<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AEP INDUSTRIES INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3081 22-1916107
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
</TABLE>
125 PHILLIPS AVENUE
SOUTH HACKENSACK, NEW JERSEY 07606-1546
(201) 641-6600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
PAUL M. FEENEY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
AEP INDUSTRIES INC.
125 PHILLIPS AVENUE
SOUTH HACKENSACK, NEW JERSEY 07606-1546
(201) 641-6600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of
Agent for Service)
------------------------------
COPY TO:
PAUL E. GELBARD, ESQ.
BACHNER, TALLY, POLEVOY & MISHER LLP
380 MADISON AVENUE
NEW YORK, NEW YORK 10017-2590
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
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 of the earlier effective registration statement for the
same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
9.875% Senior Subordinated Notes $200,000,000
due 2007....................... Principal Amount 100% $200,000,000 $59,000
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--DATED FEBRUARY 13, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
AEP INDUSTRIES INC.
OFFER TO EXCHANGE $200,000,000 OF ITS
9.875% SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR $200,000,000 OF ITS OUTSTANDING
9.875% SENIOR SUBORDINATED NOTES DUE 2007
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
------------------------
AEP INDUSTRIES INC. (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 of up to $200,000,000 principal amount of 9.875% Senior
Subordinated Notes due 2007 (the "Exchange Notes") of the Company for an
identical face amount of the issued and outstanding 9.875% Senior Subordinated
Notes due 2007 (the "Old Notes" and together with the Exchange Notes the
"Notes") of the Company from the Holders (as defined) thereof. As of the date of
this Prospectus, there are $200,000,000 aggregate principal amount of the Old
Notes outstanding. The terms of the Exchange Notes are identical in all material
respects to the Old Notes except that the Exchange Notes have been registered
under the Securities Act of 1933, as amended (the "Securities Act") and
therefore will not bear legends restricting their transfer and will not contain
certain provisions providing for an increase in the interest rate on the Old
Notes under certain circumstances described in the Registration Rights Agreement
(as defined), which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer.
Interest on the Exchange Notes will be payable semi-annually on May 15 and
November 15 of each year, commencing on May 15, 1998. The Exchange Notes will
mature on November 15, 2007. Except as described below, the Company may not
redeem the Exchange Notes prior to November 15, 2002. On or after such date, the
Company may redeem the Exchange Notes, in whole or in part, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time on or prior to November 15,
2000, the Company may, subject to certain requirements, redeem up to 35% of the
aggregate principal amount of the Exchange Notes originally issued with the net
proceeds of one or more Equity Offerings (as defined), at a price equal to
109.875% of the aggregate principal amount to be redeemed together with accrued
and unpaid interest, if any, to the date of redemption; provided that at least
$100,000,000 of the aggregate principal amount of the Exchange Notes remains
outstanding immediately after each such redemption. The Exchange Notes will not
be subject to any sinking fund requirements. Upon the occurrence of a Change of
Control (as defined), the Company will be required to make an offer to purchase
the Exchange Notes at a price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Exchange Notes."
The Exchange Notes will be unsecured obligations of the Company subordinate
in right of payment to all existing and future Senior Debt (as defined) of the
Company, including obligations under the Credit Agreement (as defined), and will
rank senior to all other Subordinated Indebtedness (as defined) of the Company.
As of October 31, 1997, after giving effect to the issuance of the Notes, the
aggregate amount of the Company's outstanding Senior Debt would have been
approximately $185 million (excluding unused commitments) and the Company would
have had no senior subordinated indebtedness outstanding other than the Notes.
See "Description of the Exchange Notes--Subordination."
The Old Notes were issued and sold on November 19,1997 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement (as defined).
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes, and
neither such holder nor any such other person is engaging in, or intends to
engage in, a distribution of such Exchange Notes. However, the Company has not
sought and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, 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 stales 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 any resale of Exchange Notes
received in exchange for such Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that for a period of 120 days after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. 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. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date (as defined). Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay all of the expenses incident to the Exchange Offer.
SEE "RISK FACTORS," BEGINNING ON PAGE 13, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE
OFFER AND 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 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>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made.
The Company is presently subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Commission.
The Registration Statement, such reports and other information can be inspected
and copied at the Public Reference Section of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at
regional public reference facilities maintained by the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material, including copies of all or any portion of the Registration
Statement, can be obtained from the Public Reference Section of the Commission
at prescribed rates. Such material may also be accessed electronically by means
of the Commission's home page on the Internet (http://www.sec.gov). The
Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq").
Reports, proxy statements and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006-1500.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED THEREIN BY
REFERENCE) ARE AVAILABLE UPON REQUEST FROM AEP INDUSTRIES INC., 125 PHILLIPS
AVENUE, SOUTH HACKENSACK, NEW JERSEY 07606-1546 (TELEPHONE: (201) 641-6600). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
, 1998.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND UNAUDITED PRO
FORMA FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN
THIS OFFERING MEMORANDUM. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN
THIS OFFERING MEMORANDUM TO "AEP" AND THE "COMPANY" REFER TO AEP INDUSTRIES INC.
AND ITS SUBSIDIARIES.
THE COMPANY
AEP Industries Inc. (the "Company") is a leading worldwide manufacturer of
plastic packaging films. Incorporating both cast and blown film technologies,
the Company manufactures an extensive range of specialty and standard flexible
packaging products for use in the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries. The Company currently has manufacturing operations
located in 11 countries in North America, Europe and the Asia/Pacific region.
In October 1996, in order to establish a worldwide market presence,
diversify its product lines and strengthen market share in certain of its
existing businesses, the Company acquired the global packaging operations of
Borden, Inc. ("Borden") in exchange for approximately $280 million (including
the assumption of certain indebtedness and other purchase price adjustments) and
2.4 million shares of common stock of the Company, $.01 par value ("Common
Stock"). The addition of Borden's global packaging operations (the "Borden
Acquisition") broadened the Company's product portfolio, established the Company
as the largest manufacturer of polyvinyl chloride food wrap and polyethylene
stretch wrap in North America and worldwide, and positioned the Company as a
leader in a number of other markets, including processed cheese films and twist
wrap. Moreover, the Company has realized economies of scale and other synergies
which have enabled it to significantly reduce certain operating expenses of the
combined business.
The following table summarizes the Company's product lines:
<TABLE>
<CAPTION>
PRODUCT LOCATION MATERIAL USES
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Polyvinyl chloride wrap North America, Europe, Polyvinyl chloride Meat and food wrap,
Asia/Pacific institutional films, twist
wrap
Stretch (pallet) wrap North America, Europe, Polyethylene Pallet wrap
Asia/Pacific
Industrial films North America, Polyethylene Drum, box, carton, and pail
Asia/Pacific liners; bags for furniture
and mattresses; films to
cover high value products;
agricultural films
Printed and converted films Europe, Asia/Pacific Primarily polyethylene Printed, laminated and/ or
converted films providing
flexible packaging to
consumer markets
Polypropylene and barrier North America, Europe Polypropylene Polyethylene Packaging of baked goods,
films cheese, candies, and salted
snacks; used in tape,
diaper tabs, box windows
and graphic arts
Other products and North America, Europe, Various thermoplastics and Manufactured and resale
specialty films Asia/Pacific, South Africa machinery items used in packaging
</TABLE>
3
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include the following:
- LEADING MARKET SHARES. The Company is a market leader in most of its core
product lines. The Company believes it now holds the number one market
share, on a worldwide basis, in polyvinyl chloride food wrap and
polyethylene stretch wrap, is a market leader in Europe for processed
cheese films and twist wrap and holds the number two market share position
for industrial films in North America.
- PRODUCT LINE AND GEOGRAPHIC DIVERSITY. The Company manufactures a broad
array of packaging films, including specialty and commodity films, thereby
enabling the Company to satisfy the specific needs of each of its
customers and reduce its dependence on any single product. For example,
the Company's stretch wrap business, which accounted for approximately 40%
of total sales prior to the Borden Acquisition, accounted for 24% of total
sales during the fiscal year ended October 31, 1997 ("Fiscal 1997"), and
no single product line accounted for more than 30% of the Company's sales
during Fiscal 1997. Because of its broad range of products, the Company is
able to bundle various products and offer new and existing customers
one-stop shopping, thereby affording it a greater opportunity to increase
market share. In addition, the location of the Company's operations
reduces its dependence on any single geographic market. Primarily a North
American stretch wrap and industrial films manufacturer prior to the
Borden Acquisition, the Company now manufactures products for a variety of
packaging applications and has a substantial presence in Europe and a
growing presence in the Asia/Pacific region, as evidenced by the fact that
38% of the Company's sales during Fiscal 1997 were generated outside North
America.
- LOW COST PRODUCER. The Company believes its production costs are among the
lowest in the industry. The Company's favorable cost position is the
result of several important factors, many of which were enhanced by the
Borden Acquisition. The Company's position as North America's largest
stretch wrap and second largest industrial films manufacturer, as well as
its long-standing relationships with its suppliers, have enabled the
Company to negotiate favorable resin prices. Since resin typically
comprises approximately 60% of a manufacturer's costs of goods sold, the
Company's purchasing leverage ensures that it is able to offer competitive
pricing. In addition, the Company uses highly automated manufacturing
equipment and continually seeks to consolidate less efficient operations
and allocate production among the Company's various plants in order to
maximize capacity utilization. These efforts have enabled the Company to
significantly reduce labor costs, waste and production time.
- STRATEGICALLY LOCATED MANUFACTURING SITES. The strategic locations of the
Company's large, well-integrated plants provide it with unique cost
advantages, including reduced transportation and warehousing costs. In
addition, the proximity of the Company's manufacturing sites to major
markets enables the Company to rapidly respond to changing customer needs
and market conditions.
- HIGH-QUALITY PRODUCTS AND SERVICES; STRONG RELATIONSHIPS WITH
CUSTOMERS. The Company has adopted strict quality control systems and
procedures which it regularly reviews, updates and modifies as
appropriate. The Company believes that its ability to consistently
manufacture high-quality products and provide timely delivery and superior
customer service is a critical component of its success. As a result of
its focus on quality and service, the Company believes it has developed a
reputation in the industry as a dependable manufacturer of a wide variety
of high-quality, high-performance products, which makes the Company the
supplier of choice for many of its customers and has enabled it to develop
long-standing relationships with them.
- CUSTOMER-ORIENTED RESEARCH AND DEVELOPMENT. The Company's research and
development efforts are structured to anticipate and respond to evolving
customer needs. The principal efforts of the
4
<PAGE>
research and development department are directed to assisting sales
personnel in designing specialty products to meet individual customer's
needs and reformulating existing products to improve quality and/or
performance. These efforts have resulted in the development of a number of
new products and improvements to existing products, including the
Company's improvement to its cold seal wrap technology, a system which
permits automatic sealing of films without application of glue or
significant heat. The Company's research and development team also seeks
to reduce production costs and maintain and improve quality control in the
Company's manufacturing operations.
- PROVEN MANAGEMENT TEAM. The Company, which was founded by its current
chief executive officer in 1970, has assembled a superior management team
with a strong track record and an average of 25 years of experience in the
plastic packaging industry. The current management team has been
successful in diversifying product lines, increasing sales and market
share, strengthening customer and supplier relationships, improving
manufacturing efficiencies and productivity, selecting and integrating
strategic acquisitions, and developing new technologies to enhance the
competitive strengths of the Company.
BUSINESS STRATEGY
The Company's goals are to build and maintain leading market positions in a
broad range of products, provide superior quality and customer service, expand
its markets worldwide and continue to serve as a low-cost producer. The Company
intends to achieve these goals through application of the following strategies:
- INCREASE MARKET SHARE. The Company pursues opportunities to increase
market share and improve profitability through (i) the expansion of its
product lines, (ii) penetration into new geographic markets, (iii) the
development of opportunities to cross-market and bundle multiple products
to new and existing customers and (iv) small strategic acquisitions. For
example, the Company is continuing to develop new barrier, high
performance and cold seal films to further penetrate these high growth
and/or high margin markets. In addition, the Company will continue to
pursue opportunities for additional growth in additional geographic
markets for plastic films, including Eastern Europe, Mexico, Central
America, the Caribbean, and the Asia/Pacific region, where the Company
believes that the opportunities for growth and/or competitive conditions
are favorable. The Company may also seek small strategic acquisitions,
particularly when they provide opportunities to consolidate operations and
decrease unit production costs, such as the recent acquisition of ICI's
Visqueen industrial films operations in Australia, which will enable the
Company to consolidate several operations in Australia and eliminate
duplication of facilities, equipment and personnel.
- REDUCE COSTS. In order to maintain and improve its cost position, the
Company continues to identify opportunities for ongoing cost reduction. In
connection with the Borden Acquisition and in response to overcapacity in
the stretch wrap industry and other market conditions, the Company has (i)
reduced its labor force by approximately 500 people (10.9% of its total
workforce); (ii) closed its North Andover manufacturing facility for
polyvinyl chloride food wrap and consolidated those operations at its
Griffin, Georgia facility; and (iii) reduced its excess stretch wrap
capacity by an aggregate of approximately 103 million pounds through a
combination of permanently eliminating, temporary idling and reallocating
stretch wrap capacity, thereby improving efficiency. Some of these actions
were consummated late in Fiscal 1997 and had associated costs to the
Company in this period. Accordingly, the Company expects a portion of the
benefits of these actions will not be realized until its fiscal year
ending October 31, 1998 ("Fiscal 1998"). In addition, the Company
continuously scrutinizes its manufacturing processes and overhead
infrastructure to conserve material and energy, reduce set-up time and
lower overhead expenses. To this end, the Company has identified
additional cost saving opportunities it expects to implement in Fiscal
1998,
5
<PAGE>
including reformulating certain products to reduce raw material costs,
further rationalizing its salesforce to reduce selling expenses per unit
and further streamlining its distribution systems to reduce delivery
costs.
- DIVEST NON-CORE PRODUCT LINES. In order to concentrate on its core
business and reduce costs, the Company seeks to consolidate certain of its
existing product lines and divest itself of businesses which do not fit
into its overall strategy for growth. To this end, the Company is
endeavoring to sell certain businesses acquired from Borden, namely the
rigids businesses and the Company's operations in South Africa.
The Company was organized under the laws of the State of New Jersey in 1970
and reincorporated under the laws of the State of Delaware in 1985. Its
principal executive offices are located at 125 Phillips Avenue, South
Hackensack, New Jersey 07606, and its telephone number at that address is (201)
641-6600.
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer......... The Company is offering to exchange pursuant to the Exchange
Offer up to $200,000,000 aggregate principal amount of its new
9.875% Subordinated Notes due 2007 (the "Exchange Notes") for a
like aggregate principal amount of its outstanding 9.875%
Senior Subordinated Notes due 2007 (the "Old Notes" and
together with the Exchange Notes, the "Notes"). The terms of
the Exchange Notes are identical in all material respects
(including principal amount, interest rate) to the terms of the
Old Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are freely
transferrable by Holders (as defined) thereof (other than as
provided herein), and are not subject to any covenant regarding
registration under the Securities Act. See "The Exchange
Offer."
Interest Payments.......... Interest on the Exchange Notes shall accrue from the last
interest payment date (May 15 or November 15) on which interest
was paid on the Notes so surrendered or, if no interest has
been paid on such Notes, from November 19, 1997 (the "Interest
Payment Date").
Minimum Condition.......... The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered for
exchange.
Expiration Date; Withdrawal
of Tender................ The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1998, unless the Exchange Offer is
extended, in which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is extended.
Tenders may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
Exchange Date.............. The date of acceptance for exchange of the Old Notes will be
the fourth business day following the Expiration Date.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. The Company currently
expects that each of the conditions will be satisfied and that
no waivers will be necessary. See "The Exchange Offer--Certain
Conditions to the Exchange Offer." The Company reserves the
right to terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile, together with
the Old Notes and any other required documentation, to the
Exchange Agent (as defined) at the address set forth therein.
See "The Exchange Offer--Procedures for Tendering Old Notes"
and "Plan of Distribution."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds............ There will be no proceeds to the Company from the exchange of
Notes pursuant to the Exchange Offer.
Federal Income Tax
Consequences............. The exchange of Notes pursuant to the Exchange Offer should not
be a taxable event for federal income tax purposes. See
"Certain U.S. Federal Income Tax Consequences."
Special Procedures for Any beneficial owner whose Old Notes are registered in the name
Beneficial Owners........ 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. If such beneficial owner
wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering the Old Notes, either make
appropriate arrangements to register ownership of the Old 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. See "The
Exchange Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old Notes and
Procedures............... whose Old Notes are not immediately available or who cannot
deliver their Old Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange
Notes.................... The Company will accept for exchange any and all Old 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--Acceptance of Old Notes for Exchange; Delivery of
Exchange Notes."
Effect on Holders of Old As a result of the making of, and upon acceptance for exchange
Notes.................... of all validly tendered Old Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a covenant
contained in the Registration Rights Agreement (the
"Registration Rights Agreement"), dated November 19, 1997,
among the Company and J.P. Morgan & Co., Morgan Stanley Dean
Witter and Salomon Brothers Inc (the "Initial Purchasers") and,
accordingly, there will be no increase in the interest rate on
the Old Notes pursuant to the terms of the Registration Rights
Agreement, and the holders of the Old Notes will have no
further registration or other rights under the Registration
Rights Agreement. Holders of the Old Notes who do not tender
their Old Notes in the Exchange Offer will continue to hold
such Old Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture, dated
November 19, 1997, between the Company and The Bank of New York
relating to the Old Notes and the Exchange Notes (the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
"Indenture"), except for any such rights under the Registration
Rights Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered Old Notes
pursuant to, the Exchange Offer. All untendered Old Notes will
continue to be subject to the restrictions on transfer provided
for in the Old Notes and in the Indenture. To the extent that
Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered Old Notes could be adversely
affected.
Consequence of Failure to
Exchange................. Holders of Old Notes that do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Notes as
set forth in the legend thereon as a consequence of the offer
or sale of the Old Notes pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of
the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the
Old Notes under the Securities Act.
Exchange Agent............. The Bank of New York is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer. See
"The Exchange Offer--Exchange Agent."
TERMS OF THE EXCHANGE NOTES
Securities Offered......... $200,000,000 of 9.875% Senior Subordinated Notes due 2007.
Maturity Date.............. November 15, 2007.
Interest Payment Dates..... May 15 and November 15, commencing May 15, 1998.
Optional Redemption........ The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after November 15, 2002, at
the redemption prices set forth herein, plus accrued and unpaid
interest to the redemption date. In addition, on or prior to
November 15, 2000, the Company may redeem up to 35% of the
Notes originally issued at a redemption price equal to 109.875%
of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, with the net cash
proceeds of one or more Equity Offerings, provided, however,
that at least $100.0 million in aggregate principal amount of
Notes shall remain outstanding after each such redemption.
Ranking.................... The Notes will be unsecured obligations of the Company,
subordinated in right of payment to all existing and future
Senior Debt of the Company, including all obligations under the
Credit Agreement. As of October 31, 1997, after giving pro
forma effect to the Offering and the application of the net
proceeds therefrom, the Company would have had approximately
$185 million of Senior Debt outstanding (including
approximately $128.0 million outstanding under the Credit
Agreement).
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Change of Control.......... Upon the occurrence of a Change of Control, the Company will be
required to make an offer to repurchase all outstanding Notes
at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the
purchase date. See "Description of Notes--Covenants--Change of
Control." The terms of the Credit Agreement may limit the
Company's ability to repurchase any Notes upon a Change of
Control. In addition, there can be no assurance that upon a
Change of Control the Company will have sufficient funds to
repurchase any of the Notes.
Certain Covenants.......... The Indenture will contain certain covenants that, among other
things, limit the ability of the Company or any of its
Restricted Subsidiaries to incur additional Indebtedness, make
certain Restricted Payments and Investments, create Liens,
permit dividend or other payment restrictions to apply to
Restricted Subsidiaries, enter into certain transactions with
Affiliates or consummate certain merger, consolidation or
similar transactions. In addition, in certain circumstances,
the Company will be required to offer to purchase Notes at 100%
of the principal amount thereof with the net proceeds of
certain asset sales. These covenants are subject to a number of
significant exceptions and qualifications. See "Description of
Notes."
Absence of Market.......... The Exchange Notes are new securities for which there is
currently no established market. 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 a
listing on a securities exchange of the Exchange Notes.
</TABLE>
RISK FACTORS
Holders of the Old Notes should carefully consider the specific matters set
forth under "Risk Factors" as well as the other information and data included in
this Prospectus, including the documents incorporated herein by reference, prior
to tendering Old Notes in the Exchange Offer.
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary historical and unaudited pro
forma consolidated financial data, which should be read in connection with the
Company's Consolidated Financial Statements and the Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary statement of operations data for the years ended
October 31, 1993 and 1994 have been derived from the Company's audited financial
statements. The summary balance sheet data as of October 31, 1997 and statement
of operations data for the years ended October 31, 1995, 1996 and 1997, have
been derived from the Company's audited financial statements included elsewhere
herein. The accompanying unaudited Pro Forma statement of operations and balance
sheet data are based upon the consolidated financial statements of the Company
included elsewhere herein, and adjusted to give effect to the sale of the Old
Notes, the application of the net proceeds therefrom and the amendment to the
Credit Agreement (defined below) as if each such event had occurred on November
1, 1996. See "Description of Credit Facilities--Credit Agreement--Amendment to
Credit Agreement."
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED OCTOBER
YEARS ENDED OCTOBER 31, 31,
----------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 (1)
--------- --------- --------- --------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Dollars in thousands
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 153,307 $ 184,669 $ 242,886 $ 270,534 $ 759,123 $ 759,123
Gross profit..................... 43,839 54,068 60,373 59,770 159,732 159,732
Income from operations........... 14,277 19,734 25,224 15,538 39,852 39,852
Interest expense................. 1,897 1,456 3,209 11,517 30,061 37,658
Other (income) expense........... 474 (523) (384) (390) (3,475) (3,475)
Pre-tax income................... 11,906 18,801 22,399 4,411 13,266 5,669
Income tax provision............. 4,572 7,397 8,723 1,858 4,695 1,656
Net income....................... 6,880 11,404 13,486 2,553 8,571 4,013
OTHER FINANCIAL DATA:
EBITDA (2)....................... $ 20,678 $ 28,537 $ 35,430 $ 28,462 $ 75,978 $ 75,978
EBITDA margin (2)................ 13.5% 15.5% 14.6% 10.5% 10.0% 10.0%
Depreciation and amortization.... $ 6,875 $ 8,280 $ 9,822 $ 12,534 $ 32,651 $ 32,651
Capital expenditures............. 9,319 28,007 28,402 14,040 39,352 39,352
RATIOS:
Ratio of earnings to fixed
charges (3).................... 5.43 9.56 6.49 1.36 1.42 1.14
Ratio of EBITDA to interest
expense........................ 10.9 19.6 11.04 2.47 2.53 2.02
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-------------------------
<S> <C> <C>
BALANCE SHEET DATA: ACTUAL PRO FORMA (4)
--------- --------------
Working capital....................................................................... $ 56,045 $ 56,045
Total assets.......................................................................... $ 613,083 $ 621,083
Total debt (including current portion)................................................ $ 377,006 $ 385,006
Stockholders' equity.................................................................. $ 87,982 $ 87,982
</TABLE>
- ------------------------
(1) Interest Expense for the year ended October 31, 1997 would have been $7.6
million higher on a pro forma basis giving effect to the refinancing as if
it had occurred on November 1, 1996. The refinancing resulted in a change of
the interest rate from an average rate of 6.29% under the Credit Agreement
to 9.875% under the Notes.
(2) EBITDA is defined as pre-tax income before interest, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt. However, EBITDA
should not be considered in isolation as a substitute for net income or cash
flow data determined in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity. In
addition, this measure of EBITDA may not be comparable to similar measures
reported by other
11
<PAGE>
companies. EBITDA margin is calculated as the ratio of EBITDA to net sales
for the period. For Fiscal 1996 and 1997, amortization included $2.9 million
and $3.3 million related to write off of prior unamortized debt costs.
(3) For purposes of the ratio of earnings to fixed charges, earnings are
calculated as the Company's income before extraordinary charge and income
taxes, plus fixed charges. Fixed charges include interest expense on all
indebtedness (including amortization of deferred financing costs) and the
component of operating lease rental expense that management of the Company
believes is representative of the interest component of rent expense.
(4) Adjusted to give effect to the sale of the Old Notes and the application of
the net proceeds therefrom to reduce a portion of the outstanding
indebtedness under that certain Term Loan and Revolving Credit Facility (the
"Credit Agreement"), dated October 16, 1996, as amended as of October 24,
1997, among the Company as borrower, the lending banks and Morgan Guaranty
and Trust Company as agent for the respective lending banks. See "Use of
Proceeds," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
12
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET
FORTH BELOW AS WELL AS THE OTHER INFORMATION SET FORTH, OR INCORPORATED BY
REFERENCE, IN THIS PROSPECTUS BEFORE DECIDING TO TENDER OLD NOTES IN THE
EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE GENERALLY APPLICABLE TO THE
OLD NOTES AS WELL AS THE EXCHANGE NOTES.
LEVERAGE; RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
As of October 31, 1997, on a pro forma basis giving effect to the sale of
the Old Notes and the application of the net proceeds therefrom, the Company's
total consolidated indebtedness and total shareholders' equity was $319.5
million and $88.0 million, respectively, and total indebtedness represented 78%
of total capitalization.
The degree to which the Company is leveraged could have important
consequences to the holders of Notes, including: (i) the Company's ability to
obtain additional financing for working capital (including inventory financing),
capital expenditures, acquisitions or other purposes may be restricted; (ii) a
substantial portion of the Company's cash flow from operations will be required
to be used for debt service; (iii) the Company's leveraged position may make it
more vulnerable to economic downturns and may limit its ability to withstand
competitive pressures; and (iv) the Company's ability to capitalize on
significant business opportunities may be limited. In addition, the Company's
operating flexibility with respect to certain business matters will be limited
by covenants contained in the Indenture and the Credit Agreement.
As a result of the Company's high degree of leverage and the effect on net
sales that occurred as a result of overcapacity in the domestic stretch wrap
industry, the Company believed there was a substantial likelihood that it would
fail to maintain certain financial ratios, including minimum fixed charge
coverage and leverage ratios, at the levels required by the Credit Agreement.
See "--Competition" below. The Company has received a waiver relating to such
ratios and has entered into an amendment to the Credit Agreement. The amendment,
among other things, modifies the financial covenants to require maintenance of
such ratios at levels which the Company believes it can achieve, although there
can be no assurance in this regard. See "Description of Credit
Facilities--Amendment to Credit Agreement."
The Company believes that, based on its current level of operations, it will
have sufficient capital to carry on its business and will be able to meet its
scheduled debt service requirements. However, there can be no assurance that the
future cash flow of the Company will be sufficient to meet the Company's
obligations and commitments, including its obligations under the Notes. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its indebtedness and to meet its other commitments, the Company will
be required to adopt one or more alternatives, such as refinancing or
restructuring its indebtedness, selling material assets or operations or seeking
to raise additional debt or equity capital. There can be no assurance that any
of these actions could be effected on a timely basis or on satisfactory terms or
that these actions would enable the Company to continue to satisfy its capital
requirements. In addition, the terms of existing or future debt agreements,
including the Indenture and the Credit Agreement, may prohibit the Company from
adopting any of these alternatives. See "Description of Credit Facilities" and
"Description of Notes."
The Indenture contains certain covenants that restrict, among other things,
the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, consummate certain asset
sales or enter into certain transactions with affiliates and impose restrictions
on the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any person or sell, assign, transfer, lease,
convey, or otherwise dispose of all or substantially all of the assets of the
Company. A breach of any of these covenants could result in a default under the
Indenture. In the event of any event of default under the Indenture, the
Noteholders could elect
13
<PAGE>
to declare all amounts outstanding thereunder, together with accrued and unpaid
interest, to be immediately due and payable. However, the ability of the
Noteholders to realize any recovery in respect of this action, as well as their
ability to pursue their other rights and remedies upon the occurrence of a
default under the Indenture, is limited by the subordination provisions
applicable to the Notes set forth in the Indenture. See "--Subordination of the
Notes," "Description of Credit Facilities" and "Description of
Notes--Covenants."
SUBORDINATION OF THE NOTES
The Notes are subordinated in right of payment to all Senior Debt of the
Company, including all obligations under the Credit Agreement. In the event of
the bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all Senior
Debt of the Company has been paid in full, and sufficient assets may not remain
to pay amounts due on any or all of the Notes then outstanding. In addition,
holders of Designated Senior Debt of the Company could prohibit payments of
amounts due to holders of the Notes under certain circumstances. See
"Description of Notes--Ranking." As of October 31, 1997, on a pro forma basis
after giving effect to the sale of the Old Notes and the application of the net
proceeds therefrom, the Company would have had approximately $185 million of
Senior Debt outstanding. In addition, the Company could have borrowed up to $100
million of additional Senior Debt under existing credit facilities. The Notes
are also effectively subordinated to all future secured indebtedness of the
Company, if any, to the extent of the value of the assets securing such
indebtedness. Under the terms of the Indenture, the Company is permitted,
subject to certain limitations, to incur additional Senior Debt. See
"Description of Credit Facilities," "Description of Notes--Ranking" and
"--Covenants."
Pursuant to the Credit Agreement, a default in any payment under, or the
occurrence of any other event or condition which causes or permits the
acceleration of, the Notes constitutes an event of default under the Credit
Agreement which would permit the lenders under the Credit Agreement to prohibit
payments of amounts due under the Notes for certain periods of time. It is
likely that the documents governing any future Senior Debt will contain similar
provisions. Therefore, the occurrence of an event of default under the Indenture
will constitute an event of default under the Credit Agreement and will likely
constitute an event of default with respect to other Senior Debt, if any. By
reason of the subordination provisions described above, the ability of the
Trustee to pursue, on behalf of the holders of the Notes, the rights and
remedies provided to the holders of the Notes by the Indenture upon the
occurrence of a default will be severely restricted.
The Notes are not guaranteed by the Company's direct or indirect
subsidiaries. As a result, any right of the Company or its creditors, including
holders of the Notes, to participate in the assets of any such subsidiary upon
its liquidation or reorganization will be subject to the prior claims of that
subsidiary's creditors, including holders of its indebtedness and trade
creditors. Accordingly, the Notes are effectively subordinated to all existing
and future indebtedness and other obligations, including trade payables, of the
Company's subsidiaries.
RAW MATERIAL AVAILABILITY AND PRICE VOLATILITY
The principal raw materials used in the Company's products are polyethylene,
polypropylene and polyvinyl chloride resins (collectively, "resins"). The
Company's financial performance is therefore dependent in large part on the
market for plastic resins. The capacity, supply and demand for plastic resins
and the petrochemical intermediates from which they are produced are subject to
substantial cyclical price fluctuations and other market disturbances, including
shortages of supply. Consequently, plastic resin prices may fluctuate as a
result of changes in natural gas and crude oil prices and the capacity, supply
and demand for plastic resins and the petrochemical intermediates from which
they are produced. There can be no assurance that the prices of the Company's
raw materials will not increase in the future or that the Company will be able
to pass on any such increases to its customers. A significant increase in the
price of
14
<PAGE>
raw materials that cannot be passed on to customers could have a material
adverse effect on the Company's results of operations and financial condition.
