 2,454 304 810 -- 3,568
-------- ------- ------- -------- --------
Total current assets.............. 28,274 3,012 23,379 (2,723) 51,942
-------- ------- ------- -------- --------
NET PROPERTY, PLANT AND EQUIPMENT...... 22,935 2,525 7,496 -- 32,956
OTHER ASSETS:
Investment in subsidiaries........... 41,403 7,653 -- (49,056) --
Intercompany loan receivable......... -- 22,163 -- (22,163) --
Other assets......................... 16,751 4,236 2,709 -- 23,696
-------- ------- ------- -------- --------
Total assets...................... $109,363 $39,589 $33,584 $(73,942) $108,594
======== ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES.................... $ 17,485 $ 834 $12,336 $ (2,439) $ 28,216
LONG-TERM DEBT, net of current
portion.............................. 48,548 -- 277 -- 48,825
INTERDIVISION LONG-TERM DEBT........... 15,145 -- 7,018 (22,163) --
OTHER NONCURRENT LIABILITIES........... 3,481 638 2,730 -- 6,849
TOTAL SHAREHOLDERS'
EQUITY............................... 24,704 38,117 11,223 (49,340) 24,704
-------- ------- ------- -------- --------
Total liabilities and
shareholders'
equity.......................... $109,363 $39,589 $33,584 $(73,942) $108,594
======== ======= ======= ======== ========
</TABLE>
F-24
<PAGE> 107
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE PREDECESSOR
-------------------------------------------------------------------
FIVE MONTHS ENDED MAY 26, 1995
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $33,513 $ -- $14,093 $(5,394) $42,212
Cost of goods sold................. 24,147 -- 11,237 (5,282) 30,102
------- ------ ------- ------- -------
Gross profit................ 9,366 -- 2,856 (112) 12,110
Selling, general and administrative
expense.......................... 13,549 -- 1,789 -- 15,338
------- ------ ------- ------- -------
Operating income (loss)..... (4,183) -- 1,067 (112) (3,228)
Other expenses (income):
Interest expense................. 999 -- 200 (549) 650
Interest income.................. -- (549) -- 549 --
Other, net....................... (205) (23) (48) -- (276)
Equity in earnings of
subsidiaries.................. (784) (544) -- 1,328 --
------- ------ ------- ------- -------
Income (loss) before income
taxes.................... (4,193) 1,116 915 (1,440) (3,602)
Provision (benefit) for income
taxes............................ (1,978) 220 371 -- (1,387)
------- ------ ------- ------- -------
Net income (loss)........... $(2,215) $ 896 $ 544 $(1,440) $(2,215)
======= ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
SEVEN MONTHS ENDED DECEMBER 30, 1995
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $46,865 $ -- $19,320 $(7,253) $58,932
Cost of goods sold.................. 33,272 -- 15,328 (7,247) 41,353
------- ------ ------- ------- -------
Gross profit................. 13,593 -- 3,992 (6) 17,579
Selling, general and administrative
expense........................... 7,668 -- 2,508 -- 10,176
------- ------ ------- ------- -------
Operating income............. 5,925 -- 1,484 (6) 7,403
Other expenses (income):
Interest expense.................. 3,413 29 246 (808) 2,880
Interest income................... (808) 808 --
Other, net........................ (289) -- 81 -- (208)
Equity in earnings of
subsidiaries................... (1,155) (649) -- 1,804 --
------- ------ ------- ------- -------
Income before income taxes... 3,956 1,428 1,157 (1,810) 4,731
Provision for income taxes.......... 1,081 267 508 -- 1,856
------- ------ ------- ------- -------
Net income................... $ 2,875 $1,161 $ 649 $(1,810) $ 2,875
======= ====== ======= ======= =======
</TABLE>
F-25
<PAGE> 108
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 28, 1996
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $76,957 -- $33,515 $(11,811) $98,661
Cost of goods sold................. 55,121 -- 26,421 (11,714) 69,828
------- ------- ------- -------- -------
Gross profit................ 21,836 -- 7,094 (97) 28,833
Selling, general and administrative
expense.......................... 12,155 -- 4,980 -- 17,135
------- ------- ------- -------- -------
Operating income............ 9,681 -- 2,114 (97) 11,698
Other expenses (income):
Interest expense................. 5,411 35 365 (1,412) 4,399
Interest income.................. -- (1,412) -- 1,412 --
Other, net....................... 360 -- (115) 245
Equity in earnings of
subsidiaries.................. (1,735) (960) -- 2,695 --
------- ------- ------- -------- -------
Income before income
taxes.................... 5,645 2,337 1,864 (2,792) 7,054
Provision for income taxes......... 1,662 505 904 -- 3,071
------- ------- ------- -------- -------
Net income.................. $ 3,983 $ 1,832 $ 960 $ (2,792) $ 3,983
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 27, 1997