COMPETITION
The business of supplying plastic packaging products is extremely
competitive and the Company faces competition from a substantial number of
companies engaged in similar and alternative packaging products businesses. Some
of the Company's competitors are subsidiaries or divisions of large
international, diversified companies with extensive production facilities, well
developed sales and marketing staffs and substantially greater financial
resources than the Company.
Because many of the Company's products are available from a number of local
and national manufacturers, competition is highly price sensitive and margins
are relatively low. The Company believes it also competes on the basis of
quality, service (including its ability to supply customers in a timely fashion)
and product differentiation.
The Company believes that there are few barriers to entry into many of the
Company's markets, enabling new and existing competitors to rapidly affect
market conditions. As a result, the Company may experience increased competition
resulting from the introduction of products by new manufacturers. In addition,
in several of the Company's markets, products are generally regarded as a
commodity. As a result, competition in such markets is based almost entirely on
price and service.
During Fiscal 1997, the Company experienced extreme competition in the
stretch wrap business, resulting in reduced sales volume and profit margins
(measured in the industry as the number of cents per pound above manufacturing
and raw material costs). The Company believes that such reduced sales and
margins were primarily the result of overcapacity in the market. There can be no
assurance that such competitive pressures will not continue or that the Company
will be able to reduce costs or maintain or increase its market share in this
competitive environment. See "--Raw Material Availability and Price Volatility"
above. Moreover, there can be no assurance that the Company will be able to
continue to compete effectively with other companies in its market, or that
other companies will not develop products which are superior to the Company's or
which achieve greater market penetration.
INTEGRATION OF ACQUISITIONS
While the Company believes it has been successful in integrating certain of
the operations of Borden into the operations of the Company, no assurance can be
given that the Company will be successful at integrating the remaining
operations or that the anticipated strategic benefits of the Borden Acquisition
or any future acquisitions will be realized. Acquisitions may involve a number
of special risks, including, but not limited to, adverse short-term effects on
the Company's reported operating results, diversion of management's attention,
standardization of accounting systems, dependence on retaining, hiring and
training key personnel and unanticipated problems or legal liabilities.
Moreover, the Borden Acquisition involves the integration of foreign operations
into the operations of the Company which may involve additional challenges. If
the Company is unable to successfully integrate Borden or any future acquisition
for these or other reasons, it could have a material adverse affect on the
Company's results of operations and financial condition. In addition, as a
result of the Company's rapid growth through acquisitions, past operating
history is not necessarily indicative of future results.
POTENTIAL RISKS RELATED TO FOREIGN OPERATIONS
In Fiscal 1997, 38% of the Company's net sales were derived from operations
conducted outside North America. Such sales are principally in currencies other
than United States dollars. Foreign operations are subject to certain risks that
can materially affect the sales, profits, cash flows and financial position of
the Company, such as currency exchange rate fluctuations, inflation, changes in
import duties,
15
<PAGE>
exchange controls and variable political conditions. In particular, currency
exchange rate fluctuations may impact the revenues and gross margins of the
Company's foreign operations.
For purposes of financial reporting, any change in the value of local
currencies in the countries in which the Company has operations against the
United States dollar during a given financial reporting period would result in a
foreign exchange gain or loss upon the translation of results to United States
dollars. Moreover, a substantial portion of the Company's indebtedness is
denominated in United States dollars and exchange rate moves and other factors
may affect the amount and availability of dollars to service such debt. Although
the Company attempts to hedge exchange rate risks, there can be no assurance
that the Company will be successful and that exchange rate fluctuations will not
have a material adverse effect on the Company's results of operations and
financial condition. In addition, a highly inflationary economy may also give
rise to increased production costs without correspondingly increased prices,
especially if products are exported to countries with low inflation rates.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the management experience and continued services
of its executive officers, including J. Brendan Barba and Paul M. Feeney. See
"Management." The loss of the services of these officers could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, the Company's continued growth depends on its ability to attract
and retain experienced key employees. Competition for qualified employees is
intense, and the loss of such persons, or an inability to attract, retain and
motivate additional highly skilled employees, could have a material adverse
affect on the Company's results of operations and financial condition and
prospects. There can be no assurance that the Company will be able to retain its
existing personnel or attract and retain additional qualified employees.
CONTROL BY EXISTING STOCKHOLDERS
The Company's principal stockholders, Borden and J. Brendan Barba and his
family, control more than 50% of the outstanding shares of the Company's Common
Stock. As a result, such stockholders will generally be able to control the
outcome of corporate transactions or other matters submitted for stockholder
approval and otherwise exert substantial influence over the affairs and
operations of the Company. In connection with the Borden Acquisition, Borden and
the Company have entered into a Governance Agreement pursuant to which, among
other things, Borden has the right to designate up to four persons to serve on
the ten-person Board of Directors of the Company and to consent to certain
material corporate transactions. See "Management--Governance Agreement."
Circumstances may occur in which the interests of such persons could be in
conflict with the interests of the holders of the Notes. In addition, such
persons may have an interest in pursuing transactions that, in their judgment,
enhance the value of their equity investment in the Company, even though such
transactions may involve risks to the holders of Notes.
LIMITED CONTRACTUAL RELATIONSHIPS
As is typical in the Company's industry, the Company generally does not
enter into long-term contractual relationships with its customers. As a result,
such customers may unilaterally reduce their purchase of the Company's products
or, in certain cases, terminate existing orders for which the Company may have
incurred significant production costs. Moreover, in the absence of binding
commitments, customers are free to quickly switch their sources of supply away
from the Company. Any such action by a significant customer could have a
material adverse effect on the Company.
16
<PAGE>
NET ASSETS HELD FOR SALE
At the time of the Borden Acquisition, management decided not to retain the
rigids businesses acquired from Borden, which businesses manufacture, market and
distribute wet food containers, dry food trays and disposable food service
products. The Company has classified the net assets of such businesses as net
assets held for sale and has written down the assets to approximately $15
million, representing the Company's best estimate as to their fair market value.
There can be no assurance, however, that the Company will be successful in
selling such businesses on terms satisfactory to the Company, or at all.
LABOR RELATIONS
Approximately 320 of the Company's employees in North America are
represented by two unions. Collective bargaining agreements with these unions
affecting these employees expire beginning in February 1998 and are currently
being negotiated. As is common in many foreign jurisdictions, substantially all
of the Company's hourly employees in foreign countries are covered by
country-wide collective bargaining agreements. While the Company believes that
its relations with its employees are satisfactory, a dispute between the Company
and its employees could have a material adverse effect on the Company.
PRODUCT LIABILITY
The Company's businesses expose it to potential product liability risks that
are inherent in the design, manufacture and sale of plastic packaging products.
While the Company maintains what it believes to be suitable product liability
insurance, there can be no assurance that it will be able to maintain such
insurance on acceptable terms or that any such insurance will provide adequate
protection against potential liabilities.
ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to various foreign, Federal, state and
local environmental laws and regulations, including, but not limited to, those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, the remediation of soil and groundwater
contaminated by petroleum products or hazardous substances or wastes, and the
health and safety of employees. Compliance with environmental laws, stricter
interpretations of or amendments to such laws, or more vigorous enforcement
policies by regulatory agencies may require material expenditures by the
Company. The nature of the Company's current and former operations and the
history of industrial uses at some of its facilities expose the Company to the
risk of liabilities or claims with respect to environmental and worker health
and safety matters.
In addition, under certain environmental laws, a current or previous owner
or operator of property may be jointly and severally liable for the costs of
investigation, removal or remediation of certain substances on, under, or in
such property, without regard to negligence or fault. The presence of, or
failure to remediate properly, such substances may adversely affect the ability
to sell or rent such property or to borrow using such property as collateral. In
addition, persons who generate, arrange for the disposal or treatment of, or
dispose of, hazardous substances may be jointly and severally liable for the
costs of investigation, remediation or removal of such hazardous substances at
or from the disposal or treatment facility, regardless of whether the facility
is owned or operated by such person. Responsible parties also may be subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. See "Business--Environmental
Matters."
RISKS RELATING TO A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes may require
the Company to repurchase all or a portion of such holder's Notes. In addition,
it is likely that any Change of Control would trigger an event of default under
the Credit Agreement and under the Indenture pursuant to change of
17
<PAGE>
control provisions similar to those contained in the Credit Agreement. If a
Change of Control were to occur, there can be no assurance that the Company
would have sufficient financial resources or would be able to arrange financing
to pay the repurchase price for all Notes tendered by holders thereof. Further,
the provisions of the Indenture may not afford holders of Notes protection in
the event of a highly leveraged transaction, reorganization, restructuring,
merger or similar transaction involving the Company that may adversely affect
holders of Notes, if such transaction does not result in a Change of Control.
Moreover, the terms of the Credit Agreement may limit the Company's ability to
repurchase any Notes upon a Change of Control. Any future credit agreements or
other agreements relating to other indebtedness to which the Company becomes a
party may contain similar restrictions and provisions. In the event that a
Change of Control occurs at a time when the Company is prohibited from
repurchasing Notes, the Company could seek the consent of its lenders to
repurchase Notes or could attempt to refinance the borrowings under the
agreements that contain such prohibition. If the Company does not obtain such
consent or repay such borrowing, the Company would remain prohibited from
repurchasing Notes. In such case, the Company's failure to repurchase tendered
Notes would constitute an Event of Default under the Indenture, which would
likely constitute a further default under the terms of other indebtedness that
the Company may enter into from time to time. See "Description of
Notes--Covenants--Change of Control."
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in November 1997 to a small number of
institutional investors and are eligible for trading in the Private Offerings,
Resale and Trading through Automatic Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. if such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. Although there is currently no market for the Exchange
Notes, the Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so, and any market making with respect to the Exchange
Notes may be discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997, and as adjusted to give effect to the issuance and sale of the
Old Notes and the application of the proceeds therefrom to repay a portion of
the Company's outstanding indebtedness under the Credit Agreement. See
"Description of Credit Facilities--Credit Agreement."
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
DOLLARS IN THOUSANDS
Short-term debt:
Short-term debt(1)..................................................................... $ 50,207 $ 50,207
Current portion of long term debt...................................................... 15,277 15,277
---------- -----------
Total current debt................................................................... 65,484 65,484
---------- -----------
Long-term debt (less current portion):
Term loan portion of Credit Agreement.................................................. 305,000 113,000
Revolving credit portion of Credit Agreement........................................... -- --
Senior Subordinated Notes.............................................................. -- 200,000
Other(2)............................................................................... 6,522 6,522
---------- -----------
Total long-term debt................................................................. 311,522 319,522
---------- -----------
Shareholders' equity:
Common stock and additional paid-in capital............................................ 90,074 90,074
Treasury stock--common stock--at cost.................................................. (61,783) (61,783)
Retained earnings...................................................................... 78,679 78,679
Cumulative Translation Adjustment...................................................... (18,988) (18,988)
---------- -----------
Total shareholders' equity........................................................... $ 87,982 $ 87,982
---------- -----------
Total capitalization..................................................................... $ 399,504 $ 407,504
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Represents debt related to foreign bank borrowings by foreign subsidiaries
of the Company under available credit facilities aggregating approximately
$71 million, of which approximately $51.0 million is outstanding, $20.0
million remains available for borrowing, and $42 million of such borrowings
is guaranteed by the Company.
(2) Includes approximately $5.7 million in Pennsylvania industrial development
bonds and $818,000 associated with foreign credit facilities.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth certain selected historical and unaudited pro
forma consolidated financial data, which should be read in connection with the
Company's Consolidated Financial Statements and the Notes thereto included
elsewhere herein and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected balance sheet data as of
October 31, 1993, 1994 and 1995 and statement of operations data for the years
ended October 31, 1993 and 1994, have been derived from the Company's audited
financial statements. The selected balance sheet data as of October 31, 1996 and
1997 and statement of operations data for the years ended October 31, 1995, 1996
and 1997, have been derived from the Company's audited financial statements
included elsewhere herein. The accompanying unaudited Pro Forma statement of
operations and balance sheet data are based upon the consolidated financial
statements of the Company included elsewhere herein, and adjusted to give effect
to the sale of the Old Notes, the application of the net proceeds therefrom and
the amendment to the Credit Agreement (defined below) as if each such event had
occurred on November 1, 1996.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
YEARS ENDED OCTOBER 31, OCTOBER 31,
---------------------------------------------------------- -----------
1993 1994 1995 1996 1997 1997(1)(4)
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
DOLLARS IN THOUSANDS
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 153,307 $ 184,669 $ 242,886 $ 270,534 $ 759,123 $ 759,123
Gross profit........................... 43,839 54,068 60,373 59,770 159,732 159,732
Income from operations................. 14,277 19,734 25,224 15,538 39,852 39,852
Interest expense....................... 1,897 1,456 3,209 11,517 30,061 37,658
Other (income) expense................. 474 (523) (384) (390) (3,475) (3,475)
Pre-tax income......................... 11,906 18,801 22,399 4,411 13,266 5,669
Income tax provision................... 4,572 7,397 8,723 1,858 4,695 1,656
Net income............................. 6,880 11,404 13,486 2,553 8,571 4,013
OTHER FINANCIAL DATA:
EBITDA (2)............................. $ 20,678 $ 28,537 $ 35,430 $ 28,462 $ 75,978 $ 75,978
EBITDA margin (2)...................... 13.5% 15.5% 14.6% 10.5% 10.0% 10.0%
Depreciation and amortization.......... $ 6,875 $ 8,280 $ 9,822 $ 12,534 $ 32,651 $ 32,651
Capital expenditures................... 9,319 28,007 28,402 14,040 39,352 39,352
RATIOS:
Ratio of earnings to fixed charges
(3).................................. 5.43 9.56 6.49 1.36 1.42 1.14
Ratio of EBITDA to interest expense.... 10.90 19.60 11.04 2.47 2.53 2.02
BALANCE SHEET DATA:
Working capital........................ $ 23,303 $ 20,592 $ 15,030 $ 60,536 $ 56,045 $ 56,045
Total assets........................... 88,992 118,496 143,287 611,665 613,083 621,083
Total debt (including current
portion)............................. 20,254 23,595 86,000 377,545 377,006 385,006
Shareholders' equity................... 50,616 61,789 16,808 95,133 87,982 87,982
</TABLE>
- ------------------------
(1) Interest Expense for the year ended October 31, 1997 would have been $7.6
million higher on a pro forma basis giving effect to the refinancing as if
it had occurred on November 1, 1996. The refinancing resulted in a change of
the interest rate from an average rate of 6.29% under the Credit Agreement
to 9.875% under the Notes.
(2) EBITDA is defined as pre-tax income before interest, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to incur and service
20
<PAGE>
debt. However, EBITDA should not be considered in isolation as a substitute
for net income or cash flow data determined in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity. In addition, this measure of EBITDA may not be
comparable to similar measures reported by other companies. EBITDA margin is
calculated as the ratio of EBITDA to net sales for the period. For Fiscal
1996 and Fiscal 1997, amortization included $2.9 million and $3.3 million,
respectively, related to write off of prior unamortized debt costs.
(3) For purposes of the ratio of earnings to fixed charges, earnings are
calculated as the Company's income before extraordinary charge and income
taxes, plus fixed charges. Fixed charges include interest expense on all
indebtedness (including amortization of deferred financing costs) and the
component of operating lease rental expense that management of the Company
believes is representative of the interest component of rent expense.
(4) Adjusted to give effect to the sale of the Old Notes and the application of
the net proceeds therefrom to reduce a portion of the outstanding
indebtedness under that certain Term Loan and Revolving Credit Facility (the
"Credit Agreement"), dated October 16, 1996, as amended as of October 24,
1997, among the Company as borrower, the lending banks and Morgan Guaranty
and Trust Company as agent for the respective lending banks. See "Use of
Proceeds," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's primary business is the manufacture and marketing of plastic
films for use in the packaging, transportation, beverage, food, automotive,
pharmaceuticals, chemical, electronics, construction, agricultural and textile
industries. The Company currently has manufacturing operations located in 12
countries in North America, Europe, the Asia/Pacific region and Africa. The
Company manufactures plastic films principally from resins blended with other
raw materials, using both cast and blown extrusion processes. The Company may
either sell the film after the extrusion processes or further process the film
by metallizing, printing, laminating, slitting or converting it. Further
processing technologies enable the Company to create a variety of value-added
products according to the specifications of its customers.
Resin costs generally constitute approximately 60% of the cost of goods
sold. Since resin costs typically fluctuate, selling prices are generally
determined as a "spread" over resin costs, usually expressed as cents per pound.
Accordingly, costs and profits are most often expressed in cents per pound, and,
with limited exceptions, the historical increases and decreases in resin costs
have generally been reflected in the sales prices of the products on a penny for
penny basis. Assuming a constant volume of sales, an increase in resin costs
should therefore result in increased sales revenues but lower gross profit as a
percentage of sales ("gross profit margin"), while a decrease in resin costs
should result in lower sales revenues with higher gross profit margins.
On October 11, 1996, in order to establish a worldwide market presence,
diversify its product lines and strengthen market share in certain of its
existing businesses, the Company acquired the global packaging operations of
Borden, Inc. ("Borden"). The purchase price for the acquisition (the "Borden
Acquisition") was approximately $280 million (including the assumption of
certain indebtedness and other purchase price adjustments) and 2.4 million
shares of Common Stock of the Company. However, as a result of the assumption by
the Company of certain indebtedness of foreign subsidiaries acquired in the
transaction, as well as certain purchase price adjustments, the actual cash
portion of the purchase price was $263 million, which amount includes
approximately $36 million used to repay certain additional intercompany
indebtedness of such foreign subsidiaries to Borden. The Borden Acquisition was
accounted for using the purchase method of accounting, and the results of
operations of Borden for the 20 day period following the Borden Acquisition are
included in the Company's results of operations for Fiscal 1996.
Management had decided not to retain the rigids businesses of Borden. The
rigids businesses manufacture, market and distribute wet food containers, dry
food trays and disposable food service products. These businesses are not
considered core businesses, and the Company has offered these businesses for
sale. Accordingly, the net assets of such businesses are classified as net
assets held for sale in the accompanying Consolidated Balance Sheets and the
results of the rigids businesses have not been included in the Company's results
of operations. The $15 million carrying value of the rigids businesses
represents the Company's best estimate as to the fair market value based on
recent market information.
The Borden Acquisition resulted in a significant increase in the Company's
sales and costs associated therewith. As a result, the results of operations for
the years ended October 31, 1997 and 1996, and, to a lesser extent, for the
years ended October 31, 1996 and 1995, are not comparable from period to period.
A summary of unaudited proforma consolidated results of operations of the
Company as if the Acquisition had occurred at November 1, 1995, has been
presented in Note 3 to the Consolidated Financial Statements.
22
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997 AS COMPARED TO YEAR ENDED OCTOBER 31, 1996
Net sales for Fiscal 1997 increased by 181% to $759,123,000 from
$270,534,000 during Fiscal 1996. This increase in net sales reflects the Borden
Acquisition which resulted in increased net sales in North America of
$199,097,000, in Europe of $208,906,000 and in the Asia/Pacific region of
$80,586,000. The Company believes that sales during Fiscal 1997 were negatively
impacted as a result of volume and price declines in the overall North America
stretch wrap business due to overcapacity which was partially offset by volume
increases in the Company's other product lines, Europe and Asia/Pacific had an
increase in sales volume which was offset by a decrease in average selling
prices when compared to the proforma results in the prior year.
Gross profit for Fiscal 1997 increased by 167% to $159,732,000 from
$59,770,000 during the same period in Fiscal 1996. This increase in gross profit
resulted from the Borden Acquisition and consisted of increased gross profit in
North America of $43,564,000, Europe of $41,777,000 and the Asia/Pacific region
of $14,621,000. Gross profit as a percentage of sales during 1997 declined to
21.0% from 22.1% during Fiscal 1996 primarily as a result of overcapacity and
intense competition in the North America stretch wrap business, which was
partially offset by cost savings associated with the Borden Acquisition. This
overcapacity resulted in reduced sales volume and underutilization of plant
facilities, each of which negatively impacted margins as labor and other fixed
costs were spread over fewer sales. Europe had a slight increase in gross
margins due to increased sales volumes, which lowered production costs by
increasing plant efficiencies Asia/Pacific had decreased gross profit margins
primarily due to the deterioration of economic conditions in the regions which
resulted in lower average selling prices.
Operating expenses for Fiscal 1997 increased 171% to $119,880,000 from
$44,232,000 during Fiscal 1996. This increase of $75,648,000 in operating
expenses can be attributed to the businesses acquired from Borden and the
operating expenses associated with them. Operating expenses as a percentage of
sales during Fiscal 1997 decreased slightly to 15.8% from 16.3% during Fiscal
1996. Operating expenses in Fiscal 1997 reflect certain synergies achieved as a
result of the Borden Acquisition through the consolidation of administrative and
sales personnel and warehouse facilities, partially offset by higher than
expected costs associated with closing operations at a North Andover plant and
relocating certain of those operations to the Griffin, Georgia plant. The
Company incurred increased warehouse and delivery costs during the current
period due to the installation of new delivery systems to accommodate this
consolidation.
Interest expense for Fiscal 1997 increased by 161% to $30,061,000 from
$11,517,000 during Fiscal 1996. This increase in interest expense is primarily
due to increased borrowings used to finance the Borden Acquisition and an
additional charge of $3,330,000 for loan origination fees applicable to
amendments to the current credit facility in connection with the Company's
issuance of its $200,000,000 of 9.875% Senior Subordinated Notes. A decline in
interest rates during the Fiscal 1997 partially offset this increase for the
period.
Other income for Fiscal 1997 increased to $3,475,000 from $390,000 in Fiscal
1996. The amount for the Fiscal 1997 includes $1,278,000 in interest income,
$198,000 in foreign currency exchange gains realized during the period, $416,000
in gain from the sale of securities and income from investment in a joint
venture of $317,000. Also included in other income were $256,000 in gains on
sales of machinery and equipment $121,000 in rental income and other
miscellaneous income earned for the period.
Net income for Fiscal 1997 increased by 236% to $8,571,000 from $2,553,000
in Fiscal 1996. This increase was due primarily to additional sales volume
attributable to the Borden Acquisition, offset by the aforementioned
overcapacity in the stretch wrap business, as well as increased interest
expense.
23
<PAGE>
YEAR ENDED OCTOBER 31, 1996 AS COMPARED TO YEAR ENDED OCTOBER 31, 1995
Net sales for Fiscal 1996 increased by 11% to $270,534,000 from $242,886,000
during the Company's fiscal year ended October 31, 1995 ("Fiscal 1995"). This
increase can be attributed to the additional sales revenue generated from the
Borden Acquisition. The business of the Company excluding Borden had an increase
in sales volume of 19%, which was offset by an 18% decrease in per unit selling
prices, which decrease was primarily due to corresponding reductions in market
prices for resins.
Gross profit for Fiscal 1996 decreased by 1% to $59,770,000 from $60,373,000
in Fiscal 1995. The Fiscal 1996 gross profit was adversely impacted by
approximately $7,300,000 because the Company absorbed inventory valuation
charges of $5,600,000 related to the acquisition of Borden inventory and an
additional charge during the fourth quarter of Fiscal 1996 of $1,700,000
incurred in the build up of Company inventory levels. These charges were
primarily a result of the Company's consistent costing of its inventories using
the last-in, first-out (LIFO) method. Gross profit as a percentage of sales
during Fiscal 1996 declined to 22.1% from 24.9% during Fiscal 1995, primarily as
a result of the aforementioned inventory charges which more than offset the
increases in gross profit margin attributable to the increase in sales volume,
net of the reduction in per unit sales prices.
Operating expenses for Fiscal 1996 increased by 26% to $44,232,000 from
$35,149,000 in Fiscal 1995. Approximately $5,200,000 of the Fiscal 1996 amount
can be attributed directly to the additional expenses absorbed by the Company
for the 20 day period of operations following the Borden Acquisition. The AEP
business had an increase of $2,200,000, or 13%, in shipping and warehousing
costs and an increase of $1,500,000, or 12%, in selling expenses which were
directly attributable to the 19% increase in sales volume. Operating expenses as
a percentage of sales during Fiscal 1996 increased to 16.3% from 14.5% during
Fiscal 1995, primarily as a result of the 18% decrease in per unit selling
prices, partially offset by the increase in sales volume.
Interest expense for Fiscal 1996 increased by 259% to $11,517,000 from
$3,209,000 in Fiscal 1995. This increase can be attributed to new credit
facilities and increased borrowings during Fiscal 1996. In Fiscal 1996, the
Company incurred interest expense associated with the credit facility that was
put in place during the fourth quarter of Fiscal 1995, which financed the
Company's purchase of shares of the Company's Common Stock (the "Stock
Repurchase") for its treasury from its stockholders and chief executive officer.
In October 1996, the Company replaced that credit facility with the Credit
Agreement used to finance the Borden Acquisition and retire the then existing
credit facility. The Company absorbed an additional charge to interest expense
in Fiscal 1996 of $2,900,000 for loan origination fees applicable to the old
credit facility. Interest expense as a percentage of sales increased to 4.3%
during Fiscal 1996 from 1.3% during Fiscal 1995, primarily as a result of the
additional debt incurred as a result of the Stock Repurchase and the Borden
Acquisition.
Other income in Fiscal 1996 amounted to $390,000, which consisted primarily
of interest and dividend income of $113,000, net gains on sale of machinery and
equipment of $71,000, foreign currency exchange gains of $135,000, and other
miscellaneous income of $71,000.
Net income for Fiscal 1996 decreased by 81% to $2,553,000 from $13,486,000
in Fiscal 1995. This decrease was due primarily to the aforementioned charges
totaling $7,300,000 related to valuation of inventories and increased interest
expense incurred during the period, including the charge of $2,900,000 for loan
origination fees on the old credit facility.
YEAR ENDED OCTOBER 31, 1995 AS COMPARED TO YEAR ENDED OCTOBER 31, 1994
Net sales for Fiscal 1995 increased by 32% to $242,886,000 from $184,669,000
during the Company's fiscal year ended October 31, 1994 ("Fiscal 1994"). The
increase was attributable primarily to a 27% increase in average selling prices
combined with a 4% increase in sales volume. The increase in per unit
24
<PAGE>
selling prices was a result of an increase in raw material (resin) costs, which
were passed through to customers.
Gross profit for Fiscal 1995 increased by 12% to $60,373,000 from
$54,068,000 in Fiscal 1994. The increase in gross profit resulted from volume
increases and higher selling prices per unit offset by start-up costs associated
with the implementation of new production lines in the Company's Midwest
facility and a provision of $740,000 related to the 1996 relocation of the
Company's New Jersey manufacturing facility to Pennsylvania. Gross profit as a
percentage of sales during Fiscal 1995 declined to 24.9% from 29.3% during
Fiscal 1994, as the Company maintained its gross profit per unit sold as selling
prices per unit increased as a result of increased resin costs, thereby
resulting in lower gross profit margins.
Operating expenses for Fiscal 1995 increased by 2% to $35,149,000 from
$34,334,000 in Fiscal 1994. This increase in operating expenses can be directly
attributed to the Company's 4% increase in sales volume over the prior year
which increased selling expenses. These increased costs were offset by a
reduction in per unit delivery costs during the year, which can be attributed to
the opening of the Company's Midwest plant. Operating expenses as a percentage
of sales decreased during Fiscal 1995 to 14.5% from 18.6% during Fiscal 1994,
primarily as a result of the increased unit selling prices noted above coupled
with reduced per unit operating expenses.
Interest expense in Fiscal 1995 increased by 120% to $3,209,000 from
$1,456,000 in Fiscal 1994. This increase was due to the Company's new credit
facility, which replaced its old credit facility and was used to finance the
Stock Repurchase. These purchases were completed during the fourth quarter of
Fiscal 1995. Interest expense as a percentage of sales increased during Fiscal
1995 to 1.3% from 0.8% during Fiscal 1994, primarily as a result of the
establishment of the new credit facility.
Other income in Fiscal 1995 totaled $384,000, which included, among other
things, interest and dividend income of $213,000 and gain on sales of machinery
and equipment of $109,000.
Net income in Fiscal 1995 increased by 18% to $13,486,000 from $11,404,000
in Fiscal 1994. This increase was a result of the improvement in gross profit
due to increased sales volume and a nominal increase in operating expenses. This
improvement was partially offset by an extraordinary net of tax charge of
$190,000 associated with the prepayment penalty paid when the Company prepaid
its 6.59% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash flow
generated from operations and borrowings by the Company or its subsidiaries
under various credit facilities. The Company's principal uses of cash have been
to fund working capital, including operating expenses, debt service, and capital
expenditures.
The Company's working capital amounted to $56,045,000 at October 31, 1997,
compared to $75,624,000 at October 31, 1996. This decrease of $19,579,000 in
working capital is primarily attributable to maturities of long term debt and
the strengthening of the United States dollar during Fiscal 1997, thereby
reducing the translation of working capital balances of foreign subsidiaries.
The remaining increases and decreases in components of the Company's financial
position reflect normal operating activity.
On October 11, 1996, the Company entered into the Credit Agreement with the
Morgan Guaranty Trust Company, as Agent, and the banks party thereto. The Credit
Agreement provided the Company with two credit facilities, consisting of a term
credit facility in the amount of $350,000,000 and a revolving credit facility
for an amount up to $100,000,000. The proceeds borrowed under the Credit
Agreement were used to pay the $263,000,000 cash portion of the purchase price
for the Borden Acquisition, to repay the $95,400,000 balance under the then
existing term credit and revolving credit obligations and to pay the expenses
and related costs of the Borden Acquisition and the borrowing under the Credit
Agreement. The term loan commitment expired on the date of the closing of the
Credit Agreement and the borrowing of
25
<PAGE>
the term loan thereunder. Amounts repaid or prepaid with respect to the term
loan may not be reborrowed. As of October 31, 1997, there was $320,000,000
outstanding under the term credit facility and no outstanding borrowings under
the revolving credit facility.
As a result of the Company's high degree of leverage and the effect on net
sales that occurred as a result of overcapacity in the domestic stretch wrap
industry, the Company believed there was a substantial likelihood that it would
fail to maintain certain financial ratios, including minimum fixed charge
coverage and leverage ratios, at the levels required by the Credit Agreement.
The Company received a waiver relating to such ratios and entered into an
amendment to the Credit Agreement. The amendment, among other things, modifies
the financial covenants to require maintenance of such ratios at levels which
the Company believes it can achieve, although there can be no assurance in this
regard.
On November 19, 1997, the Company completed an offering of $200,000,000 in
aggregate principal amount of 9.875% Senior Subordinated Notes due November 15,
2007. The issue price was 99.224% resulting in an effective yield of 10%. The
net proceeds from the Notes have been used to repay a portion of the
indebtedness outstanding under the Company's outstanding Credit Agreement. After
giving retroactive effect to the sale of the Notes on November 19, 1997, and the
application of the net proceeds therefrom, at October 31, 1997, the Company
would have had $128,000,000 outstanding under the term credit facility, no
outstanding borrowings under the revolving credit facility, and $200,000,000
Notes due November 2007 outstanding.
The Company also has a $10,000,000 unsecured revolving credit facility
available for working capital purposes. At October 31, 1997, there were no
outstanding borrowings under this facility.
The Company also maintains various unsecured short-term credit facilities at
its foreign subsidiaries. At October 31, 1997, the aggregate amount outstanding
under such facilities was approximately $51,000,000 and approximately
$20,000,000 was available for borrowing. Borrowings from these facilities are
used to support operations at such subsidiaries and are generally serviced by
cash flow from operations at such subsidiaries. Approximately $42,000,000 of
such indebtedness is guaranteed by the Company.
The Company's cash and cash equivalents decreased by $7,924,000 for Fiscal
1997, as compared to an increase of $11,738,000 during Fiscal 1996. Net cash
provided by operating activities during Fiscal 1997 was $39,316,000 primarily
due to net income of $8,571,000, depreciation and amortization expense of
$32,651,000 offset by net decreases in other operating assets and liabilities of
$1,906,000. Net cash provided by operating activities during Fiscal 1996 was
$7,336,000, which was primarily due to net income of $2,553,000 and depreciation
and amortization expense of $12,534,000, offset by net decreases in other
operating assets and liabilities of $7,751,000. In each period, the net
decreases in other operating assets and liabilities reflect normal operating
activity.
Net cash used in investing activities during Fiscal 1997 was $43,536,000,
resulting primarily from the net investment in capital expenditures of
$39,352,000 and certain acquisitions in our Asia/Pacific region of $8,758,000
which were partially offset by the sale of certain marketable securities and
machinery and equipment. Net cash used in investing activities during Fiscal
1996 was $269,018,000, resulting primarily from cash used to consummate the
Borden Acquisition of $254,939,000 (net of cash acquired) and capital
expenditures of $14,040,000.
Net cash provided by financing activities during Fiscal 1997 was $1,640,000,
reflecting net borrowings on long-term debt of $10,549,000 and stock issuances
of $1,091,000, offset by a repayment under the revolving credit portion of the
Credit Agreement of $10,000,000. The remaining increases and decreases in the
components of the Company's financial position reflect normal operating
activity. Net cash provided by financing activities during Fiscal 1996 was
$274,703,000, which reflected $370,300,000 in funds received under the Credit
Agreement (of which $263,000,000 was used to consummate the Borden Acquisition),
offset in part by the repayment of existing long-term debt of $101,710,000.
26
<PAGE>
The Company anticipates that its Fiscal 1998 capital expenditures will be
approximately $32,000,000, of which approximately $16,000,000 has been committed
and approximately $8,000,000 is expected to be utilized for general maintenance
of equipment. This investment in capital expenditures is expected to be used to
expand the Company's product lines and increase capacity of existing equipment.
The Company anticipates that in Fiscal 1998 its debt service will
approximate $49,451,000, including scheduled principal payments of $15,451,000
and interest expense of approximately $34,000,000.
The Company believes that its cash flow from operations, combined with the
availability of funds under the Credit Agreement and credit lines available to
the Company's foreign subsidiaries for local currency borrowings, will be
sufficient to meet the Company's working capital, capital expenditure and debt
service requirements for the foreseeable future. The Company may also receive
cash in the event that its rigids businesses are sold.
EFFECTS OF INFLATION
Inflation is not expected to have significant impact on the Company's
business.
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The Company is currently undertaking a systems readiness review which will
help mitigate the risks associated with the year 2000 issue. The Company has
purchased certain new operating systems during Fiscal 1997 and as a result, the
year 2000 issues will not have a material effect on its financial position and
results of operations.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results
of Operations contains "Forward Looking Statements" about the Company's
prospects for the future such as its ability to generate sufficient working
capital, its ability to continue to maintain sales and profits of its combined
AEP and Borden operations and its ability to generate sufficient funds to meet
its cash requirements. Such statements are subject to certain risks and
uncertainties which can cause actual results to differ materially from those
projected, including availability of raw materials, ability to pass raw material
price increases to customers in a timely fashion, the potential of technological
changes which would adversely affect the need for the Company's products and
price fluctuations which could adversely impact the Company's inventory. Parties
are cautioned not to rely on any such forward looking benefits or judgments in
this section and in other parts of this Prospectus.
27
<PAGE>
BUSINESS
GENERAL
AEP Industries Inc. ("AEP" or the "Company") is a worldwide manufacturer of
plastic packaging films. Incorporating both cast and blown film technologies the
Company manufactures an extensive range of specialty and standard flexible
packaging products for use in the packaging, transportation, beverage, food,
automotive, pharmaceuticals, chemical, electronics, construction, agricultural
and textile industries. The Company currently has manufacturing operations
located in 11 countries in North America, Europe, and the Asia/Pacific region.
In October 1996, in order to establish a worldwide market presence,
diversify its product lines and strengthen market share in certain of its
existing businesses, the Company acquired the global packaging operations of
Borden, Inc. ("Borden") in exchange for approximately $280 million (including
the assumption of certain indebtedness and other purchase price adjustments) and
2.4 million shares of the Common Stock of the Company. The addition of Borden's
global packaging operations (the "Borden Acquisition") broadened the Company's
product portfolio, established the Company as the largest manufacturer of
polyvinyl chloride food wrap and polyethylene stretch film in North America, and
positioned the Company as a leader in a number of other markets, including
processed cheese films and twist wrap.
PRODUCTS
The Company manufactures and markets an extensive and diverse line of
polyethylene, polyvinyl chloride and polypropylene flexible packaging products,
with consumer, industrial and agricultural applications. Flexible packaging and
film products are thin, ductile bags, sacks, labels and films for food and non-
food consumer, agricultural and industrial items. Flexible packaging containers
not only protect their contents, they are also cost-effective, space-saving,
lightweight, tamper-evident, convenient and often recyclable. The flexible
packaging and film products manufactured by the Company are used in a variety of
industries, including the packaging, transportation, beverage, food, automotive,
pharmaceuticals, chemical, electronics, construction, agricultural and textile
industries.
28
<PAGE>
The following table summarizes the Company's product lines:
<TABLE>
<CAPTION>
PRODUCT LOCATION MATERIAL USES
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Polyvinyl chloride wrap North America, Europe, Polyvinyl chloride Meat and food wrap;
Asia/Pacific, institutional films, twist
wrap
Stretch (pallet) wrap North America, Europe Polyethylene Pallet wrap
Asia/Pacific,
Industrial films United States, Asia/ Polyethylene Drum, box, carton, and pail
Pacific liners; bags for furniture
and mattresses; films to
cover high value products;
agricultural films
Printed and converted films Europe, Asia/Pacific Primarily polyethylene Printed, laminated and/ or
converted films providing
flexible packaging to
consumer markets
Polypropylene and barrier North America, Europe Polypropylene Polyethylene Packaging of baked goods,
films cheese, candies, and salted
snacks; used in tape,
diaper tabs, box windows
and graphic arts
Other products and North America, Europe, Various thermoplastics and Manufactured and resale
specialty films Asia/Pacific, machinery items used in packaging
</TABLE>
NORTH AMERICAN OPERATIONS
RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap for the supermarket,
consumer, institutional and industrial markets in North America, offering a
broad range of products with approximately 45 different formulations. These
films are used for packaging of fresh red meats, poultry, fish, fruits and
vegetables, and bakery products.
The Company's Resinite facility also manufactures dispenser (cutter) boxes
containing polyvinyl chloride food wrap for sales to consumers and to
institutions, including restaurants, schools, hospitals and penitentiaries. The
Company's most popular branded institutional polyvinyl chloride food wrap is
marketed under the SEAL WRAP name. A substantial part of this product is sold to
large paper and food distributors, with the rest sold directly to supermarket
chains.
The Company also has exclusive rights to an innovative separate slide
cutter, which the Company believes is safer than regular cutters. The Company
has begun to introduce the slide cutter into the market, and believes that this
new product has had a positive impact on cutter box sales.
STRETCH WRAP
The Company manufactures a family of high performance stretch wrap for
wrapping and securing palletized products for shipping. The Company markets a
wide variety of stretch wrap designed for
29
<PAGE>
commodity and specialty uses and sells approximately 90% of its stretch wrap
through distributors, while the remainder of its output is sold directly to
customers on a national account basis.
In connection with the Borden Acquisition, the Company identified and
consolidated certain of the acquired less efficient stretch wrap operations,
thereby reducing its stretch wrap capacity by approximately 58 million pounds.
In addition, as a result of industry-wide overcapacity in the stretch wrap
market, the Company has reduced its stretch wrap capacity by an additional 45
million pounds. Collectively, the Company has reduced its stretch wrap capacity
by an aggregate of approximately 103 million pounds to an aggregate of 230
million pounds through a combination of permanently eliminating, temporarily
idling and reallocating its capacity.
INDUSTRIAL FILMS
The Company manufactures a broad range of industrial films, generally
custom-tailored, including sheeting, tubing and bags which are cut, rolled, or
perforated; drum, box, carton and pail liners; and bags to package specialty
items such as furniture and mattresses. The Company also manufactures films to
protect items stored outdoors or in transit (such as boats and cars) and a wide
array of shrink films and overwrap films. The Company sells the majority of its
industrial film output directly to customers on a national account basis, with
approximately 20% sold through distributors.
Most of the industrial films manufactured by the Company, which may number
as many as 20,000 separate and distinct products in any given year, are custom
designed to meet the specific needs of its customers.
The Company believes that the strength of its industrial film operations
lies in its technologically superior products, high quality control standards,
well-trained and knowledgeable sales force, and commitment to customer service.
The Company's sales force, consisting of experts in packaging systems, provides
technical support to the Company's distribution network and focuses on product
knowledge and customer relations.
The industrial films market is comprised of a large number of smaller
manufacturers who together constitute approximately two-thirds of all sales,
with the remainder of the market represented by a few large manufacturers.. The
Company believes that its research and development team, which continually
improves applications and creates new industrial film products, has helped
establish the Company as one of the largest producers in this fragmented market.
The Company believes it can continue to expand its share of the industrial films
market through its ability to offer a broad range of industrial as well as other
packaging films (including stretch wrap), thereby offering its customers
one-stop shopping.
PROFORMANCE
The Company manufactures and markets oriented polypropylene films
(characterized by their inelasticity) and, through Pro-Ex, co-extruded (layered)
barrier and non-barrier films. Barrier films either encourage or restrict the
passage of moisture, oxygen, light and gases (depending upon the desired
properties), and are puncture resistant. A substantial portion of the Company's
oriented polypropylene films (including metallized films) are used in packaging
items such as salted snacks, confectionery, cookies, crackers, baked goods, and
cheese. Industrial applications, such as tape, diaper tabs, box windows, tape
and graphic arts, account for the remaining oriented polypropylene films
manufactured by the Company.
The Company sells the majority of its oriented polypropylene films to
printers and converters for further processing before reaching end-users.
The oriented polypropylene films market is dominated by a few large
manufacturers, each with a substantial market share. The Company believes it is
a niche supplier in this market. As a result, the Company has repositioned its
efforts and adopted a niche strategy, de-emphasizing some of the lower margin
commodity films such as tape and diaper tabs in favor of higher margin films
such as films for
30
<PAGE>
packaging reduced fat and fat-free foods, which, because of the absence of fat
(which serves as a preservative), require more sophisticated technology. The
Company has several patents and patent applications relating to its cold seal
and barrier films, and has a patent application pending for a barrier film
useful for flavor retention for packaging of reduced fat and fat-free foods.
INTERNATIONAL OPERATIONS
EUROPEAN RESINITE (POLYVINYL CHLORIDE)
The Company manufactures polyvinyl chloride food wrap in cutter boxes and
perforated rolls which are primarily sold to restaurants and food service
establishments. European Resinite sells films across Europe (with the exception
of Italy, which is covered by FIAP) and sells most of its film directly to end-
users. The Company has recently streamlined its labor force in these businesses
and anticipates that this will have a positive impact on its operating results.
The market for polyvinyl chloride food wrap is relatively mature in Northern
Europe, with intense competition. The Company expects that growth in Europe will
be driven by developing catering, food service and volume feeding markets in
Eastern Europe and by developing food distribution markets in Southern and
Eastern Europe. In certain European markets, a tax is levied on packaging
materials based on weight which has led to a demand for thinner but stronger
meat films. The Company has the technology to deliver films with such properties
at a low price and believes it maintains a competitive advantage over packaging
entities without such technology.
EUROPEAN FLEXIBLES
The Company manufactures flexible packaging and converted films used in the
food processing and pharmaceutical industries, including freezer film, processed
cheese innerwrap and tamper evident seals. European Flexibles also manufactures
and sells polyethylene-based stretch wrap for wrapping and securing pallet
loads.
European Flexibles sells 55% of its stretch wrap to distributors, and 45%
directly to end-users. The European Flexibles division underwent staff
reductions and equipment rationalizations in the fiscal year ended October 31,
1997 ("Fiscal 1997"), which combined with investments in new equipment, are
expected to have a positive impact on future financial results.
FIAP
The Company, through Fabbrica Italiana Articoli Plastici (FIAP),
manufactures polyvinyl chloride food wrap, unplasticized polyvinyl chloride
twist wrap, and converted and printed films. FIAP is known as a specialist in
unplasticized polyvinyl chloride twist wrap, which is used to wrap candles,
candies, and similar products. This product, which has similar performance
characteristics as cellophane, is emerging as a low cost substitute and, as a
result, may continue to replace cellophane in the future. The Company believes
unplasticized polyvinyl chloride, because of its performance characteristics,
has significant growth potential opportunities as a replacement for cellophane
and believes opportunities are developing for new uses for such wrap, such as
battery covers and credit card laminates.
Films manufactured by FIAP are sold in the United States, Europe, Africa,
and the Middle East, mostly through an internal sales force directly to
end-users.
ASIA/PACIFIC REGION
The Company is a major manufacturer of industrial films and flexible
packaging and converted films in Australia and New Zealand. The Company's
operations in the Asia/Pacific region resemble its North American and European
operations with the same variety of films. Additionally, the Company acquired
31
<PAGE>
certain assets of ICI's Visqueen operations in August 1997, which strengthened
its position as a major supplier of industrial packaging films in Australia.
The Company sells the majority of the products it manufactures in Australia
and New Zealand to end-users and the remainder to distributors.
The markets for plastic packaging products in Australia and New Zealand are
relatively small, offering limited growth opportunities. However, since New
Zealand and Australia are significant exporters of high protein products, the
Company expects to participate in the growing market for packaging materials for
protein rich products for exports to China and Southeast Asia.
The Company also has a 50% joint venture in Japan with Hitachi Chemical,
which supplies polyvinyl chloride food wrap to the Japanese market. The Company
accounts for the joint venture on an equity basis.
MANUFACTURING AND PRODUCTION
MANUFACTURING OPERATIONS
The Company manufactures both industrial grade products, which are
manufactured to an industry specification or for distribution from stock, and
specialty products, which are manufactured under more exacting standards to
assure that their chemical and physical properties meet the particular
requirements of the customer or the specialized application appropriate to its
intended market. Specialty products generally sell at higher margins than
industrial grade products.
Prior to the Borden Acquisition, polyvinyl chloride food wrap was
manufactured in North Andover, Massachusetts and Griffin, Georgia. In order to
streamline operations, the Company has closed the Massachusetts plant and
expanded and consolidated its domestic polyvinyl chloride food wrap
manufacturing operations at the Georgia plant. The Company also manufactures
polyvinyl chloride food wrap in Europe at three Resinite plants strategically
located in Spain, France and England.
The Company manufactures stretch wrap and industrial films at several large
geographically dispersed, integrated extrusion facilities located throughout
North America, which also have the ability to produce other products. The size
and location of those facilities, as well as their capacity to manufacture
multiple types of films or re-orient equipment as market conditions warrant,
enable the Company to achieve savings and minimize overhead and transportation
costs.
The Company manufactures polypropylene films at its remaining plant in North
Andover, Massachusetts. The Company has cast polypropylene capacity available in
its North Carolina plant and is adding new capacity for five layer blown
co-extruded film lines at its Wright Township, Pennsylvania facility. These
lines are expected to be commissioned in the fiscal year ending October 31, 1998
("Fiscal 1998").
At the FIAP facility located in Turate, Italy, the Company manufactures
polyvinyl chloride food wrap, unplasticized polyvinyl chloride twist wrap, and
converted and printed films. The Company manufactures flexible packaging and
converted films in Europe at facilities strategically located in Holland and
Belgium. The Company is in the process of installing new, efficient pallet wrap
equipment at these facilities which the Company believes will increase its
market presence in Europe in this product. The Company also manufactures
industrial films and flexible packaging and converted films at its facilities
located in Australia and New Zealand.
PRODUCTION
In the film manufacturing process, resins (primarily polyethylene, polyvinyl
chloride, and polypropylene) with various properties are blended with chemicals
and other concentrates (including coloring, where appropriate) to achieve a wide
range of specified product characteristics, such as color,
32
<PAGE>
clarity, tensile strength, toughness, thickness, shrinkability, surface
friction, transparency, sealability and permeability. The gauges of the
Company's products range from less than one mil (.001 inches) to more than 20
mils. The Company's extrusion equipment can produce printed products and film up
to 40 feet wide. The blending of various kinds of resin combined with chemical
and color additives is computer controlled to avoid waste and to maximize
product consistency. The blended mixture is melted by a combination of applied
heat and friction under pressure, and then is mechanically mixed. The mixture is
then forced (extruded) through a die, at which point it is expanded into a flat
sheet (cast) or a vertical tubular column (blown) of film and is cooled. The
cooled film can then be shipped to a customer or can be further processed and
then shipped. Generally, the Company's manufacturing plants operate 24 hours a
day, seven days a week, except for plants located in areas where hours of
operation are limited by law, local custom or in cases when 24 hour operations
are not economically advantageous.
The Company's domestic equipment has several processing features, including
the capability to print "in-line" and to cut tubular film at either end to
produce "bags" or to cut the side of the tubes to produce "sheeting." This
sheeting can then be sold or further processed by metallizing, perforating
and/or heat sealing it into a variety of products according to customer
specifications.
The Company's foreign operations have the capability of further processing
the sheeting using the Company's flexographic or rotogravure printing
capabilities. The printed sheet is then laminated, slit and/ or converted into a
form desired by the customer. Sale to the customer can occur after any process
or combination of processes.
The Company has regularly upgraded or replaced older equipment in order to
keep abreast of technological advances and to maximize production efficiencies
by reducing labor costs, waste and production time. During the past five fiscal
years, the Company made several capital improvements, which included the
construction of new manufacturing, warehouse and sales facilities in Alsip,
Illinois and Wright Township, Pennsylvania, the purchase of new state-of-the-art
extrusion equipment and the upgrading of older equipment. The Company is in the
process of shifting production among its plants to improve efficiency and cost
savings and is upgrading and replacing equipment at certain of these facilities
in order to increase production capacity and enhance efficiency. The Company
will continue to upgrade or replace equipment as it deems appropriate.
QUALITY CONTROL
The Company believes that maintaining the highest standards of quality in
all aspects of its manufacturing operations plays an important part in its
ability to maintain its competitive position. To that end, the Company has
adopted strict quality control systems and procedures designed to test the
mechanical properties of its products (such as strength, puncture resistance,
elasticity, abrasion characteristics and sealability), which it regularly
reviews, updates and modifies as appropriate. These quality control systems and
procedures have been implemented in the manufacturing facilities acquired as
part of the Borden Acquisition.
RAW MATERIALS
The Company manufactures film products primarily from polyethylene,
polypropylene and polyvinyl chloride resins, all of which are available from a
number of domestic and foreign suppliers. The Company selects its suppliers
based on the price, quality and characteristics of the resins they produce. As a
result of the Borden Acquisition, the Company has been able to achieve economies
of scale by reason of increased purchasing power for its North American
requirements. Most of the Company's purchases of resin in Fiscal 1997 have been
from 15 of the 20 international resin suppliers, none of which accounted for
more than 15% of the Company's requirements. The Company believes that the loss
of any resin supplier would not have a materially adverse effect on the Company.
33
<PAGE>
The resins used by the Company are produced from petroleum and natural gas.
Instability in the world markets for petroleum and natural gas could adversely
affect the prices of the Company's raw materials and their general availability,
and this could have an adverse effect on the Company's profitability if the
increased costs could not be passed on to customers or if the supply is limited.
The cost of resin typically comprises approximately 60% of a manufacturer's cost
of goods sold. With limited exceptions, the Company has historically been able
to pass on substantially all of the price increases in raw materials to its
customers on a penny for penny basis, although there can be no assurance that
the Company will be able to do so in the future. The Company generally maintains
a resin inventory of less than one month's supply and has not experienced any
difficulty in maintaining its supply. Other raw materials, principally chemical
colorings and other concentrates, are available from many sources.
MARKETING AND SALES
The Company believes that its ability to continue to provide superior
customer service will be critical to the Company's success. Even in those
markets where the Company's products are considered commodities and price is the
single most important factor, the Company believes that its sales and marketing
capabilities and its ability to timely deliver products can be a competitive
advantage. To that end, the Company has established good relations with its
suppliers, and has long-standing relationships with most of its customers, which
it attributes to its ability to consistently manufacture high-quality products
and provide timely delivery and superior customer service.
The Company believes that its research and development efforts, its high
efficiency equipment (which is both automated and microprocessor-controlled) and
the technical training given to its sales personnel enhance the ability of the
Company to expand its sales in all of its product lines. An important component
of the Company's marketing philosophy is the ability of its sales personnel to
provide technical assistance to customers. The Company's sales force regularly
consults with customers with respect to performance of its products and the
customers' particular needs and communicates with appropriate research and
development staff regarding these matters. In conjunction with the research and
development staff, sales personnel are often able to recommend a product or
suggest a resin blend to produce the product with the characteristics/properties
which best suit the customers' requirements.
The Company markets its polyethylene products in North America principally
through its own sales force under the supervision of national and regional
managers. The Company generally sells either directly to customers who are
end-users of the products or to distributors for resale to end-users.
The Company markets its polyvinyl chloride products in North America
primarily through large distributors. Sales of polypropylene in North America
are made by the Company's sales force primarily to packaging converters. The
Company has restructured its Proponite division sales force into the newly
formed PROformance division to use its preexisting relationships to sell its
barrier films, cast polypropylene films and other specialty products into the
existing market place. Because the Company has expanded and continues to expand
its product lines, sales persons are able to offer a much broader line of
products than they could offer prior to the Borden Acquisition.
During Fiscal 1996 and Fiscal 1997, approximately 52% and 35%, respectively,
of the sales by the Company in North America were directly to end-users with the
balance representing sales to distributors or representatives. The Company
serves approximately 16,000 customers, none of which account for more than 5% of
the Company's net sales.
Sales and marketing efforts in Europe and in the Asia/Pacific region are
primarily by the Company's sales force to end-users, although distributors are
used in cases where the distributor adds value to the customer.
34
<PAGE>
DISTRIBUTION
The Company believes that the timely delivery to customers of its products
is a critical factor in the Company's ability to maintain its market position.
Domestically, in order to ensure timely delivery, the Company uses both internal
and external sources of distribution. The Company maintains a fleet of 36
trucks, most of which it leases, for the delivery to customers of approximately
21% of the Company's products, and it uses dedicated service haulers, contract
carriers and common carriers where appropriate for the remainder of its
deliveries. This combination enables the Company to control the distribution
process and thereby insure priority handling and direct transportation of
products to its customers, thus improving the speed, reliability and efficiency
of delivery.
Because of the geographic dispersion of the Company's plants, the Company is
able to deliver most of its products within a 500 mile radius of its plants.
This enables the Company to reduce its use of warehouses to store product.
However, the Company also ships products great distances when necessary and
exports to other countries.
Internationally, the Company uses common and contract carriers to deliver
most of its products, both in the country of origin and for export. The Company
does not deliver its own products to an appreciable degree.
RESEARCH AND DEVELOPMENT
The Company has a research and development department with a staff of
approximately 20 persons. In addition, other members of management and
supervisory personnel, from time to time, devote substantial amounts of time to
research and development activities. The principal efforts of the research and
development department are directed to maintaining and improving quality control
in the Company's manufacturing operations, assisting sales personnel in
designing specialty products to meet individual customer's needs, developing new
products and reformulating existing products to improve quality and/or reduce
production costs. During Fiscal 1997, the Company has focused a significant
portion of its research and development efforts on co-extruded (layered), cold
seal, high barrier and MAPAC-Registered Trademark- (modified atmosphere
packaging, designed to either contain gases or allow the migration thereof)
technologies.
The Company's research and development department has developed a number of
products with unique properties which the Company considers proprietary, certain
of which are protected by patent.
During Fiscal 1997, the Company spent approximately $2,192,000 for research
and development activities. For the fiscal years ended October 31, 1996 and
1995, the Company incurred expenses for research and development activities of
$635,000 and $698,000, respectively.
PROPRIETARY RIGHTS
The Company owns or has rights to 77 issued patents and has filed 36
additional patent applications. The Company also owns a number of trademarks
throughout the world and is in the process of applying for additional
trademarks. The Company does not consider that any of these intellectual
property rights are material to its overall business. In connection with the
Borden Acquisition, the Company obtained the right to use the Borden trademark
in conjunction with the Company's trademark until October 1998 as the Borden
trademark is phased out.
COMPETITION
The business of supplying plastic packaging products is extremely
competitive, and the Company faces competition from a substantial number of
companies engaged in similar and alternative packaging products businesses. Some
of the Company's competitors are subsidiaries or divisions of large
international, diversified companies with extensive production facilities, well
developed sales and marketing staffs and substantially greater financial
resources than the Company.
35
<PAGE>
The Company competes principally with (i) local manufacturers, who compete
with the Company in specific geographic areas, generally within a 500 mile
radius of its plants, (ii) companies which specialize in the extrusion of a
limited group of products which they market nationally, and (iii) a limited
number of manufacturers of flexible packaging products who offer a broad range
of products and maintain production and marketing facilities domestically and
internationally.
Because many of the Company's products are available from a number of local
and national manufacturers, competition is highly price sensitive and margins
are relatively low. The Company believes that all of its products require
efficient, low cost and high speed production to remain competitive. The Company
believes it also competes on the basis of quality, service (including its
ability to supply customers in a timely fashion) and product differentiation.
The Company believes that there are few barriers to entry into many of the
Company's markets, enabling new and existing competitors to rapidly affect
market conditions. As a result, the Company may experience increased competition
resulting from the introduction of products by new manufacturers. In addition,
in several of the Company's markets, products are generally regarded as a
commodity. As a result, competition in such markets is based almost entirely on
price and service.
BACKLOG
The Company estimates that the total dollar volume of its backlog as of the
end of Fiscal 1997 and Fiscal 1996 was approximately $58,000,000 and
$40,000,000, respectively. These backlogs represent approximately 27 days of
production in Fiscal 1997 and 14 days in Fiscal 1996. The Company believes that
because the great majority of its production is based upon purchase orders
rather than long term contracts, the amount of its backlog is not an important
indicator of future sales.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, Federal, state and
local environmental laws and regulations, including, but not limited to, those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, the remediation of soil and groundwater
contaminated by petroleum products or hazardous substances or wastes, and the
health and safety of employees. Compliance with environmental laws, stricter
interpretations of or amendments to such laws, or more vigorous enforcement
policies by regulatory agencies may require material expenditures by the
Company. The nature of the Company's current and former operations and the
history of industrial uses at some of its facilities expose the Company to the
risk of liabilities or claims with respect to environmental and worker health
and safety matters.
In addition, under certain environmental laws, a current or previous owner
or operator of property may be jointly and severally liable for the costs of
investigation, removal or remediation of certain substances on, under or in such
property, without regard to negligence or fault. The presence of, or failure to
remediate properly such substances may adversely affect the ability to sell or
rent such property or to borrow using such property as collateral. In addition,
persons who generate, arrange for the disposal or treatment of, or dispose of
hazardous substances may be jointly and severally liable for the costs of
investigation, remediation or removal of such hazardous substances at or from
the disposal or treatment facility, regardless of whether the facility is owned
or operated by such person. Responsible parties also may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. The Company believes that
there are no current environmental matters that would have a material adverse
effect on the Company's financial position or results operations.
36
<PAGE>
NET ASSETS HELD FOR SALE
At the time of the Company's acquisition of BGP, management decided not to
retain the rigids businesses of BGP. The rigids businesses manufacture, market
and distribute wet food containers, dry food trays and disposable food service
products. These businesses are not considered core businesses, and the Company
has offered these businesses for sale with the intention that they would be sold
within one year from the date of acquisition and it would use the proceeds from
the sale to pay down its debt. The Company is currently negotiating the sale of
these businesses, although there can be no assurance that any transaction will
occur. Following October 31, 1997, such businesses are being accounted for as
discontinued operations.
EMPLOYEES
At October 31, 1997, the Company had approximately 4,200 employees
worldwide, including employees at its rigids operations and officers and
administrative personnel. In North America, the Company has two collective
bargaining agreements, one of which expired in February 1998, covering
approximately 320 employees. The Company is currently renegotiating a new
collective bargaining agreement to replace the one that has expired. Further,
the Company has collective bargaining agreements at 16 international facilities
covering substantially all of the hourly employees at such international
facilities. As is common in many foreign jurisdictions, substantially all of the
Company's employees in such foreign jurisdictions are covered by country-wide
collective bargaining agreements. While the Company believes that its relations
with its employees are satisfactory, a dispute between the Company and its
employees could have a material adverse effect on the Company.
PROPERTIES
The Company's principal executive and administrative offices are located in
a leased building in South Hackensack, New Jersey.
The Company owns and leases numerous properties in the ordinary course of
business. Currently such properties consist of ten manufacturing facilities in
the United States and Canada, twelve in Europe, three in Australia, four in New
Zealand and one in Japan, pursuant to a joint venture with Hitachi. Sales
offices are assigned to each of the Company's plants.
In addition, as part of the Borden Acquisition, the Company acquired ten
leaseholds for warehouse and office facilities, nine in the United States and
one in Canada. The leases expire at various times through 2018. Some of these
leases provide renewal options.
The Company is in the process of divesting itself of certain of these
facilities, including those located at: North Andover, Massachusetts; Moonachie,
New Jersey; Scarborough, Ontario, Canada; Les Ulis, France; and Remschied,
Germany.