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $86,060 $ 3,797 $38,910 $(14,585) $114,182
Cost of goods sold................. 60,571 2,401 30,362 (14,536) 78,798
------- ------- ------- -------- --------
Gross profit................ 25,489 1,396 8,548 (49) 35,384
Selling, general and administrative
expense.......................... 14,288 900 5,961 -- 21,149
------- ------- ------- -------- --------
Operating income............ 11,201 496 2,587 (49) 14,235
Other expenses (income):
Interest expense................. 6,163 196 430 (1,826) 4,963
Interest income.................. -- (1,826) 1,826 --
Other, net....................... 463 186 (129) -- 520
Equity in earnings of
subsidiaries.................. (2,402) (1,231) -- 3,633 --
------- ------- ------- -------- --------
Income before income
taxes.................... 6,977 3,171 2,286 (3,682) 8,752
Provision for income taxes......... 1,976 720 1,055 -- 3,751
------- ------- ------- -------- --------
Net income.................. $ 5,001 $ 2,451 $ 1,231 $ (3,682) $ 5,001
======= ======= ======= ======== ========
</TABLE>
F-26
<PAGE> 109
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 28, 1997
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $42,696 $ -- $20,032 $(7,352) $55,376
Cost of goods sold................. 30,189 -- 15,410 (7,352) 38,247
------- ------ ------- ------- -------
Gross profit................ 12,507 -- 4,622 -- 17,129
Selling, general and administrative
expense.......................... 6,964 -- 2,980 -- 9,944
------- ------ ------- ------- -------
Operating income............ 5,543 -- 1,642 -- 7,185
Other expenses (income):
Interest expense................. 2,962 -- 394 (956) 2,400
Interest income.................. -- (809) (153) 956 (6)
Other, net....................... 211 15 (54) -- 172
Equity in earnings of
subsidiaries.................. (1,296) (788) -- 2,084 --
------- ------ ------- ------- -------
Income before income
taxes.................... 3,666 1,582 1,455 (2,084) 4,619
Provision for income taxes......... 1,018 286 667 -- 1,971
------- ------ ------- ------- -------
Net income.................. $ 2,648 $1,296 $ 788 (2,084) $ 2,648
======= ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 27, 1998
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $43,960 $5,099 $21,272 $(7,690) $62,641
Cost of goods sold................. 30,344 3,344 16,283 (7,690) 42,281
------- ------ ------- ------- -------
Gross profit................ 13,616 1,755 4,989 -- 20,360
Selling, general and administrative
expense.......................... 7,374 1,310 3,277 -- 11,961
------- ------ ------- ------- -------
Operating income............ 6,242 445 1,712 -- 8,399
Other expenses (income):
Interest expense................. 3,044 238 452 (1,249) 2,485
Interest income.................. -- (1,106) (151) 1,249 (8)
Other, net....................... 240 26 (99) -- 167
Equity in earnings of
subsidiaries.................. (1,654) (853) -- 2,507 --
------- ------ ------- ------- -------
Income before income
taxes.................... 4,612 2,140 1,510 (2,507) 5,755
Provision for income taxes......... 1,298 486 657 -- 2,441
------- ------ ------- ------- -------
Net income.................. $ 3,314 $1,654 $ 853 $(2,507) $ 3,314
======= ====== ======= ======= =======
</TABLE>
F-27
<PAGE> 110
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE PREDECESSOR
----------------------------------------------------------------------
FIVE MONTHS ENDED DECEMBER 30, 1995
----------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $ 1,773 $ 52 $ (774) $ 402 $ 1,453
Cash flows from investing activities:
Proceeds from asset sales.............. 31 -- 14 -- 45
Purchase of equipment.................. (630) -- (115) -- (745)
------- ---- ------ ----- -------
Net cash used by investing
activities.......................... (599) -- (101) -- (700)
Cash flows from financing activities:
Change in overdraft.................... 147 -- 2 -- 149
Proceeds from issuance of long-term
debt................................ (284) -- 37 -- (247)
Principal payments of long-term debt... (914) -- 173 (391) (1,132)
Intercompany loans..................... -- (27) 27 -- --
------- ---- ------ ----- -------
Net cash (used in) provided by
financing activities................ (1,051) (27) 239 (391) (1,230)
Effect of foreign exchange............. -- -- (178) (11) (189)
------- ---- ------ ----- -------
Increase (decrease) in cash.............. 123 25 (814) -- (666)
Cash at beginning of the period.......... 17 1 1,430 -- 1,448
------- ---- ------ ----- -------
Cash at end of the period................ $ 140 $ 26 $ 616 $ -- $ 782
======= ==== ====== ===== =======
</TABLE>
F-28
<PAGE> 111