37
<PAGE>
The following chart sets forth the properties owned and operated by the
Company:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION(1) SQUARE FOOTAGE
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
NORTH AMERICA
Griffin, Georgia.................................................................................. 330,000
Wright Township, Pennsylvania..................................................................... 328,000
North Andover, Massachusetts...................................................................... 250,000
Matthews, North Carolina.......................................................................... 242,000
Gainesville, Texas................................................................................ 220,000
Alsip, Illinois................................................................................... 182,000
West Hill, Ontario, Canada........................................................................ 117,000
Chino, California................................................................................. 115,000
Waxahachie, Texas................................................................................. 100,000
Edmonton, Alberta, Canada......................................................................... 15,000
ASIA/PACIFIC
Auckland, New Zealand............................................................................. 154,000
Christchurch, New Zealand......................................................................... 128,000
Shimodate, Japan.................................................................................. 69,000
Sydney, Australia................................................................................. 180,000
Melbourne, Australia.............................................................................. 45,000
EUROPE
Apeldoom, Holland................................................................................. 267,000
Baudour-Lez-Mons, Belgium......................................................................... 223,000
Turate, Italy..................................................................................... 220,000
Bridgwater, England............................................................................... 220,000
Beuningen, Holland................................................................................ 122,000
Fecamp, France.................................................................................... 105,000
Pithiviers, France................................................................................ 100,000
Venlo, Holland.................................................................................... 68,000
Edinburgh, Scotland............................................................................... 68,000
Southampton, England.............................................................................. 61,000
Alicante, Spain................................................................................... 52,000
Barbezieux, France................................................................................ 25,000
</TABLE>
- ------------------------
(1) Where the Company maintains multiple facilities at any particular location,
the square footage has been aggregated. All facilities are owned by the
Company except for the following facilities, subject to leasehold interests,
which begin expiring in 1998: Bridgwater, England; Venlo, Holland; Auckland,
New Zealand (both facilities); Christchurch, New Zealand (one of two
facilities); Sydney, Australia (one of three facilities); and Melbourne,
Australia.
The Company believes that all of its properties are well maintained and in
good condition, and that the current operating facilities are adequate for its
present and immediate future business needs. However, the Company is in the
process of increasing capacity and automating some manufacturing operations in
Europe and relocating and consolidating some manufacturing operations in North
America.
At November 1, 1996, the Company had two separate manufacturing operations
in North Andover, Massachusetts. The Company has closed one of these facilities
and transferred the operations and equipment to other Company manufacturing
facilities. In addition, as part of the Borden Acquisition, the Company acquired
ten leaseholds for warehouse and office facilities, nine in the United States
and one in
38
<PAGE>
Canada. The Company has closed down many of these facilities and transferred
warehouse and office operations to existing Company facilities.
In aggregate, the Company currently utilizes approximately 6 million square
feet of manufacturing, office and warehouse space excluding the North Andover
facility being closed. Sales offices are assigned to each of the Company plants.
As of October 31, 1997, the Company's manufacturing facilities had a combined
average annual production capacity exceeding 1 billion pounds.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company believes that there are currently no
material legal proceedings the outcome of which would have a material adverse
effect on the Company's financial position or its results of operations.
FORWARD LOOKING STATEMENTS
Certain statements by the Company in this Prospectus in its description of
the business of the Company, both prior to and subsequent to the Borden
Acquisition, including its contemplated activities with respect to the Borden
packaging business operations which it acquired, its statements as to its
beliefs with respect to its business and its prospects and its statements of
potential changes in the operations of the combined AEP and Borden business,
potential savings and the integration of the Borden operations into the
Company's business and statements about the Company's prospects for the future,
such as its ability to generate sufficient working capital, its ability to
continue to maintain sales to justify capital expenses, and its ability to
generate additional sales and cash flow to meet the added costs incurred by the
Company as a result of the Borden Acquisition and the debt incurred, including
its ability to meet the required payments under the credit agreement pursuant to
which a portion of the purchase price of the Borden Acquisition was financed.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected, including risks
associated with the ability of the Company's management to integrate the Borden
operations with the AEP operations, the ability of the Company to effect cost
savings in the combined operations of AEP and Borden, the ability of the Company
to manage both operations efficiently, changes in market conditions, inability
to pass on raw material cost increases, and competitive factors.
39
<PAGE>
MANAGEMENT
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
J. Brendan Barba 56 Chairman of the Board, President and Director
Paul M. Feeney 55 Executive Vice President and Director
John J. Powers 33 Executive Vice President--Sales and Marketing
David J. Cron 43 Executive Vice President--Manufacturing
Lawrence R. Noll 49 Vice President, Secretary, Controller and Director
James B. Rafferty 45 Vice President and Treasurer
Robert S. House 53 Vice President--Tax
Jean L'Allier 42 Vice President and General Counsel
Robert Seavey 51 Vice President--International Operations
Kenneth Avia 55 Director
William H. Carter 44 Director
Paul E. Gelbard 67 Director
C. Robert Kidder 53 Director
Clifton S. Robbins 39 Director
Lee C. Stewart 49 Director
Scott M. Stuart 38 Director
</TABLE>
J. BRENDAN BARBA is one of the founders of the Company and has been its
President and a director since its organization in January 1970. In November
1985 Mr. Barba assumed the additional title of Chairman of the Board of
Directors of the Company.
PAUL M. FEENEY has been an Executive Vice President and a director of the
Company since December 1988. From 1980 to 1988 Mr. Feeney was Vice President and
Treasurer of Witco Corporation.
JOHN J. POWERS was elected Executive Vice President Sales and Marketing in
May 1996. Prior thereto, he was Vice President-Industrial Products of the
Company.
DAVID J. CRON has been Executive Vice President--Manufacturing since July
1997 Prior thereto he was Vice President--Manufacturing, a plant manager and
held various other positions since 1976.
LAWRENCE R. NOLL has been a Vice President, Secretary and a director of the
Company since September 1993. For more than 16 years prior thereto, he was the
Controller of the Company, and he was re-elected Controller in October 1996.
JAMES B. RAFFERTY has been Vice President and Treasurer of the Company
since October 1996. Prior thereto, he was Assistant Treasurer since July 1996.
From 1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden,
Inc.
40
<PAGE>
ROBERT HOUSE has been Vice President-Tax since October 1996. Prior thereto,
he was Manager-International Tax at Avnet Inc. since 1994. Prior thereto, he was
Director of Taxes at Sunoco Products Company.
JEAN L'ALLIER has been employed by the Company as general counsel since
April 1997. He was elected Vice President and General Counsel in November 1997.
Prior to April 1997 he was engaged in the practice of law as a sole
practitioner.
ROBERT SEAVEY was employed by the Company since December 1996 as director
of European operations. He was elected Vice President--International Operations
in November 1997. Prior to December 1996 he was held various management
positions with Mobil Chemicals and Interplast Group/Formosa Plastics.
KENNETH AVIA has served as a director of the Company since 1980. Mr Avia
has been Executive Vice President of First Data Merchant Services (a merchant
credit card servicing company) since 1993 and served as Divisional Vice
President of Automatic Data Processing, Inc. from 1984 to 1993.
WILLIAM H. CARTER has served as a director of the Company since October
1996. Mr. Carter has served as Executive Vice President, Chief Financial Officer
and a director of Borden, Inc. since 1995, and was employed by Price Waterhouse
& Co. from 1975 to 1994, most recently as a partner.
PAUL E. GELBARD has served as a director of the Company since 1991. Mr.
Gelbard has been Of Counsel to Bachner, Tally, Polevoy & Misher LLP, counsel to
the Company, since January 1997 and was a Partner of such firm from 1974 to
1996.
C. ROBERT KIDDER has served as a director of the Company since October
1996. Mr. Kidder has been Chairman of the Board and Chief Executive Officer of
Borden, Inc. since 1995 and Chairman and Chief Executive Officer of Duracell
International, Inc. from 1991 to 1995. Mr. Kidder also serves as a member of the
Board of Directors of Borden, Inc., Electronic Data Systems Corporation and Dean
Witter, Discover & Co.
CLIFTON S. ROBBINS has served as a director of the Company since October
1996. Mr. Robbins has been a member of KKR & Co., LLC since 1996; a general
partner of Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of
Kohlberg Kravis Roberts & Co., from 1987 to 1994. Mr. Robbins also serves as a
member of the Board of Directors of Borden, Inc., Borden Chemicals & Plastics,
IDEX Corporation, Kindercare Learning Centers, Inc., Newsquest Capital PLC,
Newsquest Media Group, Ltd. and Glenisla Group Ltd. (U.K.).
LEE C. STEWART has served as a director of the Company since December 1996.
Mr. Stewart has been Vice President of Union Carbide Corporation since 1996, and
was an investment banker with Bear Stearns & Co. Inc. for more than five years
prior thereto.
SCOTT M. STUART has served as a director of the Company since October 1996.
Mr. Stuart has been a Member of KKR & Co., LLC since 1996; general partner of
Kohlberg Kravis Roberts & Co., L.P. in 1995; and an executive of Kohlberg Kravis
Roberts & Co. from 1986 to 1994. Mr. Stuart also serves as a member of the Board
of Directors of Borden, Inc., Newsquest Capital PLC, World Color Press, Inc.,
Glenisla Group Ltd. (U.K.), KC Cable, KSL Golf Holdings, Inc., KSL Land
Corporation, KSL Recreation Corporation and Newsquest Media Group, Ltd.
The Company's directors are elected for terms of three years. Their terms
are classified so that approximately one-third are elected each year.
41
<PAGE>
GOVERNANCE AGREEMENT
In connection with the Borden Acquisition, Borden and the Company entered
into a Governance Agreement, dated as of June 20, 1996 (the "Governance
Agreement"), with respect to certain matters relating to the corporate
governance of the Company. The Governance Agreement provides that the Company's
Board of Directors shall initially consist of ten members. Borden is entitled to
designate four persons to serve on the Board, subject to reduction in the event
that Borden's stockholdings are reduced below 25% of the outstanding common
stock of the Company (the "Shares"), and to participate in the selection of one
independent director so long as Borden's stockholdings remain above 10%.
The Governance Agreement also provides that Borden will have certain rights
to designate directors to serve on specified committees, that the approval of a
number of directors that represent at least 66-2/3% of the total number of
directors will be required on certain specific Board actions, and that, as long
as Borden owns in excess of 25% of Shares, a Borden-designated director must be
part of the 66-2/3% majority. The Governance Agreement also provides Borden with
preemptive rights to purchase additional Shares in order to maintain its
percentage ownership of the Shares and that Borden may not acquire Shares such
that for the three-year period following the closing of the Borden Acquisition
its percentage ownership of Shares would increase beyond the number of Shares it
acquired pursuant to the Borden Acquisition and that Borden is subject to
certain additional standstill provisions for the three-year period.
42
<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $200,000,000
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1998, to all holders of Old
Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on November 19, 1997, in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 90 days after the date of issuance of the Old Notes and to use
its best efforts to cause the registration statement relating to the Exchange
Offer to become effective under
the Securities Act not later than 150 days after the date of issuance of the Old
Notes and the Exchange Offer to be consummated not later than 180 days after the
date of issuance of the Old Notes (or use its best efforts to cause to become
effective by the 180th calendar day after the Issuance Date (as defined) a shelf
registration statement with respect to resales of the Old Notes). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder" with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange
43
<PAGE>
Notes are acquired in the ordinary course of such Holder's business and that
such Holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Notes. See "--Resale of Exchange Notes." Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no action letter, there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from November 19, 1997.
Tendering holders of the Old Notes shall 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 Old Notes
pursuant to the Exchange Offer.
44
<PAGE>
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on ,
1998, unless the Company, in its sole discretion, has extended the period of
time for which the Exchange Offer is open (such date, as it may be extended, is
referred to herein as the "Expiration Date") . The Expiration Date will be at
least 20 business days after the commencement of the Exchange Offer in
accordance with Rule 14e-1 (a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by
45
<PAGE>
written instruments of transfer in form satisfactory to the Company and duly
executed by the registered holder, and the signature on the endorsement or
instrument of transfer must be guaranteed by a bank, broker, dealer, credit
union, savings association, clearing agency or other institution (each an
"Eligible Institution") that is a member of a recognized signature guarantee
medallion program within the meaning of Rule 17Ad-15 under the Exchange Act. If
the Exchange Notes and/or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance
46
<PAGE>
might, in the judgment of the Company or its counsel, be unlawful. The Company
also reserves the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to any particular Old Notes either before or
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Notes in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Notes or transfer
ownership of such Old Notes on the account books maintained by a book-entry
transfer facility. The Transferor further agrees that acceptance of any tendered
Old Notes by the Company and the issuance of Exchange Notes in exchange therefor
shall constitute performance in full by the Company of certain of its
obligations under the Registration Rights Agreement. All authority conferred by
the Transferor will survive the death or
47
<PAGE>
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a Prospectus in connection with any resale of such Exchange
Notes. 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 Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 120 days after the Expiration
Date, make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender, and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
48
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes which are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
book-entry confirmation of such Old Notes into the Exchange Agent's account at
the book-entry transfer facility, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount than
the holder desires to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
49
<PAGE>
have a material adverse effect on the contemplated benefits of the Exchange
Offer to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder 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 such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any governmental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
50
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal, should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
Attn: Corporate Trust Attn: Corporate Trust
Department Department
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
</TABLE>
By Facsimile:
(212) 815-5915
Attn: Corporate Trust Department
Telephone: (212) 815-5735
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $300,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company.
Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tenders be accepted from or on behalf of) holders of Old Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Notes in such jurisdiction. In any jurisdiction in which the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
51
<PAGE>
the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
52
<PAGE>
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further 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 that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a Prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a Prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
53
<PAGE>
DESCRIPTION OF CREDIT FACILITIES
CREDIT AGREEMENT
GENERAL
On October 11, 1996, the Company and certain of its subsidiaries entered
into a Credit Agreement (the "Credit Agreement") with a syndicate of twenty-five
banks led by Morgan Guaranty Trust Company of New York, as agent (the "Agent").
The Credit Agreement was amended as of October 24, 1997, and is described herein
as so amended. The Credit Agreement provides for a term loan commitment of
$350,000,000 and a revolving credit commitment of $100,000,000. The revolving
credit commitment may be utilized for the issuance of letters of credit in a
maximum stated amount at any one time outstanding of $30,000,000. The term loan
commitment expired on the date of the closing of the Credit Agreement and the
borrowing of the term loan thereunder. Amounts repaid or prepaid with respect to
the term loan may not be reborrowed. As of October 31, 1997, the principal
amount of the term loan outstanding was $320,000,000. Upon application of the
net proceeds from the sale of the Notes, the outstanding principal amount of the
term loan will be reduced to approximately $128,000,000.
The proceeds of the term loan and a portion of the proceeds of the revolving
credit loans were used to refinance certain indebtedness of the Company to The
Chase Manhattan Bank in an aggregate amount of approximately $95,000,000 and to
finance the cash portion of the purchase price paid in connection with the
Borden Acquisition and to pay fees and expenses in connection with such
purchase. The remaining proceeds of the revolving credit loans and the letters
of credit are to be used for general corporate purposes.
The loans bear interest at a rate based on either the Base Rate (the greater
of (i) the prime rate of the Agent and (ii) the Federal Funds Rate plus 1/2%) or
the London Interbank Offered Rate ("LIBOR"), at the option of the Company, in
each case plus the applicable margin. The applicable margin is determined based
on a pricing schedule and increases as the ratio (the "Cash Flow Ratio") of the
consolidated debt of the Company and its subsidiaries to Consolidated EBITDA
increases. "Consolidated EBITDA" equals the consolidated net income of the
Company and its subsidiaries plus consolidated interest expense, depreciation,
amortization and other non-cash charges, income tax expense and certain
transaction costs. The margin on base rate loans varies from 0% to .75%. The
margin on LIBOR loans varies from .45% to 1.75%. Interest on base rate loans is
payable in arrears on the last day of each March, June, September and December
and on the date on which any Base Rate loan is converted to a LIBOR loan.
Interest on LIBOR loans is payable on the last day of the applicable interest
period and, if the interest period is longer than three months, at three-month
intervals during such interest period.
The revolving credit commitment expires on October 11, 2002. Prior thereto,
the revolving credit commitment is subject to automatic reduction on the date
and in the amount of each mandatory prepayment applied to revolving credit loans
or to provide cash collateral for letter of credit liabilities.
The term loan is subject to scheduled amortization on the last day of
January, April, July and October of each year. Such amortization is in the
amount of $3,750,000 for each payment date during 1998 and 1999, $5,000,000 for
each payment date during 2000, $6,250,000 for each payment date during 2001 and
the first three payment dates of 2002, with a final payment of $226,250,000 due
at maturity.
Mandatory prepayments of the loans are required in the event of certain
asset sales by the Company and in the event that the Company incurs long-term
debt in a principal amount in excess of $5,000,000. The amount of each such
prepayment is the amount of cash received by the Company, net of fees,
commissions, expenses and similar costs and, in the case of asset sales, debt
secured by a lien on such assets which is discharged with the proceeds of sale,
as well as certain taxes and reserves. "Excess Cash Flow" means the excess of
(i) the sum of Consolidated EBITDA plus certain increases in cash and cash
equivalents over (ii) the sum of income taxes paid; cash interest paid;
consolidated capital expenditures made in cash;
54
<PAGE>
certain decreases in cash and cash equivalents; mandatory reductions in
long-term debt; certain optional prepayments of loans; certain investments,
repurchases of stock and interest rate hedge payments; and cash expenditures of
up to $5,000,000 made in the ordinary course of business. Mandatory prepayments
are applied first to the term loans, then to the revolving credit loans and then
to cash collateralize letters of credit. Mandatory prepayments made from the
proceeds of asset sales or long-term debt other than the Notes are applied to
the term loans ratably to future installments thereof. Mandatory prepayments
made from the proceeds of the issuance of the Notes and from Excess Cash Flow
are applied to the term loans to future installments thereof in inverse order of
maturity. The obligations of the Company under the Credit Agreement are
unsecured.
COVENANTS
The Credit Agreement provides for a facility fee based on the aggregate
amount of the term loans outstanding and the revolving credit commitment (used
or unused), which fee also varies based on the Cash Flow Ratio. This fee varies
from .30% to .50%. It also provides for a letter of credit fee based on the
aggregate daily undrawn stated amount of all letters of credit and a letter of
credit fronting fee to each issuer of a letter of credit. The letter of credit
fee varies based on the Cash Flow Ratio from a low of .45% to a high of 1.75%.
The fronting fee is .25% per annum.
The Credit Agreement contains certain covenants customary for facilities of
this type. These include maintenance of a Cash Flow Ratio not in excess of the
amount specified for each relevant period and a Fixed Charge Coverage Ratio of
not less than the amount specified for each relevant period. The Cash Flow Ratio
varies from a high of 5.75:1 to a low of 2.5:1 in accordance with a schedule set
forth in the Credit Agreement. The Fixed Charge Coverage Ratio (the ratio of
Consolidated EBITDA minus consolidated capital expenditures to consolidated
interest expense) varies from a low of 1.15:1 to a high of 2.5:1 in accordance
with a schedule set forth in the Credit Agreement.
The Company is also subject to restrictions on its ability to sell its
assets and make investments. In general, the Company may make asset sales of up
to $50,000,000 during any fiscal year, provided that at least 80% of the
consideration payable in connection with such sale consists of cash, and may
make investments having an aggregate net book value not in excess of
$65,000,000.
EVENTS OF DEFAULT
The Credit Agreement contains events of default which are customary for
facilities of this type and are subject to certain customary grace periods.
These include: failure to make required payments thereunder; breach of covenant;
material inaccuracy of any representation or warranty; failure to make any
required payment under, or the acceleration of, certain other indebtedness in
excess of $15,000,000; bankruptcy, insolvency or liquidation; failure to make
required payments in respect of certain employee benefits; the entry of
judgments for the payment of money in excess of $15,000,000; and Change in
Control. "Change in Control" is defined to mean (i) the acquisition by any
person or group (other than Borden, any of its affiliates as of the date of the
Credit Agreement or J. Brendan Barba) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of
39% or more of the outstanding shares of Common Stock of the Company or (ii) the
cessation of the Continuing Directors to constitute a majority of the Board of
Directors of the Company. The "Continuing Directors" at any date are those
directors who were directors during the twelve-month period prior to such date
or who were nominated to such position by the Continuing Directors then in
office.
The occurrence of an event of default (including the expiration of
applicable grace periods) entitles the lenders (acting by majority in commitment
or principal amount, as applicable) to terminate the revolving credit
commitment, to accelerate the loans and all other amounts payable under the
Credit Agreement and to require the Company to pay to the Agent an amount equal
to the aggregate stated
55
<PAGE>
amount of all outstanding letters of credit, to be held as cash collateral for
the obligations of the issuers of such letters of credit.
AMENDMENT TO CREDIT AGREEMENT
As a result of the Company's high degree of leverage and the effect on net
sales that occurred as a result of overcapacity in the domestic stretch wrap
industry, the Company believed there was a substantial likelihood that it would
fail to maintain certain financial ratios, including minimum fixed charge
coverage and leverage ratios, at the levels required by the Credit Agreement.
The Company has received a waiver relating to such ratios and has entered into
an amendment to the Credit Agreement (the "Amendment"). The Amendment, which is
dated as of October 24, 1997 (the terms of which are incorporated in the
description of the Credit Agreement above), effected several changes in the
Credit Agreement as in effect prior to the Amendment.
The principal effects of the Amendment relate to the interest rates
applicable to the indebtedness under the Credit Agreement and the amortization
schedule with respect to the term loan made thereunder. The interest rate
margins which determine the interest rates applicable to the loans under the
Credit Agreement have been increased as follows: the margin applicable to Base
Rate loans (formerly 0%) has been increased to a range (which varies based on
the Cash Flow Ratio) from 0% to .75% and the margin applicable to LIBOR Rate
loans (which formerly varied, based on the Cash Flow Ratio, from .25% to .625%)
has been increased to a range from .45% to 1.75%. The required amortization
payments in respect of the term loan have been substantially reduced so that,
instead of amortizing fully over the term of the loan, a balloon payment equal
to the remaining outstanding principal balance of the term loan will be due at
maturity. In addition, the Amendment effected certain changes in the financial
ratios under the Credit Agreement.
OTHER CREDIT FACILITIES
The Company also has a $10,000,000 unsecured revolving credit facility
available for working capital purposes. At October 31, 1997, there were no
outstanding borrowings under this facility.
The Company also maintains various unsecured short-term credit facilities at
its foreign subsidiaries. At October 31, 1997, the aggregate amount outstanding
under such facilities was $51,025,000 and approximately $19,975,000 was
available for borrowing. Borrowings from these facilities are used to support
operations at such subsidiaries and are generally serviced by cash flow from
operations at such subsidiaries. Approximately $42,000,000 of such indebtedness
is guaranteed by the Company.
56
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
As used below in this "Description of Exchange Notes" section, the "Company"
means AEP Industries Inc. but not any of its subsidiaries. The Exchange Notes
are to be issued under an Indenture, to be dated as of November 19, 1997 (the
"Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee"). The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof. A
copy of the Indenture described below will be made available upon request. The
statements under this caption relating to the Exchange Notes and the Indenture
are summaries and do not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are qualified in their entirety by such reference.
On November 19, 1997, the Company issued $200 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
The Exchange Notes will be general unsecured obligations of the Company,
limited to $200,000,000 aggregate principal amount. The Exchange Notes will be
senior subordinated obligations of the Company, subordinated in right of payment
to all Senior Debt of the Company. The Exchange Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple thereof. No service charge will be made for any registration
of transfer or exchange of Exchange Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. Initially, the Trustee will act as paying agent and
registrar for the Exchange Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on November 15, 2007 and will bear interest at the
rate of 9.875% per annum from the Issue Date or from the most recent interest
payment date to which interest has been paid or provided for. Interest will be
payable semiannually on May 15 and November 15 of each year, commencing May 15,
1998, to the Person in whose name a Note is registered (a "Holder") at the close
of business on the preceding May 1 or November 1 (each, a "Record Date"), as the
case may be. Interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months. Holders must surrender the Notes to the paying
agent for the Notes to collect principal payments. The Company will pay
principal and interest by check and may mail interest checks to a Holder's
registered address.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of the Company, in
whole or in part, at any time on or after November 15, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
Holder of Notes to be redeemed at its address appearing in the register for the
Notes, in amounts of $1,000 or an integral multiple of $1,000, at the following
redemption prices (expressed as percentages of principal amount), plus accrued
interest to but excluding the date fixed for redemption (subject to the right of
Holders on the relevant Record Date to receive interest due on an
57
<PAGE>
interest payment date that occurs on or prior to the date fixed for redemption),
if redeemed during the 12-month period beginning November 15 of the years
indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------------ -----------
<S> <C>
2002.......................................................................... 104.9375%
2003.......................................................................... 103.2917
2004.......................................................................... 101.6459
2005 and thereafter........................................................... 100.0000
</TABLE>
In addition, prior to November 15, 2000, the Company may redeem up to 35% of
the Notes originally issued with the net cash proceeds received by the Company
from one or more Equity Offerings, at a redemption price equal to 109.875% of
the principal amount thereof, plus accrued and unpaid interest to the date fixed
for redemption; PROVIDED, HOWEVER, that at least $100 million in aggregate
principal amount of Notes remains outstanding immediately after any such
redemption (excluding any Notes owned by the Company or any of its Affiliates).
Notice of redemption described in this paragraph must be mailed to Holders of
Notes not later than 60 days following the consummation of the relevant Equity
Offering.
Selection of Notes for any partial redemption shall be made by the Trustee,
in accordance with the rules of any national securities exchange on which the
Notes may be listed or, if the Notes are not so listed, pro rata or by lot or in
such other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. Notice of redemption will be mailed before the date fixed
for redemption to each Holder of Notes to be redeemed at his or her registered
address. On and after the date fixed for redemption, interest will cease to
accrue on Notes or portions thereof called for redemption.
The Notes will not have the benefit of any sinking fund.
RANKING
The Company's obligations with respect to the payment of the principal of,
premium, if any, and interest (including Additional Interest (as defined below))
on, and all other obligations in respect of, each and all of the Notes shall be
subordinated in right of payment, to the extent and in the manner provided in
the Indenture, to the prior payment in full in cash of all Senior Debt of the
Company.
In the event of (i) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or to its creditors, as such, or
to its assets, or (ii) any liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors
or any other marshaling of assets and liabilities of the Company, then and in
any such event specified in (i), (ii) or (iii) above, the holders of Senior Debt
shall be entitled to receive payment in full in cash of all amounts due or to
become due on or in respect of all Senior Debt before the Holders of the Notes
are entitled to receive any Note Payment (as defined below), and in any such
event any Note Payment to which the Holders of the Notes or the Trustee on their
behalf would be entitled, but for the subordination provisions of the Indenture,
shall be made by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other Person making such payment or distribution,
directly to the holders of the Senior Debt (pro rata to such holders on the
basis of the respective amounts of Senior Debt held by such holders) or their
respective trustee, agent or other representative under any agreement or
indenture pursuant to which any such Senior Debt may have been issued, as their
respective interests may appear, to the extent necessary to pay all such Senior
Debt in full, in cash, after giving effect to any concurrent payment,
distribution or provision therefor to or for the holders of such Senior Debt.
In the event that, notwithstanding the foregoing provision prohibiting such
Note Payment, any Note Payment shall be received by the Trustee or any Holder of
Notes at a time when such Note Payment is
58
<PAGE>
prohibited as described in the preceding paragraph and before all obligations in
respect of Senior Debt are paid in full in cash, such Note Payment shall be
received and held in trust for the benefit of, and shall be paid over or
delivered to, the holders of Senior Debt (pro rata to such holders on the basis
of the respective amounts of Senior Debt held by such holders) or their
respective trustee, agent or other representative under any agreement or
indenture pursuant to which any of such Senior Debt may have been issued, as
their respective interests may appear, for application to the payment of Senior
Debt remaining unpaid until all such Senior Debt has been paid in full in cash
after giving effect to any concurrent payment, distribution or provision
therefor to or for the account of the holders of such Senior Debt.
No direct or indirect payment, deposit or distribution of any kind or
character, whether in cash, property or securities (including any payment made
to Holders of the Notes under the terms of Indebtedness subordinated to the
Notes, but excluding any payment or distribution of Permitted Junior Securities)
by or on behalf of the Company of principal of, premium, if any, or interest
(including Additional Interest) on, or any other obligation in respect of, the
Notes whether pursuant to the terms of the Notes, upon acceleration, by way of
repurchase, redemption, defeasance or otherwise (all such payments, deposits or
distributions being referred to herein, individually and collectively, as a
"Note Payment"), shall be made if, at the time of such Note Payment, there
exists a default (a "Payment Default") in the payment when due of all or any
portion of the obligations under or in respect of any Designated Senior Debt,
whether at maturity, on account of mandatory redemption or prepayment,
acceleration or otherwise, and such Payment Default shall not have been cured or
waived. In addition, during the continuance of any default or event of default
(other than a Payment Default) with respect to any Designated Senior Debt
pursuant to which the maturity thereof may be accelerated immediately without
the giving of any notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, no Note Payment
may be made by or on behalf of the Company for a period (a "Payment Blockage
Period") commencing upon the receipt by the Company and the Trustee of written
notice of such default or event of default from the holder or holders of such
Designated Senior Debt or any trustee, agent or other representative acting on
behalf of the holder or holders of such Designated Senior Debt specifying an
election to effect a Payment Blockage Period (a "Payment Blockage Notice") and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the holder
or holders of such Designated Senior Debt or any trustee, agent or other
representative acting on behalf of the holder or holders of such Designated
Senior Debt, (ii) by discharge or repayment in full in cash of such Designated
Senior Debt or (iii) because the default or event of default giving rise to such
Payment Blockage Notice has been cured, waived or ceased to exist). Subject to
the provisions of the first sentence of this paragraph, the Company may resume
payments on the Notes after such Payment Blockage Period.
Not more than one Payment Blockage Period may be commenced with respect to
the Notes during any period of 360 consecutive days. No default or event of
default that existed or was continuing on the date of commencement of any
Payment Blockage Period with respect to the Designated Senior Debt initiating
such Payment Blockage Period may be, or be made, the basis for the commencement
of any other Payment Blockage Period by the holder or holders of such Designated
Senior Debt or any trustee, agent or other representative acting on behalf of
the holder or holders of such Designated Senior Debt, whether or not within a
period of 360 consecutive days, unless such default or event of default has been
cured or waived for a period of not less than 90 consecutive days.
In the event that, notwithstanding the foregoing, any Note Payment shall be
received by the Trustee or any Holder when such Note Payment is prohibited by
the second preceding paragraph, such payment shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of Designated
Senior Debt or any trustee, agent or other representative under any agreement or
indenture pursuant to which any such Designated Senior Debt may have been
issued, as their respective interests may appear, but only to the extent that,
upon notice from the Trustee to the holders of Designated Senior Debt that such
59
<PAGE>
prohibited Note Payment has been made, the holders of the Designated Senior Debt
(or their trustee, agent or other representative) notify the Trustee in writing
of the amounts then due and owing on the Designated Senior Debt, if any, and
only the amount specified in such notice to the Trustee shall be paid to or for
the account of the holders of Designated Senior Debt.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this section
will not be construed as preventing the occurrence of an Event of Default
described in clause (a), (b) or (c) of the first paragraph under "--Events of
Default."
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders
will be paid to holders of Senior Debt of the Company to the extent necessary to
repay such Senior Debt in full, and the Company may be unable to fully meet its
obligations with respect to the Notes. Subject to the restrictions set forth in
the Indenture, in the future the Company may incur additional Senior Debt.
At October 31, 1997, after giving pro forma effect to the Offering and the
application of the net proceeds therefrom, the Company would have had
approximately $185 million of Senior Debt outstanding.
GUARANTEES
The Company will not permit any Restricted Subsidiary to become a direct or
indirect obligor under, or in respect of, the Senior Credit Facility without
causing such Restricted Subsidiary to become a Guarantor. Any such Restricted
Subsidiary shall (a) execute and deliver a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(b) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a valid and legally binding and enforceable
obligation of such Restricted Subsidiary.
The Indenture will provide that the Guarantors, if any, will, jointly and
severally, unconditionally guarantee on a senior subordinated basis all of the
obligations of the Company under the Indenture, including its obligation to pay
principal, premium, if any, and interest with respect to the Notes. The
obligation of each Guarantor is limited to the maximum amount which, after
giving effect to all other contingent and fixed liabilities of such Guarantor,
will result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law.
Any Guarantor that is no longer a direct or indirect obligor under, or in
respect of, the Senior Credit Facility shall be released from the Guarantee upon
delivery of an Officers' Certificate to the Trustee certifying to such effect.
In addition, the Indenture will provide that if all of the Capital Stock of
a Guarantor is sold (including by issuance or otherwise) by the Company or any
Restricted Subsidiary in a transaction constituting an Asset Disposition, and
(x) the Net Available Proceeds from such Asset Dispositions are used in
accordance with the covenant described under "--Covenants--Limitation on Certain
Asset Dispositions" or (y) the Company delivers to the Trustee an Officers'
Certificate to the effect that the Net Available Proceeds from such Asset
Disposition will be used in accordance with the covenant described under
"--Covenants-- Limitation on Certain Asset Dispositions" within the time limits
specified by such covenant, then such Guarantor shall be released and discharged
from its Guarantee obligations upon such use in the case of clause (x) or upon
such delivery in the case of clause (y).
The Company may, at its option, cause any of its Subsidiaries to be a
Guarantor.
The obligations of each Guarantor under its Guarantee will be subordinated
in right of payment to the prior payment in full of all Senior Debt of such
Guarantor on the same basis as the obligations of the
60
<PAGE>
Company on the Notes are subordinated to Senior Debt of the Company. The
Guarantee will rank PARI PASSU in right of payment with any other senior
subordinated indebtedness of each Guarantor and senior in right of payment to
any future Subordinated Indebtedness of each Guarantor.
COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF INDEBTEDNESS
The Indenture will provide that the Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness), except:
(i) Indebtedness of the Company and shares of Disqualified Stock of the
Company, if, immediately after giving effect to the Incurrence of such
Indebtedness or the issuance of such Disqualified Stock and the receipt and
application of the net proceeds thereof, the Consolidated Cash Flow Ratio of
the Company for the four full fiscal quarters for which quarterly or annual
financial statements are available next preceding the Incurrence of such
Indebtedness or the issuance of such Disqualified Stock would be greater
than 2.0 to 1.0;
(ii) Indebtedness (a) of the Company and the Restricted Subsidiaries
Incurred under the Senior Credit Facility in an aggregate principal amount
at any time outstanding not to exceed $250.0 million and (b) of any Foreign
Restricted Subsidiary Incurred under a working capital facility in an
aggregate amount not to exceed $100.0 million; PROVIDED, HOWEVER, that the
Indebtedness is Incurred, denominated and payable in United States dollars
or the local currencies of the jurisdictions of the operations of the
Foreign Restricted Subsidiary Incurring such Indebtedness, less, in each
case, the amount of any repayments made pursuant to any scheduled
amortization or mandatory prepayments (to the extent, in the case of a
revolving credit facility, accompanied by a permanent commitment reduction
thereunder);
(iii) Indebtedness owed by the Company to any Wholly Owned Subsidiary or
Indebtedness owed by a Restricted Subsidiary to the Company or a Wholly
Owned Subsidiary; PROVIDED, HOWEVER, that upon either (I) the transfer or
other disposition by such Wholly Owned Subsidiary or the Company of any
Indebtedness so permitted under this clause (iii) to a Person other than the
Company or another Wholly Owned Subsidiary or (II) the issuance (other than
directors' qualifying shares), sale, transfer or other disposition of shares
of Capital Stock or other ownership interests (including by consolidation or
merger) of such Wholly Owned Subsidiary to a Person other than the Company
or another such Wholly Owned Subsidiary, the exception provided by this
clause (iii) shall no longer be applicable to such Indebtedness and such
Indebtedness shall be deemed to have been Incurred at the time of any such
issuance, sale, transfer or other disposition, as the case may be;
(iv) Indebtedness of the Company or any Restricted Subsidiary under any
interest rate agreement to the extent entered into to protect the Company or
such Restricted Subsidiary from fluctuations in interest rates on any other
Indebtedness permitted under the Indenture (including the Notes); PROVIDED,
HOWEVER, that the notional amount of such interest rate agreement does not
exceed the principal amount of the Indebtedness to which such interest rate
agreement relates;
(v) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements to the extent relating to Indebtedness of the Company or
any Restricted Subsidiary permitted to be Incurred under the Indenture;
PROVIDED, HOWEVER, that such Currency Agreements do not increase the
Indebtedness or other obligations 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 or compensation
payable thereunder;
61
<PAGE>
(vi) Indebtedness Incurred to Refinance any Indebtedness outstanding on
the Issue Date, any Indebtedness Incurred under the prior clause (i) above
or the Notes and the Guarantee; PROVIDED, HOWEVER, that (I) such
Indebtedness does not exceed the principal amount (or accreted value, if
less) of the Indebtedness so Refinanced plus the amount of any premium
required to be paid in connection with such Refinancing pursuant to the
terms of the Indebtedness being Refinanced or the amount of any premium
reasonably determined by the issuer of such Indebtedness as necessary to
accomplish such Refinancing by means of a tender offer, exchange offer, or
privately negotiated repurchase, plus the expenses of such issuer reasonably
incurred in connection therewith and (II)(A) in the case of any Refinancing
of Indebtedness that is PARI PASSU with the Notes, such Refinancing
Indebtedness is made PARI PASSU with or subordinate in right of payment to
the Notes, and, in the case of any Refinancing of Indebtedness that is
subordinate in right of payment to the Notes, such Refinancing Indebtedness
is subordinate in right of payment to the Notes on terms no less favorable
to the Holders than those contained in the Indebtedness being Refinanced,
(B) in either case, the Refinancing Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
issued, does not have an Average Life that is less than the remaining
Average Life of the Indebtedness being Refinanced and does not require
redemption or other retirement (including pursuant to any required offer to
purchase to be made by the Company or a Restricted Subsidiary) of such
Indebtedness at the option of the holder thereof prior to the final stated
maturity of the Indebtedness being Refinanced, other than a redemption or
other retirement at the option of the holder of such Indebtedness (including
pursuant to a required offer to purchase made by the Company or a Restricted
Subsidiary) which is conditioned upon a change of control of the Company
pursuant to provisions substantially similar to those contained in the
Indenture described under "--Change of Control" below and (C) any
Indebtedness Incurred to Refinance any Indebtedness is Incurred by the
obligor on the Indebtedness being Refinanced or by the Company;
(vii) Indebtedness of the Company under the Exchange Notes and
Indebtedness of the Guarantors under the Guarantee incurred in accordance
with the Indenture;
(viii) Indebtedness of the Company not otherwise permitted to be
Incurred pursuant to clauses (i) through (vii) above which, together with
any other outstanding Indebtedness Incurred pursuant to this clause (viii),
has an aggregate principal amount not in excess of $20.0 million at any time
outstanding;
(ix) Indebtedness outstanding on the Issue Date;
(x) Purchase Money Indebtedness and Capital Lease Obligations in an
aggregate amount not to exceed $20.0 million at any one time outstanding;
(xi) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(xii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or the Capital Stock
of a Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or the Capital
Stock of a Subsidiary for the purpose of financing such acquisition;
PROVIDED, HOWEVER, that (i) such Indebtedness is not reflected on the
balance sheet of the Company or any Restricted Subsidiary (contingent
obligations referred to in a footnote to financial statements and not
otherwise reflected on the balance sheet will not be deemed to be reflected
on such balance sheet
62
<PAGE>
for purposes of this clause (i)) and (ii) the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
including noncash proceeds (the fair market value of such noncash proceeds
being measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business; and
(xiv) Indebtedness of the Company incurred under its swing line credit
facility with CoreStates Bank in an aggregate principal amount not to exceed
$10.0 million.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Indenture provides that the Company will not (i) directly or indirectly,
Incur any Indebtedness that by its terms would expressly rank senior in right of
payment to the Notes and rank subordinate in right of payment to any other
Indebtedness of the Company and (ii) cause or permit any Guarantor to, and no
Guarantor will, directly or indirectly, incur any Indebtedness that by its terms
would expressly rank senior in right of payment to the Guarantee of such
Guarantor and rank subordinate in right of payment to any other Indebtedness of
such Guarantor.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend, or make any distribution of any kind or
character (whether in cash, property or securities), in respect of any class
of Capital Stock of the Company or any Restricted Subsidiary, excluding any
(x) dividends or distributions payable solely in shares of Qualified Stock
or in options, warrants or other rights to acquire Qualified Stock, or (y)
in the case of any Restricted Subsidiary, dividends or distributions payable
to the Company or another Restricted Subsidiary,
(ii) purchase, redeem, or otherwise acquire or retire for value any
shares of Capital Stock of the Company or any Restricted Subsidiary, any
options, warrants or rights to purchase or acquire such shares or any
securities convertible or exchangeable into such shares (other than any such
shares of Capital Stock, options, warrants, rights or securities that are
owned by the Company or a Restricted Subsidiary),
(iii) make any Investment (other than a Permitted Investment) in, or
make any payment on a guarantee of any obligation of, any Person, other than
the Company or a Wholly Owned Subsidiary, or
(iv) redeem, defease, repurchase, retire or otherwise acquire or retire
for value, prior to its scheduled maturity, repayment or any sinking fund
payment, Subordinated Indebtedness (each of the transactions described in
clauses (i) through (iv) (other than any exception to any such clause) being
a "Restricted Payment")
if at the time thereof:
(1) a Default or an Event of Default shall have occurred and be
continuing, or
(2) after giving effect to such Restricted Payment, the Company could
not Incur at least $1.00 of additional Indebtedness pursuant to the terms
of the Indenture described in clause (i) of "--Limitation on Incurrence
of Indebtedness" above, or
(3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments declared or made on or after the Issue Date
exceeds the sum (without duplication) of: (a) 50% of cumulative
Consolidated Net Income of the Company (or, in the case cumulative
Consolidated
63
<PAGE>
Net Income of the Company shall be negative, less 100% of such deficit)
for the period (treated as one accounting period) from the Issue Date
through the last day of the Company's most recently ended fiscal quarter
for which financial statements are available; PLUS (b) 100% of the
aggregate net cash proceeds and the fair market value of readily
marketable securities received after the Issue Date from the issuance of,
or equity contribution received by the Company with respect to, shares of
Qualified Stock and warrants, rights or options to purchase or acquire
shares of Qualified Stock (other than from a Subsidiary of the Company
and other than any such proceeds to the extent used to redeem the Notes
pursuant to the second paragraph of "--Optional Redemption" above) and
the principal amount of Indebtedness of the Company or any Restricted
Subsidiary that has been converted into or exchanged for Qualified Stock
which Indebtedness was Incurred after the Issue Date; PLUS (c) 100% of
the aggregate after-tax net cash proceeds, from the sale or other
disposition of any Investment constituting a Restricted Payment made
after the Issue Date; PROVIDED, HOWEVER, that any gain on the sale or
disposition included in such after-tax net proceeds shall not be included
in determining Consolidated Net Income for purposes of clause (a) above;
PROVIDED, FURTHER that amounts included in this clause (c) shall not
exceed the Net Investment by the Company in the asset so sold or
disposed; PLUS (d) without duplication of any amounts included in clause
(a) above, if the designation of a Subsidiary as an Unrestricted
Subsidiary was treated as a Restricted Payment made after the Issue Date,
the proportionate interest of the Company or any Restricted Subsidiary in
the fair market value of any such Unrestricted Subsidiary that has been
redesignated as a Restricted Subsidiary after the Issue Date in
accordance with the definition of "Unrestricted Subsidiary"; PROVIDED,
HOWEVER, that such amount shall not in any case exceed the amount of
Investments made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary that was treated as a Restricted Payment under
the Indenture; plus (e) without duplication of any amounts included in
clause (a) above, in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue Date,
an amount equal to the lesser of the return of capital with respect to
such Investment and the initial amount of such Investment which was
treated as a Restricted Payment, in either case, less the cost of the
disposition of such Investment and net of taxes. For purposes of
determining the amount expended for Restricted Payments under this clause
(c), property other than cash shall be valued at its fair market value.
The foregoing provision will not prohibit (i) any dividend on any class of
Capital Stock of the Company or any Restricted Subsidiary paid within 60 days
after the declaration thereof if, on the date when the dividend was declared,
the Company or such Restricted Subsidiary, as the case may be, could have paid
such dividend in accordance with the provisions of the Indenture; (ii) the
Refinancing of any Indebtedness otherwise permitted pursuant to the terms of the
Indenture described in clause (v) of "--Limitation on Incurrence of
Indebtedness" above; (iii) the exchange or conversion of any Indebtedness of the
Company or any Restricted Subsidiary for or into Qualified Stock; (iv) so long
as no Default or Event of Default has occurred and is continuing, any Investment
made with the proceeds of a substantially concurrent sale (other than to a
Subsidiary of the Company) for cash of Qualified Stock; PROVIDED, HOWEVER, that
the proceeds of such sale of Qualified Stock shall not be (and have not been)
included in clause (3) of the preceding paragraph; (v) the redemption,
repurchase, retirement or other acquisition of any Capital Stock of the Company
in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of Qualified Stock;
PROVIDED, HOWEVER, that the proceeds of such sale of Capital Stock shall not be
(and have not been) included in clause (3) of the preceding paragraph; (vi) so
long as no Event of Default has occurred and is continuing, the redemption,
repurchase or retirement of Subordinated Indebtedness of the Company in exchange
for, by conversion into, or out of the net proceeds of, (A) a substantially
concurrent sale or incurrence of Subordinated Indebtedness (other than any
Indebtedness owed to a Subsidiary of the Company) of the Company that is
contractually subordinated in right of payment to the Notes to at least the same
extent and which has an Average Life no less than, in each case, the
Subordinated Indebtedness being redeemed, repurchased or retired or (B) a
64
<PAGE>
substantially concurrent sale (other than to a Subsidiary of the Company) for
cash of Qualified Stock; PROVIDED, HOWEVER, that the proceeds of such sale of
Capital Stock shall not be (and have not been) included in clause (3) of the
preceding paragraph; (vii) the making of Investments in Unrestricted
Subsidiaries or joint ventures provided that the aggregate Net Investments
therein shall not exceed $15.0 million at any time; (viii) the repurchase,
retirement or other acquisition or retirement for value of Capital Stock of the
Company held by any future, present or former employee or director of the
Company or any of the Company's Restricted Subsidiaries or the estate, heirs or
legatees of, or any entity controlled by, any such employee or director,
pursuant to any management equity plan or stock option plan or any other
management or employee benefit plan or agreement in connection with the
termination of such person's employment for any reason (including by reason of
death or disability); PROVIDED, HOWEVER, that the aggregate Restricted Payments
made under this clause (viii) does not exceed in any calendar year the sum of
(A) $1.0 million (with unused amounts in any calendar year being carried over to
succeeding calendar years subject to a maximum (without giving effect to the
following proviso) of $10.0 million in any calendar year) and (B) the cash
proceeds of key man life insurance policies on the life of any such person
received by the Company and its Restricted Subsidiaries after the Issue Date;
(ix) so long as no Default or Event of Default shall have occurred and be
continuing, the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of the Company issued in accordance with the
covenant entitled "-- Limitation on Incurrence of Indebtedness"; (x) repurchases
of Capital Stock deemed to occur upon exercise of stock options if such Capital
Stock represents a portion of the exercise price of such options; (xi) the
declaration and payment of dividends to holders of any class or series of
Designated Preferred Stock (other than Disqualified Stock) issued after the
Issue Date; PROVIDED, HOWEVER, that at the time of such issuance, after giving
effect to such issuance on a pro forma basis, the Consolidated Cash Flow Ratio
for the Company and its Restricted Subsidiaries for the most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date of such issuance would have been no less than 2
to 1; and (xii) other Restricted Payments in an aggregate amount not to exceed
$15.0 million. Each Restricted Payment described in clauses (i) (to the extent
not already taken into account for purposes of computing the aggregate amount of
all Restricted Payments pursuant to clause (3) of the preceding paragraph),
(vii), (xi) and (xii) of the previous sentence shall be taken into account for
purposes of computing the aggregate amount of all Restricted Payments made
pursuant to clause (3) of the preceding paragraph.
The Indenture provides that for purposes of this covenant, (i) an
"Investment" shall be deemed to have been made at the time any Restricted
Subsidiary is designated as an Unrestricted Subsidiary in an amount
(proportionate to the Company's equity interest in such Subsidiary) equal to the
net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate amount of all Restricted Payments made as Investments after the Issue
Date shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of an Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is redesignated a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of Investments
previously made by the Company and the Restricted Subsidiaries in such
Unrestricted Subsidiary; PROVIDED, HOWEVER, that such amount shall not be
included in determining Consolidated Net Income for purposes of subclause (a) of
clause (3) of the second preceding paragraph (in each case (i) and (ii) "net
worth" to be calculated based upon the fair market value of the assets of such
Subsidiary as of any such date of designation); and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
LIMITATION ON RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (i) pay, directly or indirectly,
dividends
65
<PAGE>
or make any other distributions in respect of its Capital Stock or pay any
Indebtedness or other obligation owed to the Company or any other Restricted
Subsidiary, (ii) make loans or advances to the Company or any other Restricted
Subsidiary or (iii) 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 reason of (a) any agreement in effect on the Issue Date as
any such agreement is in effect on such date, (b) the Senior Credit Facility,
(c) any agreement relating to Capital Stock of, or any Indebtedness Incurred by,
such Restricted Subsidiary prior to the date on which such Restricted Subsidiary
was acquired by the Company and outstanding on such date and not Incurred in
anticipation or contemplation of becoming a Restricted Subsidiary; PROVIDED,
HOWEVER, that such encumbrance or restriction shall not apply to any property or
assets of the Company or any Restricted Subsidiary other than such Restricted
Subsidiary, (d) customary provisions contained in an agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of a Restricted Subsidiary; PROVIDED, HOWEVER, that such
encumbrance or restriction is applicable only to such Restricted Subsidiary or
its property and assets, (e) customary provisions in joint venture agreements
entered into in the ordinary course of business, (f) any agreement effecting a
Refinancing or amendment of Indebtedness Incurred pursuant to any agreement
referred to in clause (a) above; PROVIDED, HOWEVER, that the provisions
contained in such Refinancing or amendment agreement relating to such
encumbrance or restriction are no more restrictive in any material respect than
the provisions contained in the agreement that is the subject thereof in the
reasonable judgment of the Board of Directors of the Company, (g) the Indenture,
(h) applicable law, rule or regulation or any order or ruling by any
governmental authority, (i) customary provisions restricting subletting or
assignment of any lease governing any leasehold interest of any Restricted
Subsidiary, (j) Purchase Money Indebtedness that imposes restrictions of the
type referred to in clause (iii) of this covenant, or (k) restrictions of the
type referred to in clause (iii) of this covenant contained in security
agreements securing Indebtedness of a Restricted Subsidiary to the extent that
such Liens were otherwise incurred in accordance with " --Limitation on Liens"
below and restrict the transfer of property subject to such agreements.
LIMITATION ON LIENS
The Indenture provides that the Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, create, cause,
incur or suffer to exist any Lien on or with respect to the Capital Stock or any
property or assets of the Company or such Restricted Subsidiary owned on the
Issue Date or thereafter created or acquired or on the income or profits thereof
to secure any Indebtedness, without making, or causing such Restricted
Subsidiary to make, effective provision for securing the Notes and all other
amounts due under the Indenture equally and ratably with such Indebtedness or,
in the event that such Indebtedness is Subordinated Indebtedness, prior to such
Indebtedness, as to such property or assets for so long as such Indebtedness
shall be so secured.
The foregoing restrictions shall not apply to (i) Liens existing on the
Issue Date securing Indebtedness existing on the Issue Date; (ii) Liens securing
Senior Debt (including Liens securing Indebtedness under the Senior Credit
Facility) and any guarantees thereof to the extent that the Indebtedness secured
thereby is permitted to be incurred under the covenant described under
"--Limitation on Incurrence of Indebtedness" above; (iii) Liens securing only
the Notes and the Guarantees, if any; (iv) Liens in favor of the Company or any
Guarantor; (v) Liens to secure Purchase Money Indebtedness and Capital Lease
Obligations; PROVIDED, HOWEVER, that (a) such Lien does not extend to or cover
any other property or assets other than such item of property and any
improvements on such item and any insurance proceeds resulting from damage to or
destruction of such property or improvements, and (b) the Incurrence of such
Indebtedness is permitted by the provisions of the Indenture described under
"--Limitation on Incurrence of Indebtedness" above; (vi) Liens on property
existing immediately prior to the time of acquisition thereof (and not created
in connection with or in anticipation or contemplation of the financing of such
acquisition); (vii) Liens on property of a Person existing at the time such
Person is acquired or merged with or into or consolidated with the Company or
any such Restricted Subsidiary (and not created in connection
66
<PAGE>
with or in anticipation or contemplation thereof); (viii) Liens to secure
Indebtedness Incurred to Refinance, in whole or in part, any Indebtedness
secured by Liens referred to in the foregoing clauses (i)-(vii) so long as such
Liens do not extend to any other property and the principal amount of
Indebtedness so secured is not increased except for the amount of any premium
required to be paid in connection with such Refinancing pursuant to the terms of
the Indebtedness Refinanced or the amount of any premium reasonably determined
by the Company as necessary to accomplish such Refinancing by means of a tender
offer, exchange offer or privately negotiated repurchase, plus the expenses of
the issuer of such Indebtedness reasonably incurred in connection with such
Refinancing; (ix) Liens in favor of the Trustee as provided for in the Indenture
on money or property held or collected by the Trustee in its capacity as
Trustee; (x) Liens to secure the performance of statutory or regulatory
obligations, leases, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (xi)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; PROVIDED, HOWEVER, that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor, and (xii) Liens incurred in the ordinary
course of business of the Company or any Subsidiary of the Company with respect
to obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Subsidiary.
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, cause, make or suffer to exist an Asset
Disposition, unless (x) the Company, or its Restricted Subsidiaries, as the case
may be, receives consideration at the time of such Asset Disposition at least
equal to the fair market value (as determined in good faith by the Company) of
the assets or Capital Stock issued or sold or otherwise disposed of and (y) at
least 75% of the proceeds from such Asset Disposition when received consists of
either (I) cash or Cash Equivalents or (II) property or assets that are used or
useful in the business of the Company or a Similar Business, or Capital Stock of
any Person primarily engaged in a Similar Business if, as a result of the
acquisition by the Company or any Restricted Subsidiary thereof, such Person
becomes a Restricted Subsidiary; PROVIDED, HOWEVER, that the amount of any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Notes) that are assumed
by the transferee of any such assets pursuant to an agreement that releases the
Company or Restricted Subsidiary from further liability shall be deemed to be
cash for the purposes of this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Disposition, the Company or such Restricted
Subsidiary may apply the Net Available Proceeds from such Asset Disposition to
(i) repay Senior Debt and permanently reduce any related commitment thereunder,
(ii) an investment in property, capital expenditures or assets that are used or
useful in the business of the Company or a Similar Business, or Capital Stock of
any Person primarily engaged in a Similar Business if, as a result of such
acquisition by the Company or any Restricted Subsidiary, such Person becomes a
Restricted Subsidiary and/or (iii) an investment in properties or assets that
replace the properties or assets that are the subject of such Asset Disposition.
To the extent all or part of the Net Available Proceeds of any Asset
Disposition are not applied as described in clause (i) or (ii) of the
immediately preceding paragraph within the time periods set forth therein (the
"Net Proceeds Utilization Date") (such Net Available Proceeds, the "Unutilized
Net Available Proceeds"), the Company shall, within ten business days after such
Net Proceeds Utilization Date, make an Offer to Purchase all outstanding Notes
and Pari Passu Indebtedness, pro rata up to a
67
<PAGE>
maximum principal amount (expressed as a multiple of $1,000) of Notes and Pari
Passu Indebtedness equal to such Unutilized Net Available Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the Purchase Date; PROVIDED,
HOWEVER, that the Offer to Purchase may be deferred until there are aggregate
Unutilized Net Available Proceeds equal to or in excess of $15 million, at which
time the entire amount of such Unutilized Net Available Proceeds, and not just
the amount in excess of $15 million, shall be applied as required pursuant to
this paragraph. Pending the final application of any such Net Available
Proceeds, the Company or such Restricted Subsidiary may temporarily reduce
Indebtedness under a revolving credit facility, if any, or otherwise invest such
Net Available Proceeds in Cash Equivalents. To the extent that the aggregate
amount of Notes and Pari Passu Indebtedness tendered pursuant to an Offer to
Purchase is less than the Unutilized Net Available Proceeds, the Company may use
any remaining proceeds for general corporate purposes. If the aggregate
principal amount of Notes and Pari Passu Indebtedness surrendered by Holders
thereof exceeds the amount of Unutilized Net Available Proceeds, the Trustee
shall select the Notes to be purchased in the manner described in the definition
of Offer to Purchase. Upon completion of any such Offer to Purchase, the amount
of Unutilized Net Available Proceeds shall be reset at zero. These provisions
will not apply to a transaction consummated in compliance with the provisions of
the Indenture described under "--Mergers, Consolidations and Certain Sales of
Assets" below.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, enter into any
transaction with any of their respective Affiliates (other than the Company or a
Wholly Owned Subsidiary), including, without limitation, the purchase, sale,
lease or exchange of property, the rendering of any service, or the making of
any guarantee, loan, advance or Investment, either directly or indirectly,
unless the terms of such transaction are at least as favorable as the terms that
could be obtained at such time by the Company or such Restricted Subsidiary, as
the case may be, in a comparable transaction made on an arms-length basis with a
Person that is not such an Affiliate; PROVIDED, HOWEVER, that (x) in any
transaction involving aggregate consideration in excess of $5.0 million, the
Company shall deliver an officer's certificate to the Trustee stating that a
majority of the disinterested directors of the Board of Directors of the Company
have determined, in their good faith judgment, that the terms of such
transaction are at least as favorable as the terms that could be obtained by the
Company or such Restricted Subsidiary, as the case may be, in a comparable
transaction made on an arms-length basis between unaffiliated parties and (y),
if the aggregate consideration is in excess of $10.0 million, the Company shall
also obtain, prior to the consummation of the transaction, the favorable opinion
of a nationally recognized accounting, appraisal or investment banking firm as
to the fairness of the transaction to the Company or such Restricted Subsidiary,
from a financial point of view. The provisions of this covenant shall not apply
to (i) transactions permitted by the provisions of the Indenture described above
under the caption "--Limitation on Restricted Payments" above; (ii) reasonable
fees and compensation paid to, and indemnity provided on behalf of, officers,
directors and employees of the Company and the Restricted Subsidiaries as
determined in good faith by the Board of Directors of the Company; (iii) loans
or advances to employees or consultants which are approved by a majority of the
Board of Directors of the Company in good faith; (iv) transactions made in
accordance with agreements in existence on the Issue Date (including pursuant to
any amendment thereto; provided, however, that any such amendment is not more
disadvantageous to the Holders in any material respect); and (v) transactions
with customers, clients, suppliers, or purchasers or sellers of goods or
services, in each case in the ordinary course of business and otherwise in
compliance with the terms of the Indenture which, in the reasonable
determination of a majority of the members of the Board of Directors of the
Company or the senior management thereof, are
68
<PAGE>
fair to the Company or its Restricted Subsidiaries or are on terms at least as
favorable as might reasonably have been obtained at such time from an
unaffiliated party.
CHANGE OF CONTROL
Within 30 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company will commence an Offer to Purchase
all outstanding Notes at a purchase price in cash equal to 101% of their
principal amount plus accrued and unpaid interest to the Purchase Date. Such
Offer to Purchase will be consummated not earlier than 30 days and not later
than 60 days after the commencement thereof. Each holder shall be entitled to
tender all or any portion of the Notes owned by such holder pursuant to the
Offer to Purchase, subject to the requirement that any portion of a Note
tendered must be in an integral multiple of $1,000 principal amount. A "Change
of Control" will be deemed to have occurred upon any of the following events
(whether or not otherwise permitted by the Indenture): (i) the sale, lease or
transfer, in one or a series of related transactions, of all or substantially
all of the assets of the Company and its Subsidiaries, taken as a whole; (ii)
the Company becomes aware of (by way of a report or any other filing pursuant to
Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) the
acquisition by any Person or group (within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act, or any successor provision), including any
group acting for the purpose of acquiring, holding or disposing of securities
(within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than the
Permitted Holders, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination or
purchase of beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act, or any successor provision) of 40% or more of the total voting
power of the Voting Stock of the Company or such Person or group beneficially
owns more of the total voting power of the Voting Stock of the Company than the
Permitted Holders; or (iii) the first day on which a majority of the members of
the Board of Directors of the Company are not Continuing Directors.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act.
With respect to the sale of assets referred to in the definition of "Change
of Control," the phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control. The ability of the Company to pay cash to the
holders of Notes upon a Change of Control may be limited by its then existing
financial resources and, since a "Change of Control" may constitute an event of
default under the Senior Credit Facility, by the subordination provisions
applicable to the Notes as set forth in the Indenture. In addition, future debt
agreements of the Company may contain similar provisions. If the Company does
not obtain a waiver or consent permitting such payment or repay such
Indebtedness, the Company will remain prohibited from repurchasing the Notes. In
such event, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would in turn constitute a default
under the Senior Credit Facility and possibly other Indebtedness. None of the
provisions relating to a repurchase upon a Change of Control are waivable by the
Board of Directors of the Company or the Trustee.
The foregoing provisions will not prevent the Company from entering into
transactions of the types described above with management or their affiliates.
In addition, such provisions may not necessarily afford the holders of the Notes
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the holders because such transactions may not
involve a shift in voting power or beneficial
69
<PAGE>
ownership, or even if they do, may not involve a shift of the magnitude required
under the definition of Change of Control to trigger the provisions.