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------------
SEVEN MONTHS ENDED DECEMBER 30, 1995
----------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $ 3,040 $(854) $ 978 $ 2,480 $ 5,644
Cash flows from investing activities:
Proceeds from asset sales.............. 22 -- -- -- 22
Purchase of equipment.................. (1,628) -- (267) -- (1,895)
Acquisitions........................... (44,620) -- -- -- (44,620)
------- ----- ------- ------- -------
Net cash used in investing
activities.......................... (46,226) -- (267) -- (46,493)
Cash flows from financing activities:
Change in overdraft.................... 124 -- -- -- 124
Net proceeds from revolving credit
facility............................ 7,643 -- (2,590) -- 5,053
Proceeds from issuance of long-term
debt................................ 35,800 -- -- -- 35,800
Principal payments of long-term debt... (9,125) -- 1,829 (1,481) (8,777)
Intercompany loans..................... -- 829 (829) -- --
Issuance of common stock............... 11,000 -- 1,000 (1,000) 11,000
Other.................................. (1,597) -- -- -- (1,597)
------- ----- ------- ------- -------
Net cash (used in) provided by
financing activities................ 43,845 829 (590) (2,481) 41,603
Effect of foreign exchange............. -- -- 7 1 8
------- ----- ------- ------- -------
Increase (decrease) in cash.............. 659 (25) 128 -- 762
Cash at beginning of the period.......... 140 26 616 -- 782
------- ----- ------- ------- -------
Cash at end of the period................ $ 799 $ 1 $ 744 $ -- $ 1,544
======= ===== ======= ======= =======
</TABLE>
F-29
<PAGE> 112
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 28, 1996
----------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $ 2,227 $ 1,204 $(1,540) $ 4,774 $ 6,665
Cash flows from investing activities:
Proceeds from asset sales.............. 20 -- 15 -- 35
Purchase of equipment.................. (3,168) -- (470) -- (3,638)
Acquisitions........................... (1,185) (1,185) (1,185) 2,370 (1,185)
------- ------- ------- ------- -------
Net cash used in investing
activities.......................... (4,333) (1,185) (1,640) 2,370 (4,788)
Cash flows from financing activities:
Change in overdraft.................... 266 -- 53 -- 319
Net proceeds from revolving credit
facility............................ -- -- (197) -- (197)
Proceeds from issuance of long-term
debt................................ -- -- -- -- --
Principal payments of long-term debt... 865 -- 611 (4,006) (2,530)
Intercompany loans..................... -- (2,125) 2,125 -- --
Issuance of common stock............... -- 3,100 37 (3,137) --
Dividends (paid) received.............. 992 (992) -- -- --
Other.................................. (118) -- -- -- (118)
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities................ 2,005 (17) 2,629 (7,143) (2,526)
Effect of foreign exchange............. -- -- 361 (1) 360
------- ------- ------- ------- -------
Increase (decrease) in cash.............. (101) 2 (190) -- (289)
Cash at beginning of the period.......... 799 1 744 -- 1,544
------- ------- ------- ------- -------
Cash at end of the period................ $ 698 $ 3 $ 554 $ -- $ 1,255
======= ======= ======= ======= =======
</TABLE>
F-30
<PAGE> 113
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 27, 1997
-------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities........................ $ 7,385 $1,644 $ 3,342 $ 675 $13,046
Cash flows from investing
activities:
Proceeds from asset sales......... 65 37 4 1 107
Purchase of equipment............. (3,074) (18) (616) -- (3,708)
Acquisitions...................... (13,703) (8,125) -- 8,125 (13,703)
------- ------ ------- ------- -------
Net cash used by investing
activities..................... (16,712) (8,106) (612) 8,126 (17,304)
Cash flows from financing
activities:
Change in overdraft............... (488) -- (51) -- (539)
Net proceeds from revolving credit
facility....................... -- (536) (909) -- (1,445)
Proceeds from issuance of
long-term debt................. 7,700 -- -- -- 7,700
Principal payments of long-term
debt........................... (722) -- (733) 143 (1,312)
Intercompany loans................ -- 452 (452) -- --
Issuance of common stock.......... 33 9,000 (1) (8,999) 33
Dividends (paid) received......... 2,269 (2,269) -- -- --
Other............................. (138) -- -- -- (138)
------- ------ ------- ------- -------
Net cash (used in) provided by
financing activities........... 8,654 6,647 (2,146) (8,856) 4,299
Effect of foreign exchange........ -- -- (96) 55 (41)
------- ------ ------- ------- -------
Increase (decrease) in cash......... (673) 185 488 -- --
Cash at beginning of the period..... 698 3 554 -- 1,255