PROVISION OF FINANCIAL INFORMATION
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Sections or any successor provision thereto if the Company were so
required. The Company shall file such documents with the Commission on or prior
to the respective dates (the "Required Filing Dates") by which the Company would
have been required to file such documents if the Company were so required. The
Company shall also in any event (a) within 15 days of each Required Filing Date
(i) transmit by mail to all holders of Notes, as their names and addresses
appear in the Note Register, without cost to such holders, and (ii) file with
the Trustee, copies of the annual reports, quarterly reports and other documents
which the Company is required to file with the Commission pursuant to the
preceding sentence, and (b) if, notwithstanding the preceding sentence, filing
such documents by the Company with the Commission is not permitted under the
Exchange Act, promptly upon written request supply copies of such documents to
any prospective holder of Notes.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any Restricted
Subsidiary to consolidate or merge with or into any Person or sell, assign,
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 an entirety in one
transaction or a series of related transactions, including by way of liquidation
or dissolution, to any Person unless, in each such case: (i) the entity formed
by or surviving any such consolidation or merger (if other than the Company or
such Restricted Subsidiary, as the case may be), or to which such sale,
assignment, lease, conveyance or other disposition shall have been made (the
"Surviving Entity"), is a corporation organized and existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Surviving Entity assumes by supplemental indenture all of the obligations of the
Company on the Notes and under the Indenture; (iii) immediately after giving
effect to such transaction and the use of any net proceeds therefrom on a pro
forma basis, the Company or the Surviving Entity, as the case may be, could
Incur at least $1.00 of Indebtedness pursuant to clause (i) of the provisions of
the Indenture described under "--Limitation on Incurrence of Indebtedness"
above; (iv) immediately before and after giving effect to such transaction and
treating any Indebtedness which becomes an obligation of the Company or any of
its such Restricted Subsidiaries as a result of such transaction as having been
Incurred by the Company or such Restricted Subsidiary, as the case may be, at
the time of the transaction, no Default or Event of Default shall have occurred
and be continuing; and (v) if, as a result of any such transaction, property or
assets of the Company or a Restricted Subsidiary would become subject to a Lien
not excepted from the provisions of the Indenture described under "--Limitation
on Liens" above, the Company, Restricted Subsidiary or the Surviving Entity, as
the case may be, shall have secured the Notes as required by said covenant. The
provisions of this paragraph shall not apply to any merger of a Restricted
Subsidiary with or into the Company or a Wholly Owned Subsidiary or the release
of any Guarantor in accordance with the terms of the Guarantee and the Indenture
in connection with any transaction complying with the provisions of the
Indenture described under "--Limitation on Certain Asset Dispositions" above.
70
<PAGE>
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due (whether or not
prohibited by the provisions of the Indenture described under "--Ranking"
above); (b) failure to pay any interest on any Note when due, continued for 30
days (whether or not prohibited by the provisions of the Indenture described
under "--Ranking" above); (c) default in the payment of principal of and
interest on Notes required to be purchased pursuant to an Offer to Purchase as
described under "--Covenants--Change of Control" and "--Covenants-- Limitation
on Certain Asset Dispositions" above when due and payable (whether or not
prohibited by the provisions of the Indenture described under "--Ranking"
above); (d) failure to perform or comply with any of the provisions described
under "--Covenants--Mergers, Consolidations and Certain Sales of Assets" above;
(e) failure to perform any other covenant or agreement of the Company under the
Indenture or the Notes continued for 30 days after written notice to the Company
by the Trustee or holders of at least 25% in aggregate principal amount of
outstanding Notes; (f) default under the terms of one or more instruments
evidencing or securing Indebtedness of the Company or any of its Subsidiaries
having an outstanding principal amount of $15.0 million or more individually or
in the aggregate that has resulted in the acceleration of the payment of such
Indebtedness or failure to pay principal when due at the stated maturity of any
such Indebtedness; (g) the rendering of a final judgment or judgments (not
subject to appeal) against the Company or any of its Subsidiaries in an amount
of $15.0 million or more which remains undischarged or unstayed for a period of
60 days after the date on which the right to appeal has expired; (h) certain
events of bankruptcy, insolvency or reorganization affecting the Company or any
Material Subsidiary; and (i) any Guarantee ceases to be in full force and effect
or is declared null and void and unenforceable or is found to be invalid or any
Guarantor denies its liability under the Guarantee (other than by reason of a
release of such Guarantor from the Guarantee in accordance with the terms of the
Indenture and the Guarantee).
If an Event of Default (other than an Event of Default with respect to the
Company described in clause (h) of the preceding paragraph) shall occur and be
continuing, either the Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Notes may accelerate the maturity of all
Notes; PROVIDED, HOWEVER, that after such acceleration, but before a judgment or
decree based on acceleration, the holders of a majority in aggregate principal
amount of outstanding Notes may, under certain circumstances, rescind and annul
such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture;
and PROVIDED, FURTHER, that so long as the Senior Credit Facility shall be in
full force and effect, if an Event of Default shall have occurred and be
continuing (other than as specified under clause (h) above), the Notes shall not
become due and payable until the earlier to occur of (x) five business days
following delivery of a written notice of such acceleration of the Notes to the
agent under the Senior Credit Facility, if such Event of Default has not been
cured prior to such fifth business day, and (y) the acceleration of any
Indebtedness under the Senior Credit Facility. If an Event of Default specified
in clause (h) of the preceding paragraph with respect to the Company occurs, the
outstanding Notes will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any holder. For
information as to waiver of defaults, see "--Modification and Waiver."
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the holders thereof notice of all uncured Defaults or Events of Default known to
it; PROVIDED, HOWEVER, that, except in the case of an Event of Default or a
Default in any payment with respect to the Notes or a Default or Event of
Default in complying with "--Covenants--Mergers, Consolidations and Certain
Sales of Assets," the Trustee shall be protected in withholding such notice if
and so long as the Board of Directors or responsible officers of the Trustee in
good faith determine that the withholding of such notice is in the interest of
the holders of the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a
71
<PAGE>
continuing Event of Default and unless the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee, and the Trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a holder of
a Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Company will be required to furnish to the Trustee annually a statement
as to its performance of certain of its obligations under the Indenture and as
to any default in such performance.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its substantive obligations and the substantive
obligations of the Guarantors in respect of the Notes and the Guarantees by
delivering all outstanding Notes to the Trustee for cancellation and paying all
sums payable by the Company on account of principal of, premium, if any, and
interest on all Notes or otherwise. In addition to the foregoing, the Company
may, provided that no Default or Event of Default has occurred and is continuing
or would arise therefrom (or, with respect to a Default or Event of Default
specified in clause (h) of "--Events of Default" above, any time on or prior to
the 91st calendar day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until after such 91st day)) and
provided that no default under any Senior Debt would result therefrom, terminate
its substantive obligations and the substantive obligations of the Guarantors in
respect of the Notes and the Guarantees (except for the Company's obligation to
pay the principal of (and premium, if any, on) and the interest on the Notes and
such Guarantors' guarantee thereof) by (i) depositing with the Trustee, under
the terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without reinvestment) to pay all remaining indebtedness
on the Notes to maturity or to redemption, (ii) delivering to the Trustee either
an Opinion of Counsel or a ruling directed to the Trustee from the Internal
Revenue Service to the effect that the holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and termination of obligations, (iii) delivering to the Trustee an Opinion of
Counsel to the effect that the Company's exercise of its option under this
paragraph will not result in the Company, the Trustee or the trust created by
the Company's deposit of funds pursuant to this provision becoming or being
deemed to be an "investment company" under the Investment Company Act of 1940,
as amended, and (iv) complying with certain other requirements set forth in the
Indenture. In addition, the Company may, provided that no Default or Event of
Default has occurred, and is continuing or would arise therefrom (or, with
respect to a Default or Event of Default specified in clause (h) of "--Events of
Default" above, any time on or prior to the 91st calendar day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day)) and provided that no default under any
Senior Debt would result therefrom, terminate all of its substantive obligations
and all of the substantive obligations of the Guarantors in respect of the Notes
and the Guarantees (including the Company's obligation to pay the principal of
(and premium, if any, on) and interest on the Notes and such Guarantors'
guarantee thereof) by (i) depositing with the Trustee, under the terms of an
irrevocable trust agreement, money or United States Government Obligations
sufficient (without reinvestment) to pay all remaining indebtedness on the Notes
to maturity or to redemption, (ii) delivering to the Trustee either a ruling
directed to the Trustee from the Internal Revenue Service to the effect that the
holders of the Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and termination of obligations or an
Opinion of Counsel based upon such a ruling addressed to the Trustee or a change
in the applicable Federal tax law since the date of the Indenture, to such
effect, (iii) delivering to the Trustee an Opinion of Counsel to the effect that
the Company's exercise of its option under this paragraph will not result in the
Company, the Trustee or the trust created by the Company's deposit of funds
pursuant to this provision becoming or being deemed to be an "investment
company" under the Investment Company Act of 1940, as amended, and (iv)
complying with certain other requirements set forth in the Indenture.
72
<PAGE>
The Company may make an irrevocable deposit pursuant to this provision only
if at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the instruments governing
Senior Debt and the Company has delivered to the Trustee and any Paying Agent an
Officers' Certificate to that effect.
GOVERNING LAW
The Indenture, the Notes and the Guarantee will be governed by the laws of
the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding Notes; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the holder of each Note affected thereby,
(a) change the Stated Maturity of the principal of any Note, (b) alter the
optional redemption or repurchase provisions of any Note or the Indenture in a
manner adverse to the holders of the Notes, (c) reduce the principal amount of
any Note, (d) reduce the rate of or extend the time for payment of interest on
any Note, (e) change the place or currency of payment of principal of or
interest on any Note, (f) modify any provisions of the Indenture relating to the
waiver of past defaults (other than to add sections of the Indenture subject
thereto) or the right of the holders to institute suit for the enforcement of
any payment on or with respect to any Note or the Guarantee, or the modification
and amendment of the Indenture and the Notes (other than to add sections of the
Indenture or the Notes which may not be amended, supplemented or waived without
the consent of each holder affected), (g) reduce the percentage of the principal
amount of outstanding Notes necessary for amendment to or waiver of compliance
with any provision of the Indenture or the Notes or for waiver of any Default,
(h) waive a default in the payment of principal of, interest on, or redemption
payment with respect to, any Note (except a rescission of acceleration of the
Notes by the holders as provided in the Indenture and a waiver of the payment
default that resulted from such acceleration), (i) modify the ranking or
priority of the Notes or the Guarantees, or modify the definition of Senior Debt
or Designated Senior Debt or amend or modify the subordination provisions of the
Indenture in any manner adverse to the Holders, (j) release any Guarantor from
any of its obligations under its Guarantee or the Indenture otherwise than in
accordance with the Indenture, or (k) modify any of the provisions (including
the definitions relating thereto) relating to any Offer to Purchase required
under the covenants described under "--Covenants-- Limitation on Certain Asset
Dispositions" or "--Covenants--Change of Control" in a manner materially adverse
to the holders of Notes with respect to any Asset Disposition that has been
consummated or Change of Control that has occurred.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the holders of a majority in
aggregate principal amount of the outstanding Notes, on behalf of all holders of
Notes, may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Note tendered pursuant to an Offer to Purchase, or a default in
respect of a provision that under the Indenture cannot be modified or amended
without the consent of the holder of each outstanding Note affected.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company or any of its
Subsidiaries, as such, will have any liability for any obligations of the
Company or any Guarantor under the Notes, the Indenture, the Guarantees or any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each
73
<PAGE>
Holder by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws, and
it is the view of the Commission that such a waiver is against public policy.
THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a creditor of the
Company, the Guarantors, or any other obligor upon the Notes, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claim as security or otherwise. The Trustee is permitted to
engage in other transactions with the Company or an Affiliate of the Company;
PROVIDED, HOWEVER,that if it acquires any conflicting interest (as defined in
the Indenture or in the Trust Indenture Act), 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 or the Registration Rights Agreement. Reference is made to the
Indenture or the Registration Rights Agreement 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, with respect to any Person, Indebtedness of
such Person (i) existing at the time such Person becomes a Restricted Subsidiary
or (ii) assumed in connection with the acquisition of assets from another
Person, including Indebtedness Incurred in connection with, or in contemplation
of, such Person's becoming a Restricted Subsidiary or such acquisition, as the
case may be.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with any specified Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET DISPOSITION" means any sale, transfer or other disposition
(including, without limitation, by merger, consolidation or sale-and-leaseback
transaction) of (i) shares of Capital Stock of a Subsidiary of the Company
(other than directors' qualifying shares) or (ii) property or assets of the
Company or any Subsidiary of the Company; PROVIDED, HOWEVER, that an Asset
Disposition shall not include (a) any sale, transfer or other disposition of
shares of Capital Stock, property or assets by a Restricted Subsidiary to the
Company or to any Wholly Owned Subsidiary, (b) any sale, transfer or other
disposition of defaulted receivables for collection or any sale, transfer or
other disposition of property or assets in the ordinary course of business, (c)
any sale, transfer or other disposition that does not (together with all related
sales, transfers or dispositions) involve aggregate consideration in excess of
$1.0 million, (d) the grant in the ordinary course of business of any
non-exclusive license of patents, trademarks, registrations therefor and other
similar intellectual property, (e) the granting of any Lien (or foreclosure
thereon) securing Indebtedness to the extent that such Lien is granted in
compliance with "--Covenants--Limitation on Liens" above, (f) any Restricted
Payment permitted by "--Covenants--Limitation on Restricted Payments" above, (g)
any disposition of property or assets in the ordinary course of business to the
extent such property or assets are obsolete, worn-out, damaged, fully
depreciated or otherwise unsuitable for use in the Company's or any Restricted
Subsidiary's business, (h) the sale, lease, conveyance or disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "--Covenants--
74
<PAGE>
Mergers, Consolidations and Certain Sales of Assets" above, (i) any disposition
that constitutes a Change of Control, or (j) any Sale and Lease-Back Transaction
consummated within 180 days after the completion of construction or acquisition
of such asset.
"ATTRIBUTABLE INDEBTEDNESS" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the present value (discounted according
to GAAP at the cost of indebtedness implied in the lease) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale and Lease-Back Transaction (including any period for
which such lease has been extended).
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness for borrowed money or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the dates of each successive scheduled principal or liquidation
value payments of such Indebtedness or Preferred Stock, respectively, and the
amount of such principal or liquidation value payments, by (ii) the sum of all
such principal or liquidation value payments.
"BANKRUPTCY CODE" means Title 11, United States Code.
"CAPITAL LEASE OBLIGATIONS" of any Person means the obligations to pay rent
or other amounts under a lease of (or other Indebtedness arrangements conveying
the right to use) real or personal property of such Person which are required to
be classified and accounted for as a capital lease or liability on the face of a
balance sheet of such Person in accordance with GAAP. The amount of such
obligations shall be the capitalized amount thereof in accordance with GAAP and
the stated maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person.
"CASH EQUIVALENTS" means (i) marketable, direct obligations issued or
guaranteed by the United States of America, or any governmental entity or agency
or political subdivision thereof (provided, that the good faith and credit of
the United States of America is pledged in support thereof), maturing within one
year of the date of purchase; (ii) commercial paper issued by corporations or
financial institutions maturing within 180 days from the date of the original
issue thereof, and rated "P-1" or better by Moody's Investors Service, Inc. or
"A-1" or better by Standard & Poor's Rating Services or an equivalent rating or
better by any other nationally recognized securities rating agency; (iii)
certificates of deposit issued or acceptances accepted by or guaranteed by any
bank or trust company organized under the laws of the United States of America
or any state thereof or the District of Columbia, in each case having capital,
surplus and undivided profits totaling more than $500,000,000, maturing within
one year of the date of purchase; (iv) money market funds substantially all of
whose assets comprise securities of the type described in clauses (i) through
(iii) above and (v) below; (v) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (i)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above; and (vi) readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having one of the two highest rating categories
obtainable from either Moody's Investor Service, Inc. or Standard & Poor's
Rating Services.
"COMMON STOCK" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" of any Person means for
any period the Consolidated Net Income of such Person for such period increased
(to the extent Consolidated Net Income for such period has been reduced thereby)
by the sum of (without duplication) (i) Consolidated Interest Expense of such
Person for such period, plus (ii) Consolidated Income Tax Expense of such Person
75
<PAGE>
for such period, plus (iii) the consolidated depreciation and amortization
expense included in the income statement of such Person prepared in accordance
with GAAP for such period, plus (iv) any other non-cash charges to the extent
deducted from or reflected in Consolidated Net Income except for any non-cash
charges that represent accruals of, or reserves for, cash disbursements to be
made in any future accounting period.
"CONSOLIDATED CASH FLOW RATIO" of any Person means for any period the ratio
of (i) Consolidated Cash Flow Available for Fixed Charges of such Person for
such period to (ii) Consolidated Fixed Charges for such period; PROVIDED,
HOWEVER, that all Incurrences and repayments of Indebtedness (including the
Incurrence giving rise to such calculation and any repayments in connection
therewith) and all dispositions (including discontinued operations) or
acquisition of assets (other than in the ordinary course of business) made
during or after such period and on or prior to the date of determination shall
be given pro forma effect as if they occurred on the first day of such
four-quarter period, except that Indebtedness under the Senior Credit Facility
shall be deemed to be the average daily balance of such Indebtedness during such
four-quarter period). Calculations of pro forma amounts in accordance with this
definition shall be done in accordance with Article 11 of Regulation S-X under
the Securities Act or any successor provision.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person 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 such Person (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 tax
rate of such Person, expressed as a decimal.
"CONSOLIDATED INCOME TAX EXPENSE" of any Person means for any period the
consolidated provision for income taxes of such Person and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED INTEREST EXPENSE" for any Person means for any period, without
duplication, (a) the consolidated interest expense included in a consolidated
income statement (without deduction of interest or finance charge income) of
such Person and its Restricted Subsidiaries for such period calculated on a
consolidated basis in accordance with GAAP (including, without limitation, (i)
any amortization of debt discount, (ii) the net costs under interest rate
agreements, (iii) all capitalized interest and (iv) the interest portion of any
deferred payment obligation) and (b) the interest component of Capital Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" of any Person means for any period the
consolidated net income (or loss) of such Person and its Restricted Subsidiaries
for such period determined on a consolidated basis in accordance with GAAP;
PROVIDED, HOWEVER, that there shall be excluded therefrom (a) the net income (or
loss) of any Person acquired by such Person or a Restricted Subsidiary of such
Person in a pooling-of-interests transaction for any period prior to the date of
such transaction, (b) the net income (but not loss) of any Restricted Subsidiary
of such Person which is subject to restrictions which prevent or limit the
payment of dividends or the making of distributions to such Person to the extent
of such restrictions (regardless of any waiver thereof), (c) non-cash gains and
losses due solely to fluctuations in currency values, (d) the net income of any
Person that is not a Restricted Subsidiary of such Person, except to the extent
of the amount of dividends or other distributions representing such Person's
proportionate share of such other Person's net income for such period actually
paid in cash to such Person by such other Person during such period, (e) gains
or losses (other than for purposes of calculating Consolidated Net Income under
clause (3) under "Limitation on Restricted Payments") on Asset Dispositions by
such Person or its Restricted Subsidiaries, (f) all extraordinary or
non-recurring gains and losses determined in accordance with GAAP and (g) in the
case of a successor to the referent Person by consolidation or merger or as a
76
<PAGE>
transferee of the referent Person's assets, any earnings (or losses) of the
successor corporation prior to such consolidation, merger or transfer of assets.
"CONTINUING DIRECTOR" means a director who either was a member of the Board
of Directors of the Company on the Issue Date or who became a director of the
Company subsequent to the Issue Date and whose election, or nomination for
election by the Company's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Company, either by a
specific vote or by approval of the proxy statement issued by the Company on
behalf of the entire Board of Directors of the Company in which such individual
is named as nominee for director.
"CURRENCY AGREEMENT" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement,
which may include the use of derivatives, designed to protect such Person
against, or to expose such Person to, fluctuations in currency values.
"DEFAULT" means any event that is, or after notice or lapse of time or both
would become, an Event of Default.
"DESIGNATED PREFERRED STOCK" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the date of issuance thereof;
PROVIDED, HOWEVER, that the net cash proceeds received by the Company from the
issuance of such Designated Preferred Stock are excluded from the calculation
set forth in clause (3) of the first paragraph of "--Covenants--Limitation on
Restricted Payments" above.
"DESIGNATED SENIOR DEBT" means (i) so long as any Indebtedness under the
Senior Credit Facility is outstanding or any lender has any commitment to extend
credit to the Company thereunder, the Senior Debt Incurred under the Senior
Credit Facility and (ii) so long as outstanding, any other Senior Debt which has
at the time of initial issuance an aggregate outstanding principal amount in
excess of $10 million which has been so designated as Designated Senior Debt by
the Board of Directors of the Company at the time of initial issuance in a
resolution delivered to the Trustee.
"DISQUALIFIED STOCK" of any Person means any Capital Stock of such Person
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 redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity of the Notes.
"EQUITY OFFERING" means an underwritten public offering of Common Stock of
the Company pursuant to an effective registration statement filed under the
Securities Act (excluding any registration statements filed on Form S-8 or any
successor form).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"FOREIGN RESTRICTED SUBSIDIARY" means a Restricted Subsidiary whose
jurisdiction of incorporation or formation is other than the United States, any
state thereof or the District of Columbia or Canada or any province or territory
thereof.
"GAAP" means generally accepted accounting principles, consistently applied,
as in effect on the Issue Date in the United States of America, as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as is approved by a significant segment of the
accounting profession in the United States.
"GUARANTEE" means the guarantee of the Notes by each Guarantor under the
Indenture.
77
<PAGE>
"GUARANTOR" means (i) each Restricted Subsidiary that, on the Issue Date, is
a direct or indirect obligor under, or in respect of, the Senior Credit Facility
and (ii) each Restricted Subsidiary that pursuant to the terms of the Indenture
executes a supplement to the Indenture as a Guarantor, in each case, until such
Restricted Subsidiary is released from its Guarantee.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Person or any of its
Restricted Subsidiaries existing at the time such Person becomes a Restricted
Subsidiary (or is merged into or consolidates with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was incurred in connection with,
or in contemplation of, such Person becoming a Restricted Subsidiary (or being
merged into or consolidated with the Company or any Restricted Subsidiary),
shall be deemed Incurred at the time any such Person becomes a Restricted
Subsidiary or merges into or consolidates with the Company or any Restricted
Subsidiary.
"INDEBTEDNESS" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business which are not overdue or
which are being contested in good faith), (v) every Capital Lease Obligation of
such Person, (vi) every net obligation under interest rate swap or similar
agreements or Currency Agreements of such Person, (vii) Attributable
Indebtedness, and (viii) every obligation of the type referred to in clauses (i)
through (vi) of another Person and all dividends of another Person the payment
of which, in either case, such Person has guaranteed or is responsible or liable
for, directly or indirectly, as obligor, guarantor or otherwise. Indebtedness
shall include the liquidation preference and any mandatory redemption payment
obligations in respect of any Disqualified Stock of the Company, and any
Preferred Stock of a Subsidiary of the Company. Indebtedness shall never be
calculated taking into account any cash and cash equivalents held by such
Person. Indebtedness shall not include obligations arising from agreements of
the Company or a Restricted Subsidiary to provide for indemnification,
adjustment of purchase price, earn-out, or other similar obligations, in each
case, incurred or assumed in connection with the disposition of any business or
assets of a Restricted Subsidiary.
"INVESTMENT" by any Person means any direct or indirect loan, advance,
guarantee or other extension of credit or capital contribution to (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidence of Indebtedness issued by any other Person. For purposes of the
"Limitation on Restricted Payments" covenant above, the amount of any investment
shall be the original cost of such investment, plus the cost of all additions
thereto, but without any other adjustments for increases or decreases in value,
or write-ups, write-downs or write-offs with respect to such investment.
"ISSUE DATE" means the original issue date of the Notes.
"LIEN" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, security interest, lien, charge,
easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, preference, priority or other security agreement
with respect to such property or assets (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
78
<PAGE>
"MATERIAL SUBSIDIARY" means, at any date of determination, (a) any
Restricted Subsidiary that, together with its Subsidiaries that constitute
Restricted Subsidiaries (i) for the most recent fiscal year of the Company
accounted for more than 10.0% of the consolidated revenues of the Company and
the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 10.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary which, when aggregated with all
other Restricted Subsidiaries that are not otherwise Material Restricted
Subsidiaries and as to which any event described in clause (h) of "Events of
Default" above has occurred, would constitute a Material Restricted Subsidiary
under clause (a) of this definition.
"NET AVAILABLE PROCEEDS" from any Asset Disposition by any Person means cash
or readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption by the acquirer of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form) therefrom by such Person, including any
cash received by way of deferred payment or upon the monetization or other
disposition of any non-cash consideration (including notes or other securities)
received in connection with such Asset Disposition, net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred and
all federal, state, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or any of its Restricted Subsidiaries on any Indebtedness which is
secured by such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must by the terms of such Lien, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iii) all payments made
with respect to liabilities associated with the assets which are the subject of
the Asset Disposition, including, without limitation, trade payables and other
accrued liabilities, (iv) appropriate amounts to be provided by such Person or
any Restricted Subsidiary thereof, as the case may be, as a reserve in
accordance with GAAP against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, until such time as
such amounts are no longer reserved or such reserve is no longer necessary (at
which time any remaining amounts will become Net Available Proceeds to be
allocated in accordance with the provisions of clause (iii) of the covenant of
the Indenture described under "--Covenants--Limitation on Certain Asset
Dispositions"), and (v) all distributions and other payments made to minority
interest holders in Restricted Subsidiaries of such Person or joint ventures as
a result of such Asset Disposition.
"NET INVESTMENT" means the excess of (i) the aggregate amount of all
Investments made in any Unrestricted Subsidiary or joint venture by the Company
or any Restricted Subsidiary on or after the Issue Date (in the case of an
Investment made other than in cash, the amount shall be the fair market value of
such Investment as determined in good faith by the Board of Directors of the
Company or such Restricted Subsidiary) over (ii) the aggregate amount returned
in cash on or with respect to such Investments whether through interest
payments, principal payments, dividends or other distributions or payments;
PROVIDED, HOWEVER, that such payments or distributions shall not be (and have
not been) included in subclause (c) of clause (3) of the first paragraph
described under "--Covenants--Limitation on Restricted Payments"; PROVIDED,
FURTHER, that with respect to all Investments made in any Unrestricted
Subsidiary or joint venture the amounts referred to in clause (ii) above with
respect to such Investments shall not exceed the aggregate amount of all such
Investments made in such Unrestricted Subsidiary or joint venture.
"NOTE PAYMENT" has the meaning set forth in "--Ranking."
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder at his address appearing in
the register for the Notes on the date of the Offer offering to purchase up to
the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by
79
<PAGE>
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be not less than 30 days nor more
than 60 days after the date of such Offer and a settlement date (the "Purchase
Date") for purchase of Notes within five Business Days after the Expiration
Date. The Company shall notify the Trustee at least 15 Business Days (or such
shorter period as is acceptable to the Trustee) prior to the mailing of the
Offer of the Company's obligation to make an Offer to Purchase, and the Offer
shall be mailed by the Company or, at the Company's request, by the Trustee in
the name and at the expense of the Company. The Offer shall contain all the
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined pursuant
to the Section of the Indenture requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased
by the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note at
the place or places specified in the Offer prior to the close of business on
the Expiration Date (such Note being, if the Company or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Trustee duly executed
by, the holder thereof or his attorney duly authorized in writing);
(10) that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its Paying Agent) receives, not later than
the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the principal amount of the Note the holder
tendered, the certificate number of the Note the holder tendered and a
statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such
80
<PAGE>
adjustments as may be deemed appropriate so that only Notes in denominations
of $1,000 or integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in
part, the Company shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"PARI PASSU INDEBTEDNESS" means Indebtedness of the Company ranked PARI
PASSU in right of payment with the Notes.
"PERMITTED HOLDER" means (i) J. Brendan Barba, his spouse and lineal
descendants and trusts for the exclusive benefit of any of the foregoing
persons; (ii) Borden, Inc. and its Affiliates and (iii) Kohlberg Kravis Roberts
& Co. and its Affiliates.
"PERMITTED INVESTMENTS" means (i) Investments in Cash Equivalents; (ii)
Investments representing Capital Stock or obligations issued to the Company or
any Restricted Subsidiary in the course of the good faith settlement of claims
against any other Person or by reason of a composition or readjustment of debt
or a reorganization of any debtor of the Company or any Restricted Subsidiary;
(iii) deposits, including interest-bearing deposits, maintained in the ordinary
course of business in banks; (iv) any acquisition of the Capital Stock of any
Person; PROVIDED, HOWEVER, that after giving effect to any such acquisition such
Person shall become a Restricted Subsidiary; (v) trade receivables and prepaid
expenses, in each case arising in the ordinary course of business; PROVIDED,
HOWEVER, that such receivables and prepaid expenses would be recorded as assets
of such Person in accordance with GAAP; (vi) endorsements for collection or
deposit in the ordinary course of business by such Person of bank drafts and
similar negotiable instruments of such other Person received as payment for
ordinary course of business trade receivables; (vii) any interest rate
agreements or Currency Agreements with an unaffiliated Person otherwise
permitted by clause (iv) or (v) under "--Covenants--Limitation on Incurrence of
Indebtedness"; (viii) Investments received as consideration for an Asset
Disposition in compliance with the provisions of the Indenture described under
"--Covenants--Limitation on Certain Asset Dispositions" above; (ix) loans or
advances to employees of the Company or any Restricted Subsidiary in an
aggregate amount not to exceed $1.0 million at any one time outstanding; (x) any
Investment in the Company or any Restricted Subsidiary; (xi) any Investment
existing on the Issue Date; (xii) additional Investments having an aggregate
fair market value, taken together with all other Investments made pursuant to
this clause (xii) that at the time outstanding, not to exceed $15.0 million;
(xiii) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar expenses, in
each case incurred in the ordinary course of business; and (xiv) Investments the
payment for which consists of Capital Stock of the Company (exclusive of
Disqualified Stock); provided, however, that the issuance of such Capital Stock
is not included in the calculation set forth in the clause (3) of the first
paragraph of the first paragraph "--Covenants--Limitation on Restricted
Payments" above.
"PERMITTED JUNIOR SECURITIES" means (i) Qualified Stock, (ii) securities of
the Company or any other corporation authorized by an order or decree giving
effect, and stating in such order or decree that effect is given, to the
subordination of such securities to the Senior Debt, and made by a court of
competent jurisdiction in a reorganization proceeding under any applicable
bankruptcy, insolvency or other similar law, or (iii) any securities of the
Company provided for by a plan of reorganization or readjustment that are
subordinated in right of payment to all Senior Debt that may at the time be
outstanding to substantially the same extent as, or to a greater extent than,
the Notes are subordinated as provided in this Indenture.
81
<PAGE>
"PERSON" means any individual, corporation, limited or general partnership,
joint venture, limited liability company, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"PREFERRED STOCK", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"PURCHASE DATE" has the meaning set forth in the definition of "Offer to
Purchase" above.
"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 installation, construction or improvement of
any property; PROVIDED, HOWEVER, that the aggregate principal amount of such
Indebtedness does not exceed the lesser of (i) the fair market value of such
property and (ii) such purchase price or cost, as applicable, including any
refinancing of such Indebtedness that does not increase the aggregate principal
amount (or accreted amount, if less) thereof as of the date of refinancing.
"QUALIFIED STOCK" means any Capital Stock of the Company other than
Disqualified Stock.
"REFINANCE" means refinance, renew, extend, replace or refund; and
"Refinancing" and "Refinanced" have correlative meanings.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SALE AND LEASE-BACK TRANSACTION" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal Property, which property has been or is
to be sold or transferred by the Company or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"SENIOR CREDIT FACILITY" means the Credit Agreement, dated as of October 11,
1996, among the Company, the Eligible Subsidiaries (as defined in the Senior
Credit Facility), Morgan Guaranty Trust Company of New York, as Agent, and the
lenders party thereto, including any deferrals, renewals, extensions,
replacements, Refinancings or refundings thereof, or amendments, restatements,
modifications or supplements thereto and any agreement providing therefor
whether by or with the same or any other lender, creditors, or group of
creditors and including related notes, guarantee agreements, security agreements
and other instruments and agreements executed in connection therewith.
"SENIOR DEBT" means, with respect to any Person at any date, (i) in the case
of the Company or the Guarantor, all Indebtedness and other payment obligations
under the Senior Credit Facility, including principal, premium, if any, and
interest on such Indebtedness and all other amounts due on or in connection with
such Indebtedness including all charges, fees, expenses and indemnity payments,
(ii) all other Indebtedness of such Person for borrowed money, including
principal, premium, if any, and interest on such Indebtedness, unless the
instrument under which such Indebtedness for money borrowed is created,
incurred, assumed or guaranteed expressly provides that such Indebtedness for
money borrowed is not senior or superior in right of payment to the Notes or the
Guarantee, as the case may be, and all Refinancings or modifications or
amendments thereof and (iii) all interest on any Indebtedness referred to in
clauses (i) and (ii) accruing during or which would accrue but for, the pendency
of any bankruptcy or insolvency proceeding, whether or not allowed or allowable
thereunder. Notwithstanding the foregoing, Senior Debt shall not include (a)
Indebtedness which is pursuant to its terms or any agreement relating thereto
subordinated or junior in right of payment or otherwise to any other
Indebtedness of such Person; PROVIDED, HOWEVER, that no Indebtedness shall be
deemed to be subordinate or junior in right of payment or otherwise to any other
Indebtedness of a Person solely by reason of such other Indebtedness being
secured and such Indebtedness not being secured, (b) the Notes, (c) any
Indebtedness of such Person to any of its Subsidiaries, (d) Indebtedness
Incurred in violation of the provisions of the Indenture described under
82
<PAGE>
"--Covenants--Limitation on Incurrence of Indebtedness" and (e) any Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of the Bankruptcy Code, is without recourse to the Company.
"SIMILAR BUSINESS" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors) to the business of the
Company and the Restricted Subsidiaries on the Issue Date.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or any
Guarantor (whether outstanding on the date hereof or hereafter Incurred) which
is by its terms expressly subordinate or junior in right of payment to the Notes
or the Guarantee of such Guarantor, as the case may be.
"SUBSIDIARY" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more other Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and voting power relating to the
policies, management and affairs thereof.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that at
the time of determination is designated an Unrestricted Subsidiary by the Board
of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. Any such designation by the Board of Directors will be
evidenced to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions. The
Indenture provides that the Board of Directors of the Company shall not
designate any Subsidiary of the Company to be an Unrestricted Subsidiary (a)
unless such designation is made in accordance with "--Covenants--Limitation on
Restricted Payments" and (b) if, after such designation, (i) the Company or any
other Restricted Subsidiary (x) provides credit support for, or a guarantee of,
any Indebtedness of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (y) is directly or contingently
liable for any Indebtedness of such Subsidiary, (ii) a default with respect to
any Indebtedness of such Subsidiary (including the exercise of any right which
the holders thereof may have to take enforcement action against such Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity, or (iii) such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any Restricted
Subsidiary which is not a Subsidiary of the Subsidiary to be so designated. The
Board of Directors may redesignate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that (a) no Default shall have
occurred and be continuing and (b) all Indebtedness of such Unrestricted
Subsidiary and all Liens on any asset of such Unrestricted Subsidiary
outstanding immediately following such redesignation would, if Incurred at such
time, be permitted to be Incurred under the Indenture.
"VOTING STOCK" of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary, all of the
outstanding Capital Stock or other ownership interests of which (other than
directors' qualifying shares) shall at the time be owned by the Company and/or
by one or more Wholly Owned Subsidiaries.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent
83
<PAGE>
global Exchange Note, in definitive, fully registered form without interest
coupons (the "Global Exchange Note") and will be deposited with the Trustee as
custodian for The Depository Trust Company, New York, New York ("DTC") and
registered in the name of a nominee of DTC.
Exchange Notes held by persons who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered certificated form (a "Certificated Exchange Note"). Upon the transfer
of any Certificated Exchange Note initially issued to a Non-Global Holder, such
Certificated Exchange Note will, unless the transferee requests otherwise or a
Global Exchange Note has previously been exchanged in whole for Certificated
Exchange Notes, be exchanged for an interest in such Global Exchange Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
THE GLOBAL NOTES
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with the ownership of beneficial interests
in the Global Exchange Note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in the Global Exchange Note will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of participants) and
the records of participants (with respect to interests of persons other than
participants).
So long as DTC or its nominee is the registered holder of the Global
Exchange Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Exchange Note for
all purposes under the Indenture and the Notes. No beneficial owners of an
interest in the Global Exchange Note will be able to transfer that interest
except in accordance with DTC's applicable procedures.
Payments of the principal of, and interest on, the Global Notes will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of the Company, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of beneficial ownership interests in, the Global Exchange Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent Global Exchange Note desires to give or
take any action (including a suit for repayment of principal, premium or
interest) that a Holder is entitled to give or take under the Notes, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instruction of beneficial owners owning through them.
84
<PAGE>
Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Exchange Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Exchange
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the name of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a Holder
requires physical delivery of Certificated Exchange Notes for any reason,
including to sell Exchange Notes to persons in states which require such
delivery of such Exchange Notes or to pledge such Exchange Notes, such holder
must transfer its interest in the Global Exchange Note, in accordance with the
normal procedures of DTC and the procedures set forth in the Indenture.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Exchange
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
is at any time unwilling or unable to continue as a depositary for the Global
Exchange Note and a successor depositary is not appointed by the Company within
90 days, the Company will issue Certificated Exchange Notes in exchange for the
Global Exchange Note.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange)
only at the direction of one or more participants to whose accounts an interest
in the Notes is credited and only in respect of such portion of the aggregate
principal amount of Notes as to which such participant or participants has or
have given such direction.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, the Company will issue certificated notes in exchange
for the Global Exchange Note.
EXCHANGE OFFER; REGISTRATION RIGHTS
EXCHANGE OFFER. The Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issuance Date of the Old Notes pursuant to
which the Company agreed, for the benefit of the holders of the Old Notes that
it will, at its own expense (i) file the Exchange Offer Registration Statement
with the Commission with respect to the Exchange Offer to exchange the Old Notes
for Exchange Notes having substantially identical terms in all material respects
to the Old Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions or interest rate increases as described herein)
within 90 calendar days after the Issuance Date, (ii) use its best efforts to
cause the
85
<PAGE>
Exchange Offer Registration Statement to be declared effective by the Commission
under the Securities Act within 150 calendar days after the Issuance Date, and
(iii) use its best efforts to consummate the Exchange Offer within 180 calendar
days after the Issuance Date. Upon the Exchange Offer Registration Statement
being declared effective the Company will offer the Exchange Notes in exchange
for surrender of the Old Notes. The Company will keep the Exchange Offer open
for at least 30 business days (or longer if required by applicable law) after
the date that notice of the Exchange Offer is mailed to the holders of the Old
Notes. For each Old Note surrendered to the Company pursuant to the Exchange
Offer, the holder that surrendered such Old Note will receive an Exchange Note
having a principal amount equal to that of the surrendered Old Note. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Old Note surrendered in exchange therefor or if no
interest has been paid on such Old Note from the original issue date of such Old
Note. Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would generally
be freely transferable after the Exchange Offer without further registration
under the Securities Act (subject to certain representations required to be made
by each holder of Old Notes, as set forth below). However, any purchaser of Old
Notes who is an "affiliate" of the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) will not
be able to rely on the interpretations of the staff of the Commission, (ii) will
not be able to tender its Old Notes in the Exchange Offer, and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Old Notes unless such sale or
transfer is made pursuant to an exemption from such requirements. In addition,
in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") which acquired the Old Notes for its own account
as a result of market-making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Old Notes) with
the Prospectus contained in the Exchange Offer Registration Statement. The
Company has agreed to make available for a period of up to 120 days after
consummation of the Exchange Offer a prospectus meeting the requirements of the
Securities Act to any Participating Broker-Dealer and any other persons, if any,
with similar prospectus delivery requirements, for use in connection with any
resale of Exchange Notes. A Participating Broker-Dealer or any other person that
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 thereunder).
Each holder of the Old Notes (other than certain specified holders) that
wishes to exchange Old 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 or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes, (iii) it is not an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Company or, if it is such an affiliate it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable, and (iv) it is not acting on behalf of any person who
could not truthfully make the foregoing representations.
SHELF REGISTRATION. In the event that (i) any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the Exchange
Offer is not consummated within 180 calendar days after the Issuance Date, (iii)
under certain circumstances, if the Initial Purchasers shall so request, or (iv)
any holder of Old Notes (other than the Initial Purchasers) is not eligible to
participate in the Exchange Offer, the Company will, at its expense, (a) as
promptly as reasonably practicable file a Shelf Registration Statement covering
resales of the Old Notes, (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act by the
120th calendar day after the filing thereof, and (c) use its best efforts to
keep effective
86
<PAGE>
the Shelf Registration Statement until the earlier of two years from the
Issuance Date (or one year from the date the Shelf Registration Statement is
declared effective if such Shelf Registration Statement is filed upon the
request of any Initial Purchaser pursuant to clause (iii) above) or such shorter
period ending when all Old Notes covered by the Shelf Registration Statement
have been sold in the manner set forth and as contemplated in the Shelf
Registration Statement or when the Old Notes become eligible for resale pursuant
to Rule 144 under the Securities Act without volume restrictions, if any. The
Company, will, in the event of the filing of the Shelf Registration Statement,
provide to each holder of the Old Notes copies of the prospectus which is a part
of the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Notes. A holder of Old
Notes that sells its Old Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a holder (including certain
indemnification rights and obligations thereunder). In addition, each holder of
the Old Notes will be required to deliver information to be used in connection
with the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Old Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
(i) neither the Exchange Offer Registration Statement nor the Shelf Registration
Statement is not filed with the Commission on or prior to the 90th calendar day
following the Issuance Date, (ii) neither the Exchange Offer Registration
Statement nor the Shelf Registration Statement has been declared effective on or
prior to the 150th calendar day following the Issuance Date, or (iii) the
Exchange Offer is not consummated or the Exchange Offer Registration Statement
or the Shelf Registration Statement cease to be effective on or prior to the
180th calendar day following the Issuance Date (each such event referred to in
clauses (i) through (iii), a "Registration Default", the interest rate borne by
the Old Notes shall be increased by .25% per annum following such Registration
Default, which rate will be increased by an additional .25% per annum for each
90-day period that any additional interest continues to accrue; provided that
the aggregate increase in such annual interest rate may in no event exceed 1.0%.
Upon (x) the filing of the Exchange Offer Registration Statement after the
90-day period described in clause (i) above, (y) the effectiveness of the
Exchange Offer Registration Statement after the 150-day period described in
clause (ii) above, or (z) the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, after the
180-day period described in clause (iii) above, the interest rate borne by the
Old Notes from the date of such filing, effectiveness or consummation, as the
case may be, will be reduced to the original interest rate if the Company is
otherwise in compliance with this paragraph; PROVIDED, HOWEVER, that if, after
any such reduction in interest rate, a different event specified in clause (i),
(ii) or (iii) above occurs, the interest rate may again be increased and
thereafter reduced pursuant to the foregoing provisions.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement. The
Registration Rights Agreement is an exhibit to the Registration Statement of
which this Prospectus is a part.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes should not constitute a
recognition event for federal income tax purposes. Consequently, no gain or loss
should be recognized by Holders upon receipt of the Exchange Notes. For purposes
of determining gain or loss upon the subsequent sale or exchange of
87
<PAGE>
Exchange Notes, a Holder's basis in Exchange Notes should be the same as such
Holder's basis in the Old Notes exchanged therefor. Holders should be considered
to have held the Exchange Notes from the time of their original acquisition of
the Old Notes.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
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 Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. To the extent any such broker-dealer participates in
the Exchange Offer and so notifies the Company or causes the Company to be so
notified in writing, the Company has agreed that a period of 120 days after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale and 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 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 prevailing market prices at the time of resale, at prices related
to such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers or 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 on 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.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes and acknowledges and agrees that, upon receipt of notice from the
Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
88
<PAGE>
LEGAL MATTERS
Certain legal matters with regard to the validity of the Notes will be
passed upon for the Company by Bachner, Tally, Polevoy & Misher LLP, New York,
New York. Paul E. Gelbard, a director of the Company, is Of Counsel to the firm
of Bachner, Tally, Polevoy & Misher LLP.
EXPERTS
The audited financial statements included herein, to the extent and for the
periods indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents of the
Company filed with the Commission: (1) the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1997; and (2) the Proxy Statement for the
Company's 1998 Annual Meeting of Stockholders to be held on April 14, 1998.* All
documents and reports filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed incorporated herein by reference and shall be deemed to be a part hereof
from the date of filing of such documents and reports. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in any subsequently filed
document which is incorporated by reference herein modifies or supersedes such
statements. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial holder, to whom a Prospectus is delivered, upon the written or oral
request of any such person, a copy of any or all the foregoing documents
incorporated herein by reference, including exhibits specifically incorporated
by reference in such documents but excluding all other exhibits to such
documents. Requests should be made to the Corporate Secretary of the Company at
125 Phillips Avenue, South Hackensack, NJ 07601, telephone number (201)
641-6600.
- ------------------------
* To be filed on or about February 27, 1998.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report.......................................................... F-2
Consolidated Balance Sheets as of October 31, 1997 and 1996........................... F-3
Consolidated Statements of Income for the Years Ended October 31, 1997, 1996 and
1995................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended October
31, 1997, 1996 and 1995............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended October 31, 1997, 1996 and
1995................................................................................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AEP Industries Inc.:
We have audited the accompanying consolidated balance sheets of AEP
Industries Inc. (a Delaware corporation) as of October 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1997. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AEP
Industries Inc. as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 23, 1997
F-2
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 4,143 $ 12,067
Marketable securities................................................................... -- 2,070
Accounts receivable, less allowance of $5,226 and $5,097 in 1997 and 1996, respectively,
for doubtful accounts................................................................. 112,219 104,302
Inventories, net........................................................................ 92,021 94,336
Net assets held for sale................................................................ 15,000 15,000
Other current assets.................................................................... 12,978 16,327
---------- ----------
Total current assets.................................................................. 236,361 244,102
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization.... 292,743 290,316
GOODWILL less accumulated amortization of $1,351 and $51 in 1997 and 1996, respectively... 43,183 52,906
INVESTMENT IN JOINT VENTURE............................................................... 15,345 15,028
OTHER ASSETS.............................................................................. 25,451 9,313
---------- ----------
Total assets.......................................................................... $ 613,083 $ 611,665
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt................................................................. $ 65,484 $ 51,019
Accounts payable........................................................................ 74,720 68,327
Accrued expenses........................................................................ 40,112 49,132
---------- ----------
Total current liabilities............................................................. 180,316 168,478
LONG-TERM DEBT............................................................................ 311,522 325,438
OTHER LONG TERM LIABILITIES............................................................... 6,278 7,041
DEFERRED INCOME TAXES..................................................................... 26,985 15,575
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock--$1.00 par value; 1,000,000 shares authorized; none issued.............. -- --
Common stock--$.01 par value; 30,000,000 shares and 20,000,000 shares authorized in 1997
and 1996, respectively; 9,988,330 and 9,931,303 shares issued in 1997 and 1996,
respectively.......................................................................... 100 99
Additional paid-in capital.............................................................. 89,974 88,052
Treasury stock--common stock; at cost, 2,781,543 and 2,801,000 shares in 1997 and 1996,
respectively.......................................................................... (61,783) (62,142)
Retained earnings....................................................................... 78,679 70,108
Cumulative translation adjustment..................................................... (18,988) (1,283)
Net unrealized investment gain, net of taxes.......................................... -- 299
---------- ----------
Total shareholders' equity.......................................................... 87,982 95,133
---------- ----------
Total liabilities and shareholders' equity.......................................... $ 613,083 $ 611,665
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.................................................................... $ 759,123 $ 270,534 $ 242,886
COST OF SALES................................................................ 599,391 210,764 182,513
---------- ---------- ----------
Gross profit........................................................... 159,732 59,770 60,373
OPERATING EXPENSES:
Delivery and warehousing................................................... 46,492 20,825 16,666
Selling.................................................................... 43,363 15,701 12,940
General and administrative................................................. 30,025 7,706 5,543
---------- ---------- ----------
Total operating expenses............................................... 119,880 44,232 35,149
---------- ---------- ----------
Income from operations................................................. 39,852 15,538 25,224
OTHER INCOME (EXPENSE):
Interest expense........................................................... (30,061) (11,517) (3,209)
Other, net................................................................. 3,475 390 384
---------- ---------- ----------
(26,586) (11,127) (2,825)
---------- ---------- ----------
Income before extraordinary item and provision for income taxes........ 13,266 4,411 22,399
---------- ---------- ----------
PROVISION FOR INCOME TAXES................................................... 4,695 1,858 8,723
---------- ---------- ----------
Income before extraordinary item....................................... 8,571 2,553 13,676
EXTRAORDINARY ITEM, net of income tax benefit of $120 in 1995................ -- -- (190)
---------- ---------- ----------
Net income............................................................. $ 8,571 $ 2,553 $ 13,486
---------- ---------- ----------
---------- ---------- ----------
INCOME PER SHARE OF COMMON STOCK:
Before extraordinary item.................................................. $ 1.15 $ .50 $ 1.99
Extraordinary item......................................................... -- -- (.03)
---------- ---------- ----------
Net income............................................................. $ 1.15 $ .50 $ 1.96
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL CUMULATIVE NET UNREALIZED
------------------------ ---------------------- PAID-IN TRANSLATION INVESTMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT GAIN
----------- ----------- ----------- --------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
OCTOBER 31, 1994............... 7,368 $ 74 $ 7,009
Issuance of common stock upon
exercise of stock options
(Note 8)................... 62 470
Issuance of common stock
pursuant to stock purchase
plan (Note 8).............. 10 66
Net income...................
Cash dividends...............
Purchase of treasury stock
(Note 8)................... 2,633 $ (58,304)
Other........................ (3) (62)
----- ----- ----- --------- ----------- ------------ -----
BALANCES AT
OCTOBER 31, 1995............... 7,437 74 2,633 (58,304) 7,483
Issuance of common stock upon
exercise of stock options
(Note 8)................... 66 1 308
Issuance of common stock
pursuant to stock purchase
plan (Note 8).............. 15 285
Issuance of common stock
pursuant to acquisition of
Borden Global Packaging
(Note 8)................... 2,413 24 79,976
Net income...................
Purchase of treasury stock
(Note 8)................... 168 (3,838)
Translation adjustments...... $ (1,283)
Net unrealized investment
gain....................... $ 299
----- ----- ----- --------- ----------- ------------ -----
BALANCES AT
OCTOBER 31, 1996............... 9,931 $ 99 2,801 $ (62,142) $ 88,052 $ (1,283) $ 299
Issuance of common stock upon
exercise of stock options
(Note 8)................... 46 1 727
Issuance of common stock
pursuant to stock purchase
plan (Note 8).............. 11 -- 363
Tax benefit from stock option
exercises.................. 160
Net Income...................
ESOP Contribution............ (19) 359 672
Sale of securities........... (299)
Translation adjustments...... (17,705)
----- ----- ----- --------- ----------- ------------ -----
BALANCES AT
OCTOBER 31, 1997............... 9,988 $ 100 2,782 $ (61,783) $ 89,974 $ (18,988) --
----- ----- ----- --------- ----------- ------------ -----
----- ----- ----- --------- ----------- ------------ -----
<CAPTION>
RETAINED
EARNINGS
-----------
<S> <C>
BALANCES AT
OCTOBER 31, 1994............... $ 54,706
Issuance of common stock upon
exercise of stock options
(Note 8)...................
Issuance of common stock
pursuant to stock purchase
plan (Note 8)..............
Net income................... 13,486
Cash dividends............... (637)
Purchase of treasury stock
(Note 8)...................
Other........................
-----------
BALANCES AT
OCTOBER 31, 1995............... 67,555
Issuance of common stock upon
exercise of stock options
(Note 8)...................
Issuance of common stock
pursuant to stock purchase
plan (Note 8)..............
Issuance of common stock
pursuant to acquisition of
Borden Global Packaging
(Note 8)...................
Net income................... 2,553
Purchase of treasury stock
(Note 8)...................
Translation adjustments......
Net unrealized investment
gain.......................
-----------
BALANCES AT
OCTOBER 31, 1996............... $ 70,108
Issuance of common stock upon
exercise of stock options
(Note 8)...................
Issuance of common stock
pursuant to stock purchase
plan (Note 8)..............
Tax benefit from stock option
exercises..................
Net Income................... 8,571
ESOP Contribution............
Sale of securities...........
Translation adjustments......
-----------
BALANCES AT
OCTOBER 31, 1997............... $ 78,679
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
AEP INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 8,571 $ 2,553 $ 13,486
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization.................................................. 32,651 12,534 9,822
ESOP contribution............................................................ 1,031 --
Net (gain)/loss on sale of securities........................................ (416) -- --
Net (gain)/loss on sale of equipment......................................... (256) -- --
Provision for losses on accounts receivable and inventory...................... 2,605 527 500
Write-off of debt issuance costs............................................. 3,330 -- --
Deferred income taxes........................................................ 2,704 288 1,190
Equity in unremitted earnings of joint venture............................... (317) -- --
Changes in operating assets and liabilities, net of acquisition of business
(Increase) in accounts receivable.............................................. (9,561) (4,383) (2,750)
(Increase) decrease in inventories............................................. 1,354 4,393 (2,323)
(Increase) decrease in other current assets.................................... 2,749 (1,573) (684)
(Increase) decrease in other assets............................................ (18,868) 11,332 (2,531)
Decrease in goodwill......................................................... 8,423
Increase (decrease) in accounts payable........................................ 6,393 (8,576) 6,047
(Decrease) in accrued expenses................................................. (9,020) (9,759) (167)
Increase in deferred income taxes.............................................. 8,706 -- --
(Decrease) in other long term liabilities.................................... (763) -- --
--------- ---------- ---------
Net cash provided by operating activities.................................. 39,316 7,336 22,590
--------- ---------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Borden Global Packaging, net of cash acquired................... -- (254,939) --
Capital expenditures........................................................... (39,352) (14,040) (28,402)
Sales and retirements of property, plant and equipment, net.................... 2,088 14 20
Acquisition of assets in Australia............................................. (8,758)
Purchases of marketable securities............................................. -- (53) --
Sales of marketable securities................................................. 2,486 -- 1,925
--------- ---------- ---------
Net cash used in investing activities...................................... (43,536) (269,018) (26,457)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under long-term credit facilities.................. (10,000) 9,357 (2,500)
Net borrowings of debt......................................................... 10,549 370,300 92,964
Net repayments on long-term debt............................................... -- (101,710) (28,059)
Proceeds from issuance of common stock......................................... 1,091 594 474
Purchase of treasury stock..................................................... -- (3,838) (58,304)
Payment of cash dividends...................................................... -- -- (637)
--------- ---------- ---------
Net cash provided by financing activities.................................. 1,640 274,703 3,938
--------- ---------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH......................................... (5,344) (1,283) --
--------- ---------- ---------
Net increase (decrease) in cash............................................ (7,924) 11,738 71
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 12,067 329 258
--------- ---------- ---------
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 4,143 $ 12,067 $ 329
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
AEP Industries Inc. (the "Company") is an international manufacturer of a
wide range of plastic film products. The Company's products are used in a number
of industrial, commercial, food and agricultural applications and are sold
worldwide, including North America, Western Europe and the Asia/Pacific regions.
(2) SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements include the accounts of all
majority-owned subsidiaries.
All significant intercompany transactions have been eliminated.
REVENUE RECOGNITION--
Revenues are recognized when products are shipped.
CASH AND CASH EQUIVALENTS--
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES--
Marketable securities classified as available-for-sale securities are
carried at fair market value with unrealized gains and losses excluded from
income and recorded, net of income tax, as a separate component of shareholders'
equity. The Company has no securities classified as trading or held-to-maturity.
Gains and losses on investment transactions are recognized when realized
based on trade dates. Dividends are recorded in income based on payment dates.
Interest is recognized when earned.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT--
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using primarily the straight-line method over the
estimated useful lives of the assets. The cost of property, plant and equipment
and the related accumulated depreciation and amortization are removed from the
accounts upon the retirement or disposal of such assets and the resulting gain
or loss is recognized at the time of disposition. The cost of maintenance and
repairs is charged to expense as incurred.
F-7
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FOREIGN CURRENCY TRANSLATION--
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each period for revenues,
expenses, gains and losses. The related translation adjustments are recorded as
a separate component of shareholders' equity.
RESEARCH AND DEVELOPMENT COSTS--
Research and development costs are charged to expense as incurred.
Approximately $2,192,000, $635,000, and $698,000 for 1997, 1996 and 1995,
respectively, was incurred for such research and development.
INCOME TAXES--
Income taxes are accounted for in accordance with SFAS 109, "Accounting for
Income Taxes." Under SFAS 109, an asset and liability approach is required. Such
approach results in the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities.
The Company and its subsidiaries file separate foreign, state and local
income tax returns and, accordingly, provide for such income taxes on a separate
company basis.
DERIVATIVES--
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company has established policies
and procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not hold or issue
derivative financial instruments for trading purposes.
FOREIGN EXCHANGE CONTRACTS--
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are accrued as exchange rates change and are recognized in
shareholders' equity as cumulative translation adjustments. Gains and losses on
contracts designated as hedges of identifiable foreign currency firm commitments
are deferred and included in the measurement of the related foreign currency
transaction.
GOODWILL--
Goodwill, representing the excess of the purchase price over the fair value
of the net assets of the acquired entities (Note 3), is being amortized on a
straight line basis over the period of expected benefit of thirty-five (35)
years. The Company evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the assigned goodwill or
rendered the goodwill not recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS--
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value because of the short term
maturity of those instruments. The fair value of the Company's debt is discussed
in Note 7.
F-8
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATION OF CREDIT RISK--
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, marketable securities,
trade receivables and financial instruments used in hedging activities.
The Company places its cash equivalents and short-term investments with
high-quality-credit institutions and limits the amount of credit exposure with
any one financial institution.
The Company sells its products to a large number of geographically diverse
customers, thus spreading the trade credit risk. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
requiring collateral. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
The counterparties to the agreements relating to the Company's foreign
exchange and interest rate instruments consist of a number of major,
international financial institutions. The Company does not believe that there is
significant risk of nonperformance by these counterparties as the Company
continually monitors the credit ratings of such counterparties, and limits the
financial exposure and the amount of agreements entered into with any one
institution.
NET INCOME PER SHARE OF COMMON STOCK--
Net income per share of common stock is calculated using the weighted
average number of shares of common stock and (where dilutive) common stock
equivalents (options) outstanding during the period. The number of shares used
in the per share computations was 7,452,393 in 1997, 5,077,725 in 1996, and
6,883,306 in 1995.
During 1995, the Company acquired 2,633,000 shares of its common stock, the
purchase of which has been reflected in the computation of earnings per share on
the basis of the weighted shares outstanding. Had the shares been purchased at
the beginning of fiscal 1995 and had the debt, the proceeds from which the
purchase was made, been outstanding since that date, earnings per share for 1995
would have been increased by $.30.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which becomes effective for the Company's fiscal year beginning November
1, 1997, establishes new standards for computing and presenting earnings per
share ("EPS"). The new standard requires the presentation of basic EPS and
diluted EPS. Basic EPS is calculated by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available to common shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities. Previously
reported EPS amounts must be restated under the new standard when it becomes
effective. Under the new standard, basic EPS would have been $1.19, $0.52 and
$1.96 in 1997, 1996 and 1995, respectively and diluted EPS would have been $1.15
and $0.50 in 1997 and 1996, respectively.
STOCK BASED COMPENSATION--
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation ." This statement establishes a
fair value based method of accounting for an employee stock option or similar
equity instrument but allows companies to continue to measure
F-9
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Companies electing to continue using the accounting under APB
Opinion No. 25 must, however, make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. The Company has elected to continue accounting
for its stock-based compensation awards to employees and directors under the
accounting prescribed by APB Opinion No. 25 and to provide the disclosures
required by SFAS No.123 (See Note 8).
LONG-LIVED ASSETS--
Effective November 1, 1996, the Company adopted Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This statement requires
that long-lived assets and certain identifiable intangibles held and used by the
Company be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recovered. SFAS No. 121 also
requires that assets to be disposed of be reported at the lower of the carrying
value or the fair market value less costs to sell. Adoption of this statement
did not have a material impact on the Company's financial position, results of
operations or liquidity.
REPORTING COMPREHENSIVE INCOME--
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This standard establishes requirements for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is the total of
net income and all other nonowner changes in equity. The objective of the
Statement is to report a measure of all changes in equity of a company that
result from transactions and other economic events in the period other than
transactions with owners. This standard is effective for the Company's fiscal
year beginning November 1, 1998. The Company will make the necessary
disclosures, if necessary, when required and as this statement relates solely to
disclosure provisions, believes that the adoption of this standard will have no
effect on its financial position or results of operations.
RECLASSIFICATIONS--
Certain prior year amounts have been reclassified in order to conform with
the 1997 presentation.
(3) ACQUISITION OF BUSINESS
On October 11, 1996, the Company acquired the Global Packaging Business
("BGP") of Borden, Inc. for a combination of cash and shares of Company common
stock. The cash portion of the purchase price was $264,400,000, after all
adjustments, and the stock portion of the purchase price totaled $80 million and
consisted of 2,412,818 shares valued at $33.15625 per share, representing the
average market share price at the time the acquisition was agreed to and
announced. The cash portion of the purchase price was financed through bank
debt.