------- ------ ------- ------- -------
Cash at end of the period........... $ 25 $ 188 $ 1,042 -- $ 1,255
======= ====== ======= ======= =======
</TABLE>
F-31
<PAGE> 114
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------------
FOR SIX MONTHS ENDED JUNE 27, 1997
----------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $ 3,194 $ 506 $ 1,290 $(14) $ 4,976
Cash flows from investing activities:
Proceeds from asset sales.............. 38 -- -- -- 38
Purchase of equipment.................. (1,242) -- (300) -- (1,542)
Acquisitions........................... (5,578) -- -- -- (5,578)
------- ----- ------- ---- -------
Net cash used in investing
activities........................ (6,782) -- (300) -- (7,082)
Cash flows from financing activities:
Change in overdraft.................... (270) -- (20) -- (290)
Net proceeds from revolving credit
facility............................ -- -- (585) -- (585)
Proceeds from issuance of long-term
debt................................ 6,000 -- -- -- 6,000
Principal payments of long-term debt... (2,960) -- (402) -- (3,362)
Proceeds from issuance of notes
payable............................. -- -- -- -- --
Intercompany loans..................... 33 -- (1) 1 33
Issuance of common stock............... -- -- -- -- --
Purchase of treasury stock............. -- -- -- -- --
Dividends (paid) received.............. 594 (594) -- -- --
Other.................................. (32) 93 (92) (1) (32)
------- ----- ------- ---- -------
Net cash (used in)/provided by
financing activities................ 3,365 (501) (1,100) -- 1,764
Effect of foreign exchange............. -- -- (47) 14 (33)
------- ----- ------- ---- -------
Increase (decrease) in cash.............. (223) 5 (157) -- (375)
Cash at beginning of the period.......... 698 3 554 -- 1,255
------- ----- ------- ---- -------
Cash at end of the period................ $ 475 $ 8 $ 397 -- $ 880
======= ===== ======= ==== =======
</TABLE>
F-32
<PAGE> 115
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------------
FOR SIX MONTHS ENDED JUNE 28, 1998
----------------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................. $(3,043) $ 1,025 $ (600) $ 5,318 $ 2,700
Cash flows from investing activities:
Proceeds from asset sales.............. 1 -- 56 -- 57
Purchase of equipment.................. (1,874) (50) (161) -- (2,085)
Acquisitions........................... -- -- (6,781) -- (6,781)
------- ------- ------- ------- -------
Net cash used in investing
activities........................ (1,873) (50) (6,886) -- (8,809)
Cash flows from financing activities:
Change in overdraft.................... (97) -- (2) -- (99)
Net proceeds from revolving credit
facility............................ 6,167 -- 635 -- 6,802
Proceeds from issuance of long-term
debt................................ -- -- -- -- --
Principal payments of long-term debt... (2,250) -- (66) -- (2,316)
Proceeds from issuance of notes
payable............................. -- -- 1,474 -- 1,474
Intercompany loans..................... -- (5,112) 5,112 -- --
Issuance of common stock............... -- 5,358 -- (5,358) --
Purchase of treasury stock............. (47) -- -- -- (47)
Dividends (paid) received.............. 1,144 (1,144) -- -- --
Other.................................. -- -- -- -- --
------- ------- ------- ------- -------
Net cash (used in)/provided by
financing activities................ 4,917 (898) 7,153 (5,358) 5,814
Effect of foreign exchange............. -- -- (165) 40 (125)
------- ------- ------- ------- -------
Increase (decrease) in cash.............. 1 77 (498) -- (420)
Cash at beginning of the period.......... 25 188 1,042 -- 1,255
------- ------- ------- ------- -------
Cash at end of the period................ $ 26 $ 265 $ 544 -- $ 835
======= ======= ======= ======= =======
</TABLE>
F-33
<PAGE> 116
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENTS AND INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited condensed consolidated financial statements presented
(Unaudited Financial Statements) as of June 27, 1998 and for the three months
ended June 28, 1997 and June 27, 1998 have been prepared by the Company and
include all of its wholly owned subsidiaries after elimination of intercompany
accounts and transactions, without audit and, in the opinion of management,
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the interim periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted; however, the
Company believes that the disclosures included are adequate to make the
information presented not misleading. The Unaudited Financial Statements should
be read in conjunction with the consolidated financial statements and the notes
included herein.
Inventories at June 27, 1998 include approximately $5,364 of raw materials,
$7,329 of work in process and $16,004 in finished goods.
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income,
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, in a
financial statement for the period in which they are recognized. The Company has
chosen to disclose Comprehensive Income, which encompasses net income and
foreign currency translation adjustments, in the Consolidated Statements of
Shareholders' Equity. Prior years have been restated to conform to the SFAS No.
130 requirements.
On May 8, 1998, the Company acquired 100% of the outstanding stock of W.
Notting Limited for approximately $6,781, of which $5,358 was paid in cash with
additional financing from the Company's revolving credit facility and the
balance was in the form of a term Promissory Note bearing interest at 8.5% and
repayable April 30, 1999. The acquisition is accounted for as a purchase and the
purchase price has been allocated based on the fair market value of the
underlying assets and liabilities. The purchase allocation is preliminary and
subject to adjustment. Goodwill totaled $1,867 on this acquisition and will be
amortized on a straight-line basis over 40 years. The consolidated financial
statements include the results of operations of W. Notting Limited subsequent to
the date of acquisition.
In July 1998, the Company issued $100,000 of Senior Subordinated Notes (the
"Notes"). Interest on the Notes will accrue from the date of issuance at 10.25%
and is payable semi-annually on January 1 and July 1, commencing January 1,
1999. The Notes are due in 2008 but may be redeemed on or after July 1, 2003 at
specified premium prices. Proceeds from the Notes were primarily used for
repayment of indebtedness, acquisition of treasury stock, and buyout of all
outstanding stock options and warrants. The buyout of stock options resulted in
a pretax compensation charge of approximately $4,500 recorded in July 1998. The
repayment of indebtedness resulted in an extraordinary charge of approximately
$600, net of tax benefit, recorded in July 1998 to write off unamortized debt
discount and deferred financing costs. The treasury stock transaction and the
buy-out of stock options were part of a recapitalization transaction (see
"Certain Transactions") in which the Company repurchased certain of its
outstanding equity securities for an aggregate purchase price of $58.3 million,
issued new shares of voting and non-voting common stock to certain existing
stockholders for $8.1 million and to new stockholders for $10.7 million, and
issued certain warrants and stock options described below. Following the
transaction new shareholders owned approximately 31% of the outstanding common
stock.
The Company concurrently entered into a new Senior Credit Facility with a
commercial lender, that provides $30,000 availability, undrawn as of the
offering date. Borrowings under the Senior Credit Facility are available for
permitted acquisitions and working capital, including letters of credit.
The Senior Credit Facility is secured by first priority liens on all
tangible and intangible personal property and real property assets of the
Company and its subsidiaries.
F-34
<PAGE> 117
SIMONDS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Credit Facility will expire in 2003, unless extended. The
interest rate per annum applicable to the Senior Credit Facility will be, at the
Company's option, either LIBOR or the greater of the prime rate or the overnight
federal funds rate plus 0.50%, in each case plus 0.125% to 2.375% depending on
the Company's financial leverage (the "Applicable Margin"). The Company will be
required to pay certain fees in connection with the Senior Credit Facility,
including a commitment fee of 0.50% initially and thereafter at a per annum rate
equal to the Applicable Margin on the unutilized portion of the revolver.
Financing costs relating to the issuance of these Notes are estimated to be
$5,000 and will be amortized over the term of the debt.
Also in July 1998 the Company issued warrants to certain shareholders to
purchase an aggregate of 4,377.81 shares of common stock at a price of $458.52
per share, and granted options to two executives to purchase an aggregate of 673
shares of common stock at $458.52 per share. Warrants for 2,180.93 shares are
exercisable immediately. Warrants for 2,196.88 shares are exercisable only if
the Company is either sold or closes an initial public offering of its common
stock, and the warrant holders do not receive certain minimum returns on their
investment in the Company's common stock. Options granted to the two executives
are immediately exercisable except for 137.40 shares that become exercisable on
January 1, 1999.
F-35
<PAGE> 118
================================================================================
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
PAGE
----
Summary................................................................. 1
Risk Factors............................................................ 11
Use of Proceeds......................................................... 15
Capitalization.......................................................... 15
Selected Pro Forma Financial Data....................................... 16
Selected Historical Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 23
Business................................................................ 27
Management.............................................................. 34
Security Ownership of Certain Beneficial Owners and Management.......... 38
Certain Transactions.................................................... 39
Description of Senior Debt.............................................. 39
Description of Exchange Notes........................................... 41
The Exchange Offer...................................................... 66
Federal Income Tax Considerations....................................... 74
Plan of Distribution.................................................... 77
Legal Matters........................................................... 77
Experts................................................................. 78
Index to Consolidated Financial Statements.............................. F-1
================================================================================
================================================================================
$100,000,000
SIMONDS
INDUSTRIES INC.
10 1/4% SENIOR SUBORDINATED
NOTES DUE 2008
------------
PROSPECTUS
, 1998
------------
================================================================================
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.3 Consent of Arthur Andersen LLP
II-1
<PAGE> 120
SIGNATURES
Simonds Industries Inc. Pursuant to the requirements of the Securities
Act, the Registrant has duly caused this Amendment to the Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Fitchburg, Commonwealth of Massachusetts, on the 21st
day of October, 1998.
SIMONDS INDUSTRIES INC.
By: /s/ ROSS GEORGE
----------------------------------
Ross George
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on the 21st day of October, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ ROSS GEORGE President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Ross George
/s/ JOSEPH SYLVIA Executive Vice President, Chief Financial Officer
- --------------------------------------------------- and Director (principal financial and accounting
Joseph Sylvia officer)
* Director
- ---------------------------------------------------
Habib Gorgi
* Director
- ---------------------------------------------------
Bernard Buonanno III
*By: /s/ JOSEPH SYLVIA
----------------------------------------------
Joseph Sylvia
Attorney-in-Fact
</TABLE>
II-2
<PAGE> 121
SIGNATURES
Armstrong Manufacturing Company. Pursuant to the requirements of the
Securities Act, the Registrant has duly caused this Amendment to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fitchburg, Commonwealth
of Massachusetts, on the 21st day of October, 1998.
ARMSTRONG MANUFACTURING COMPANY
By: /s/ ROSS GEORGE
----------------------------------
Ross George
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on the 21st day of October, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ ROSS GEORGE President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Ross George
/s/ JOSEPH SYLVIA Chief Financial Officer and Director (principal
- --------------------------------------------------- financial and accounting officer)
Joseph Sylvia
* Director
- ---------------------------------------------------
John F. Wilson
*By: /s/ JOSEPH SYLVIA
----------------------------------------------
Joseph Sylvia
Attorney-in-Fact
</TABLE>
II-3
<PAGE> 122
SIGNATURES
Simonds Holding Company, Inc. Pursuant to the requirements of the
Securities Act, the Registrant has duly caused this Amendment to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fitchburg, Commonwealth
of Massachusetts, on the 21st day of October, 1998.
SIMONDS HOLDING COMPANY, INC.
By: /s/ JOSEPH L. SYLVIA
----------------------------------
Joseph L. Sylvia
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on the 21st day of October, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ JOSEPH L. SYLVIA President, Treasurer and Director (principal
- --------------------------------------------------- executive officer and principal financial and
Joseph L. Sylvia accounting officer)
* Director
- ---------------------------------------------------
David P. Witman
* Director
- ---------------------------------------------------
Joan Dobrzynski
* Director
- ---------------------------------------------------
Barbara Steen
*By: /s/ JOSEPH SYLVIA
----------------------------------------------
Joseph Sylvia
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 123
SIGNATURES
Simonds Industries FSC, Inc. Pursuant to the requirements of the
Securities Act, the Registrant has duly caused this Amendment to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fitchburg, Commonwealth
of Massachusetts, on the 21st day of October, 1998.
SIMONDS INDUSTRIES FSC, INC.
By: /s/ ROSS GEORGE
----------------------------------
Ross George
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on the 21st day of October, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ ROSS GEORGE President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Ross George
/s/ JOSEPH SYLVIA Treasurer and Director (principal financial and
- --------------------------------------------------- accounting officer)
Joseph Sylvia
* Director
- ---------------------------------------------------
Francisco J.T. Rivera
*By: /s/ JOSEPH SYLVIA
----------------------------------------------
Joseph Sylvia
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 124
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.3 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Simonds Industries Inc.:
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
October 19, 1998