The acquisition was accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition. Included in accrued expenses are approximately $14 million and $2.5
F-10
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITION OF BUSINESS (CONTINUED)
million at October 31, 1996 and October 31, 1997, respectively, of additional
acquisition costs (Note 6). The acquisition resulted in goodwill of
approximately $53 million which is being amortized on a straight line basis over
thirty-five years.
At the time of the Company's acquisition of BGP, management decided not to
retain the rigids' businesses of BGP. The rigids' businesses manufacture, market
and distribute wet food containers, dry food trays and disposable food service
products. These businesses are not considered core businesses and the Company
has offered these businesses for sale with the intention that they would be sold
within one year from the date of the acquisition and it would use the proceeds
from the sale to pay down its debt. Accordingly, the Company has classified the
net assets of such businesses as Net assets held for sale in the accompanying
Consolidated Balance Sheets. For the year ending October 31, 1997, the net
losses from the rigids' businesses amounted to approximately $6 million and are
not included in the Company's results of operations. The carrying value of net
assets held for sale represents the Company's best estimate at October 31, 1997
as to the fair market value based on recent market information.
The Company is actively pursuing the sale of these operations and remains
committed to a formal plan of sale and effective November 1, 1997, has begun
recording the rigids' businesses as discontinued operations until such time as
they are sold.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and BGP, without the rigids'
businesses, as if the acquisition had occurred at the beginning of fiscal 1995
and 1996, respectively, with pro forma adjustments to give effect to
amortization of goodwill, interest expense on acquisition debt and certain other
adjustments, together with related income tax effects.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Net Sales................................................. $ 765,449 $ 804,489
Operating Income.......................................... 42,227 54,676
Net Income................................................ 10,019 20,074
Earnings per Share........................................ $ 1.36 $ 2.16
</TABLE>
These pro forma results have been prepared for comparative purposes only.
They do not purport to be indicative of the results of the operations which
actually would have resulted had the combination been in effect on November 1,
1994 and 1995 or of the future results of operations of the Company.
F-11
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) INVENTORIES:
Inventories, stated at the lower of cost (last-in, first-out method for
domestic operations and first-in, first-out method for foreign operations and
supplies) or market, include material, labor and manufacturing overhead costs
and are comprised of the following--
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw materials............................................................................... $ 22,212 $ 27,362
Finished goods.............................................................................. 67,246 66,095
Supplies.................................................................................... 4,060 2,689
--------- ---------
93,518 96,146
Less: Inventory Reserve..................................................................... 1,497 1,810
--------- ---------
Total Inventories, net...................................................................... $ 92,021 $ 94,336
--------- ---------
--------- ---------
</TABLE>
The last-in, first-out (LIFO) method was used for determining the cost of
approximately 50% and 44% of total inventories at October 31, 1997 and 1996,
respectively. Inventories would have been increased by $2,330,000 and $9,358,000
at October 31, 1997 and 1996, respectively, if the FIFO method had been used
exclusively. Due to the Company's continuous manufacturing process, there is no
significant work in process at any point in time.
(5) PROPERTY, PLANT AND EQUIPMENT:
A summary of the components of property, plant and equipment and their
estimated useful lives is as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------- ESTIMATED
1997 1996 USEFUL LIVES
---------- ---------- ------------------
<S> <C> <C> <C>
(IN THOUSANDS)
Land.................................................................. $ 15,164 $ 12,982
Buildings............................................................. 76,601 72,867 15 to 31.5 years
Machinery and equipment............................................... 260,327 242,812 3 to 16 years
Furniture and fixtures................................................ 7,461 6,304 9 years
Leasehold improvements................................................ 2,293 2,521 6 to 25 years
Motor vehicles........................................................ 3,924 6,561 3 years
Construction in progress.............................................. 16,471 12,266
---------- ----------
382,241 356,313
Less--Accumulated depreciation and amortization....................... 89,498 65,997
---------- ----------
$ 292,743 $ 290,316
---------- ----------
---------- ----------
</TABLE>
Maintenance and repairs expense was approximately $13,500,000, $1,845,000,
and $2,283,000 for the years ended October 31, 1997, 1996 and 1995,
respectively.
F-12
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) ACCRUED EXPENSES
At October 31, 1997 and 1996, accrued expenses consisted of the following--
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Payroll and employee benefits............................................................... $ 15,147 $ 12,394
Interest.................................................................................. 3,181 1,130
Taxes (other than income)................................................................... 4,325 4,805
Customer Rebates............................................................................ 6,994 3,811
Acquisition Related:
Severance................................................................................. 2,000 7,800
Professional Fees......................................................................... -- 2,200
Relocation of machinery and equipment..................................................... -- 2,800
Other..................................................................................... 458 1,527
Other....................................................................................... 8,007 12,665
--------- ---------
$ 40,112 $ 49,132
--------- ---------
--------- ---------
</TABLE>
(7) DEBT:
A summary of the components of debt is as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Term loan facility (a).................................................................... $ 320,000 $ 350,000
Revolving credit facility (a)............................................................. -- 10,000
Pennsylvania Industrial Loans (b)......................................................... 5,981 5,196
Foreign bank borrowings (c)............................................................... 51,025 11,261
---------- ----------
Total Debt.............................................................................. 377,006 376,457
Less--Current portion..................................................................... 65,484 51,019
---------- ----------
Long-Term Debt............................................................................ $ 311,522 $ 325,438
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) On October 11, 1996, to facilitate the acquisition of BGP, the Company
entered into a long term credit agreement (the "Credit Agreement") with a
consortium of banks arranged by Morgan Guaranty Trust Company of New York.
The Credit Agreement provided the Company with two credit facilities
consisting of (1) a six year amortizing term loan facility in the amount of
$350,000,000 and (2) a six year revolving credit facility in the amount of
$100,000,000. The Company borrowed under the Credit Agreement: (1) a
$5,000,000 prime rate loan at 8.25% (this was repaid prior to October 31,
1996); (2) $10,000,000 under the revolving credit facility (this was repaid
in 1997); and (3) $350,000,000 term loan with installment payments due
quarterly in 1997 and in increasing amounts thereafter ($30 million was
repaid in 1997). At October 31, 1996, the interest rates ranged from 5.8875%
to 6.075%. Concurrent with the above, the Company repaid its prior credit
facilities totaling $95,356,869.
As a result of the Company's high degree of leverage and the effect on net
sales that occurred as a result of overcapacity in the domestic stretch wrap
industry, the Company believed there was a
F-13
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT: (CONTINUED)
substantial likelihood that it would fail to maintain certain financial
ratios, including minimum fixed charge coverage and leverage ratios, at the
levels required by the Credit Agreement. The Company received a waiver
relating to such ratios and entered into an amendment to the Credit
Agreement (the "Amendment") in October 1997.
The principal effects of the Amendment relate to the interest rate applicable
to the Credit Agreement and the amortization schedule with respect to the
term loan made thereunder. The interest rate margins which determine the
interest rates applicable to the loans under the Credit Agreement have been
increased as follows: the margin applicable to Base Rate loans (formerly 0%)
has been increased to a range from 0% to .75% and the margin applicable to
LIBOR Rate loans (formerly .25% to .625%) has been increased to a range from
.45% to 1.75%. The required amortization payments in respect of the term
loan have been reduced so that, instead of amortizing the full principal
during the term of the loan, a balloon payment equal to the remaining
outstanding principal balance of the term loan will be due at maturity
(October 11, 2002). As a result of the Amendment, the Company has
written-off the unamortized prior debt issuance costs of $3,330,000 and has
capitalized $1,050,000 of amendment fees. (See Note 16).
The Amendment contains certain customary representations, warranties,
covenants and conditions such as, but not limited to, cash flow ratio, fixed
charge coverage ratio and certain restrictions on, and not limited to,
dividends, mergers, investments, asset sales and additional indebtedness.
(b) During 1996, the Company entered into the following financing arrangements
in connection with the construction of its Wright Township, Pennsylvania
manufacturing facility:
$1,600,000 fifteen year fixed rate 2% loan due on August 1, 2011;
$3,300,000 fifteen year fixed rate 2% loan due on July 1, 2011;
$ 400,000 seven year fixed rate 2% loan due on July 1, 2003.
During 1997, the Company also entered into the following financing
arrangements with Wright Township, Pennsylvania:
$750,000 five year fixed rate 1% loan due on February 24, 2002.
$400,000 fifteen year fixed rate 2% loan due on August 1, 2011.
The Company has repaid $355,000 and $114,000 of these borrowings during 1997
and 1996, respectively.
(c) These amounts consist of short term foreign bank borrowings at an average
interest rate of approximately 6.9% and 6.1% in 1997 and 1996, respectively,
and long term debt of $818,000 and $615,000 in 1997 and 1996, respectively.
In 1996, the long term debt was held in Italy and South Africa, with average
interest rates of 12.36% and 18.59%, respectively. In 1997, the long term
debt was held in Australia, Italy and South Africa, with average interest
rates of 11.47%, 12.36% and 18.59%, respectively.
F-14
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT: (CONTINUED)
Payments required on all debt during each of the next five years are as
follows--
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998.......................................................................... $ 65,484
1999.......................................................................... 15,627
2000.......................................................................... 20,550
2001.......................................................................... 25,548
2002.......................................................................... 20,118
Thereafter.................................................................... 229,679
--------------
$ 377,006
--------------
--------------
</TABLE>
Cash paid for interest during 1997, 1996 and 1995 was $22,178,000,
$7,546,000 and $3,273,000, respectively.
The fair value of the Company's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The Company believes that the
stated values represent the estimated fair values of the Company's debt
instruments.
(8) SHAREHOLDERS' EQUITY:
On October 11, 1996, in connection with the acquisition of BGP (as discussed
in Note 3), the Company issued 2,412,818 shares of the Company's common stock at
a price of $33.15625 per share or a total of $80,000,000.
In August 1995, the Company executed a stock purchase agreement with J.
Brendan Barba, the Chairman of the Board, President and Chief Executive Officer
of the Company under which the Company purchased and placed into treasury
1,550,000 shares of the Company's stock owned by Mr. Barba at $21.04 per share.
Pursuant to a self tender offering commencing in August 1995, to its
shareholders, the Company purchased and placed into treasury during 1996 and
1995 168,000 and 1,083,000 shares, respectively, of the Company's stock at
$22.75 per share. The purchases of treasury stock were accounted for under the
cost method. During 1997, the Company issued 19,457 shares from treasury to fund
the Company's ESOP (Note 9).
The Company's Board of Directors may direct the issuance of the Company's
$1.00 par value Preferred Stock in series and may, at the time of issuance,
determine the rights, preferences and limitations of each series.
In April 1995, the shareholders of the Company approved the Company's 1995
Stock Option Plan and the 1995 Employee Stock Purchase Plan, previously adopted
by the Board of Directors.
The 1995 Stock Option Plan ("1995 Option Plan") has reserved 500,000 shares
of Common Stock for the granting of options to key employees of the Company,
including directors and officers. The 1995 Option Plan became effective January
1, 1995, and will terminate December 31, 2004. The 1995 Option Plan, provides
for the grant of incentive stock options ("ISOs") which may be exercised over a
period of ten years, issuance of SARS, restricted stock, performance shares and
nonqualified stock options, including fixed annual grants, to nonemployee
directors. Under the 1995 Option Plan, options have been granted to
F-15
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
key employees and outside directors for terms of up to ten years, at an exercise
price not less than the fair value at the date of grant, with the exception of
participants who were granted ISOs at 110% of the fair value because they
possessed more than 10% of the voting rights of the Company's outstanding common
stock at the time of grant, which options are exercisable in whole or in part at
stated times from the date of grant up to five years from the date of grant. The
Stock Option Committee is made up entirely of outside directors who administer
the 1995 Option Plan. Under the Plan, outside directors receive a fixed annual
grant of 1,000 options at the time of the annual meeting of shareholders. During
1997 and 1996, 125,900 and 2,000 options, respectively, under the 1995 Option
Plan were canceled. As of October 31, 1997 and 1996, 164,020 and 171,000 options
respectively, were available for grant.
The 1995 Employee Stock Purchase Plan ("1995 Purchase Plan") became
effective July 1, 1995 and will terminate June 30, 2005. The 1995 Purchase Plan
has an aggregate of 300,000 shares of common stock which has been made available
for purchase by eligible employees of the Company, including directors and
officers, through payroll deductions over successive six-month offering periods.
The purchase price of the common stock under the 1995 Purchase Plan is 85% of
the lower of the last sales price per share of common stock in the
over-the-counter market on either the first or last day of each six-month
offering period. As of October 31, 1997 and 1996, 10,682 and 15,176 shares,
respectively, had been issued under the 1995 Purchase Plan.
In November 1985, the Board of Directors and the shareholders of the Company
adopted the Company's 1985 Stock Option Plan (the "1985 Option Plan") and 1985
Employee Stock Purchase Plan (the "1985 Purchase Plan").
Under the 1985 Option Plan, 772,500 options were granted to key employees of
the Company, including directors and officers. At October 31, 1997 and 1996,
44,695 and 79,075 options, respectively, had been exercised and 353,290 and
420,425 options were outstanding. During 1997 and 1996, 22,440 and 7,500 options
respectively, under the 1985 Option Plan were canceled. The 1985 Option Plan
expired on October 31, 1995.
Under the 1985 Purchase Plan, an aggregate of 187,500 shares of common stock
were made available for purchase through December 31, 1995. As of October 31,
1995, 139,063 shares had been issued under the Purchase Plan and the 48,437
shares which were available for purchase through December 31, 1995, have expired
as of October 31, 1996.
Transactions under the Purchase Plans are as follows--
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PURCHASE
SHARES SHARES PRICE
1995 PLAN 1985 PLAN PER SHARE
----------- ----------- -----------
<S> <C> <C> <C>
Available at October 31, 1995................................................. 300,000 48,437
Expired..................................................................... (48,437)
Purchased................................................................... (15,176) $ 18.12
----------- -----------
Available October 31, 1996.................................................... 284,824 --
Purchased................................................................... (10,682) -- $ 34.00
----------- -----------
Available October 31, 1997.................................................... 274,142 --
----------- -----------
----------- -----------
</TABLE>
F-16
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
Transactions under the Option Plans are as follows--
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
----------- -------------- -----------------
<S> <C> <C> <C>
Outstanding at October 31, 1995.................................... 509,000 $ 5.09-23.13 $ 15.32
Granted.......................................................... 329,000 $ 23.75-51.15 $ 40.96
Exercised........................................................ (79,075) $ 5.66-18.75 $ 9.27
Forfeited...................................................... (9,500) $ 5.66-24.93 $ 9.81
----------- ------
Outstanding at October 31, 1996.................................... 749,425 $ 5.09-51.15 $ 27.28
Granted.......................................................... 136,180 $ 31.00-57.50 $ 36.64
Exercised........................................................ (47,995) $ 6.00-24.93 $ 14.97
----------- ------
Outstanding at October 31, 1997.................................... 689,270 $ 5.09-51.15 $ 26.61
----------- ------
----------- ------
</TABLE>
The weighted average fair values of options granted in 1996 at prices above
market value and at market value are $11.89 and $24.09 respectively. The
weighted average exercise price of options granted in 1996 at prices above
market value and at market value were $33.68 and $41.99, respectively.
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Risk-Free Interest Rates........................................................ 6.56% 6.23%
Expected Lives.................................................................. 7.2 6.5
Expected Volatility............................................................. 41% 43%
</TABLE>
The following table summarizes information about stock options outstanding
at October 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NUMBER
OPTIONS WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE AT AVERAGE
EXERCISE OCTOBER 31, REMAINING EXERCISE OCTOBER 31, EXERCISE
RANGE OF PRICE 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- ----------- ------------- --------------- ------------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 5.09 $ 7.64 38,100 3.8 $ 5.79 38,100 $ 5.79
7.65 11.47 46,300 3.6 9.91 43,420 9.82
17.23 25.84 320,590 7.5 20.29 126,876 19.83
25.85 38.77 129,280 8.4 30.18 6,000 27.42
38.78 51.15 155,000 8.6 46.81 30,000 46.83
- ----------- --
------ ------- ----------- ------- -----------
5.09 51.15 689,270 7.5 $ 26.61 244,396 $ 19.36
</TABLE>
F-17
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY: (CONTINUED)
Had compensation expense for all stock option grants in fiscal years 1997
and 1996 been determined consistent with SFAS No. 123, the Company's net income
and income per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C> <C>
Net Income:............................................... As Reported $ 8,571 $ 2,553
(In Thousands) Pro Forma 7,436 2,321
Net Income Per Share:..................................... As Reported 1.15 .50
Pro Forma 1.03 .48
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
fiscal 1996 and additional awards in future years are anticipated.
(9) PENSIONS AND RETIREMENT SAVINGS PLAN
The Company sponsors various post retirement plans for most full-time
employees. Total pension expense for 1997, 1996 and 1995 was $3,030,500,
$814,000, and $166,000, respectively. The Company sponsors a defined
contribution plan in the United States and defined benefit and defined
contribution plans in its foreign locations, obtained through the acquisition of
BGP.
Effective January 1, 1996, the Company's United States operations amended
its 401(k) savings plan to become a 401(k) Savings and Employee Stock Ownership
Plan (the "Plan"). Employees of the Company in the U.S. who have completed one
year of service and are over the age of 21 (with the exception of those
employees covered by a collective bargaining agreement) may participate. The
Plan shall be primarily invested in the common stock of the Company. The Company
will use shares currently held in treasury for contributions to the Plan.
The Company makes a contribution of the Company's common stock equal to 1%
of a participant's compensation for the plan year and will match 75% of a
participant's contribution up to 4% of the participant's compensation. For the
purpose of determining the number of shares of Company common stock to be
contributed to the Plan, the Company's stock will be valued for the first ten
business days of the month of February following the close of any Plan year. In
1997 and 1996, respectively, 19,457 and 0 shares were issued. The Company has
expensed approximately $1,031,000 and $814,000 in 1997 and 1996, respectively,
related to this Plan.
Under the Company's 401(k) savings plan prior to the 1996 amendment (in the
Unites States only), the Company matched 25% of eligible employee contributions
up to 6% of compensation. Costs charged to expense relating to this plan were
$166,000 for the year ended October 31, 1995.
The Company also sponsors defined contribution plans at selected foreign
locations obtained through the BGP acquisition. The plans cover full time
employees and provide for employer contributions of between 3% and 5% of salary
or a percentage of employee contributions. The Company's contributions related
to these plans for 1997 totaled approximately $224,500.
The Company also has defined benefit plans in certain of its foreign
locations, obtained through the BGP acquisition. For most salaried employees,
benefits under these plans generally are based on compensation and credited
service. For most hourly employees, benefits under these plans are based on
F-18
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) PENSIONS AND RETIREMENT SAVINGS PLAN (CONTINUED)
specified amounts per year of credited service. The Company funds these plans in
amounts actuarially determined or with the funding requirements of federal law
and regulations.
The following table presents a reconciliation of the status of the foreign
defined benefit pension plans to accrued pension liability:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Vested benefit obligation............................................................... $ (13,644) $ (17,021)
Accumulated benefit obligation.......................................................... (15,055) (18,375)
Projected benefit obligation............................................................ (19,295) (23,113)
Plan assets at fair value............................................................... 14,602 16,936
Unrecognized net gain................................................................... 123 --
----------- -----------
Plan assets less than projected benefit obligation...................................... $ (4,570) $ (6,177)
----------- -----------
----------- -----------
</TABLE>
The above amounts are included in other long term liabilities.
The components of net periodic pension costs for the foreign defined benefit
pension plans are as follows:
<TABLE>
<CAPTION>
1997
---------------------
<S> <C>
(IN THOUSANDS)
Service costs of benefits earned during the year............................................ $ 2,034
Interest cost of projected benefit obligation............................................... 1,325
Actual return (gain) on assets.............................................................. (1,152)
Employee contributions...................................................................... (504)
------
Net Pension Expense......................................................................... $ 1,703
------
------
</TABLE>
As BGP was acquired on October 11, 1996, the 1996 net periodic pension costs
for the foreign defined benefit plans were immaterial.
The assumptions used, shown based on a weighted average, in determining the
status of the foreign pension plans at October 31, 1997 and October 31, 1996,
were as follows:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
----------------- ---------------
<S> <C> <C>
Discount rate........................................................................... 7% 7.5%
Salary progression rate................................................................. 4% 4.1%
Long term rate of return................................................................ 6% 8.4%
</TABLE>
(10) INVESTMENT IN JOINT VENTURE
In connection with the acquisition of BGP, the Company acquired for $15
million, fifty percent of Borden Hitachi, a joint venture with Hitachi. The
joint venture manufactures pallet-wrap and polyvinyl chloride ("PVC") food films
for the Japanese industrial, institutional and consumer markets.
F-19
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INVESTMENT IN JOINT VENTURE (CONTINUED)
The investment is being accounted for using the equity method of accounting.
The investment account has been increased for income of the joint venture of
$317,000 in 1997 and $28,000 during the period October 12 to October 31, 1996.
These amounts are included in other income.
(11) INCOME TAXES:
The provision for income taxes is summarized as follows--
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current
Federal............................................................................ $ -- $ 976 $ 6,176
State and Local.................................................................... -- 416 1,357
Foreign............................................................................ 1,991 178 --
--------- --------- ---------
1,991 1,570 7,533
--------- --------- ---------
Deferred:
Federal and State.................................................................. $ 1,101 $ 728 $ 1,190
Foreign............................................................................ 1,603 (440) --
--------- --------- ---------
2,704 288 1,190
--------- --------- ---------
Total provision for income taxes..................................................... $ 4,695 $ 1,858 $ 8,723
--------- --------- ---------
--------- --------- ---------
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries of
approximately $5.8 million are considered permanently invested outside the
United States and as a result, the Company has not provided federal income taxes
on the unremitted earnings. A determination of the deferred tax liability from a
distribution of foreign earnings has not been made as such determination is not
practicable.
The tax effects of significant temporary differences which comprise the
deferred tax assets (liabilities) at October 31, 1997 and 1996 are as follows--
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax asset--
Bad debt expense............................................................................ $ 463 $ 389
Unicap adjustment........................................................................... 351 189
Alternative minimum tax..................................................................... 1,262 1,048
Fixed assets.............................................................................. 3,620 --
Net operating loss carryforwards.......................................................... 27,919 --
Other....................................................................................... 14 7
--------- ---------
Gross deferred tax asset................................................................ 33,629 1,633
Valuation Allowance....................................................................... (14,739) --
--------- ---------
--------- ---------
Net deferred tax asset.................................................................. $ 18,890 $ 1,633
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES: (CONTINUED)
Deferred tax assets are recorded in other current assets and other long term
assets.
<TABLE>
<S> <C> <C>
Deferred tax liability
Depreciation.......................................................... $ (26,119) $ (15,406)
Other................................................................. (866) (169)
--------- ---------
--------- ---------
Deferred tax liability.............................................. $ (26,985) $ (15,575)
--------- ---------
--------- ---------
</TABLE>
During the year, the Company reduced goodwill by approximately $8.4 million
relating to the deferred tax assets established as a result of the acquisition
of BGP.
Approximately $53.4 million of total net operating losses remained at
October 31, 1997, $33.7 million of which expire in the years 1998 through 2002,
and $2.3 million of which can be carried forward indefinitely. The benefits of
these carryforwards are dependent on the taxable income in those foreign
jurisdictions in which they arose and accordingly, a valuation allowance has
been provided where management has determined that it is more likely than not
that the carryforwards will not be utilized. In the event that the tax benefits
relating to the valuation allowance are realized, substantially all of such
benefits would reduce goodwill. Additionally, there are approximately $17.4
million of federal net operating losses in the United States available to be
carried forward, which will expire in the year 2012.
A reconciliation of the provision for taxes on income before extraordinary
item to that which would be computed at the statutory rate of 34%, 34%, and 35%
in 1997, 1996 and 1995, respectively is as follows--
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Provision at statutory rate.......................................................... $ 4,510 $ 1,500 $ 7,840
State tax provision, net of Federal tax benefit...................................... 153 275 882
Effect of non U.S. operations taxed at rates different than U.S Federal statutory
rate............................................................................... 142 (73) --
Other, net........................................................................... (110) 156 1
--------- --------- ---------
$ 4,695 $ 1,858 $ 8,723
--------- --------- ---------
--------- --------- ---------
</TABLE>
United States income tax returns for fiscal years 1994, 1995 and 1996 are
currently under examination by the Internal Revenue Service. Assessments, if
any, are not expected to have a material adverse effect on the financial
statements.
Cash paid for income taxes paid during 1997, 1996 and 1995 was approximately
$2,633,000, $3,990,000 and $7,101,000, respectively.
(12) LEASE COMMITMENTS:
The Company has lease agreements for several of its facilities and certain
transportation equipment expiring at various dates through October 31, 2015.
Rental expense under all leases was $5,710,000, $2,366,000 and $2,617,000 for
1997, 1996 and 1995, respectively.
F-21
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) LEASE COMMITMENTS: (CONTINUED)
Under the terms of noncancellable operating leases with terms greater than
one year, the minimum rental, excluding the provision for real estate taxes and
net of sublease rentals, is as follows--
<TABLE>
<CAPTION>
(IN
THOUSANDS)
------------
<S> <C>
1998............................................................................ $ 4,000
1999............................................................................ 3,183
2000............................................................................ 2,329
2001............................................................................ 1,821
2002............................................................................ 1,463
Thereafter...................................................................... 9,478
------------
$ 22,274
------------
------------
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS--
On October 11, 1996, the Company entered into employment agreements with the
Chairman of the Board , President and Chief Executive Officer and with the
Executive Vice President of the Company. Each contract has a term of five years
with a base salary of $500,000 for the Chairman and $240,000 for the Executive
Vice President. The base salary is increased each year by a percentage equal to
the percentage increase, if any, in the consumer price index. The employment
agreements provide that each individual may be terminated without cause prior to
the expiration of the agreement, and in such case, each person would be entitled
to severance payments equal to two times the sum of the annual base salary then
in effect plus the bonus earned for the immediate preceding year, payable over a
two year period.
CLAIMS AND LAWSUITS--
The Company and its subsidiaries are subject to claims and lawsuits which
arise in the ordinary course of business. On the basis of information presently
available and advice received from counsel representing the Company and its
subsidiaries, it is the opinion of management that the disposition or ultimate
determination of such claims and lawsuits against the Company will not have a
material adverse effect on the Company's financial position or results of
operations.
F-22
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Net sales...................................................... $ 181,686 $ 190,302 $ 198,031 $ 189,104
Gross profit................................................... 39,475 39,065 39,708 41,484
Net income..................................................... 4,056 1,991 2,214 310
----------- ---------- ---------- -----------
Net income per share of common stock......................... $ 0.56 $ 0.27 $ 0.30 $ 0.04
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
1996
Net sales...................................................... $ 54,770 $ 55,821 $ 63,907 $ 96,036
Gross profit................................................... 16,235 15,097 15,619 12,819
Net income (loss).............................................. 3,205 2,464 2,305 (5,421)
----------- ---------- ---------- -----------
Net income (loss) per share of common stock.................. $ 0.64 $ 0.50 $ 0.47 ($ 1.03)
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
Earnings per share are computed independently for each of the quarters
presented.
(15) SEGMENT INFORMATION
The Company's operations are conducted within one business segment, the
production, manufacture and distribution of plastic packaging products,
primarily for the food/beverage, industrial and agricultural markets. It
operates in three geographical regions, North America, Europe and Asia/Pacific.
Information about the Company's operations by geographical area as of and
for the year ended October 31, 1997 is as follows:
<TABLE>
<CAPTION>
DEPRECIATION
NET OPERATING CAPITAL AND IDENTIFIABLE
SALES INCOME EXPENDITURES AMORTIZATION ASSETS
---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
North America................................... $ 469,631 $ 28,170 $ 22,628 $ 22,862 $ 353,570
Europe/South Africa............................. 208,906 4,785 9,891 5,867 169,418
Asia/Pacific.................................... 80,586 4,965 6,833 3,922 59,750
Corporate....................................... -- 1,932 -- -- 30,345
---------- ----------- ------------ ------------ -----------
Total......................................... $ 759,123 $ 39,852 $ 39,352 $ 32,651 $ 613,083
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
</TABLE>
Included in Corporate assets are the investment in joint venture and the net
assets held for sale. Included in the Corporate operating income are the income
from joint venture and all elimination and adjusting entries.
As the acquisition of BGP occurred on October 11, 1996, segment information
is not material as of and for the year ending October 31, 1996 and not
applicable prior to the acquisition.
Intersegment sales and export sales are not material. Operating income
includes all costs and expenses directly related to the geographical area.
Identifiable assets are those used in each segment's operations, except net
assets held for sale which represents the fair market value of those assets.
No single customer accounted for more than 10% of sales in any year.
F-23
<PAGE>
AEP INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT INFORMATION (CONTINUED)
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires disclosures
for each business segment that are similar to current requirements, with the
addition of quarterly disclosures and more detailed geographic disclosures. The
Company is not required to adopt SFAS 131 until the year ending October 31,
1999. SFAS 131 relates solely to disclosure provisions, and therefore will not
have any effect on the results of operations, financial position and cash flows
of the Company.
(16) SUBSEQUENT EVENT
On November 19, 1997, the Company completed an offering of $200 million in
aggregate principal amount of 9.875% Senior Subordinated Notes due November 15,
2007 (the "Notes"). The issue price was 99.224% resulting in an effective yield
of 10%. The net proceeds (approximately $193 million) from the Notes have been
used to repay a portion of the indebtedness outstanding under the Company's
outstanding Credit Agreement (Note 7).
In January 1998, the Company completed the sale of its operations in South
Africa to local management for $1 million plus the settlement of all
intercompany items. As of and for the year ending October 31, 1997, total assets
for this operation amounted to approximately $6.5 million and net losses
amounted to approximately $700,000 respectively. The sale did not result in any
gain or loss.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THEN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 13
Capitalization........................ 19
Selected Historical and Pro Forma
Consolidated Financial Data......... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 28
Management............................ 40
The Exchange Offer.................... 43
Description of Credit Facilities...... 54
Description of the Exchange Notes..... 57
Exchange Offer; Registration Rights... 85
Certain United States Federal Income
Tax Consequences.................... 87
Plan of Distribution.................. 88
Legal Matters......................... 89
Experts............................... 89
Incorporation of Certain Information
by Reference........................ 89
Index to Financial Statements......... F-1
</TABLE>
PROSPECTUS
$200,000,000
AEP INDUSTRIES INC.
[LOGO]
OFFER TO EXCHANGE $200,000,000 OF ITS 9.875% SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $200,000,000 OF ITS
OUTSTANDING 9.875% SENIOR SUBORDINATED NOTES DUE 2007
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law which covers the
indemnification of directors, officers, employees and agents of a corporation is
hereby incorporated herein by reference. Reference is made to Articles Sixth and
Fifteenth of Registrant's Restated Articles of Incorporation which provide for
indemnification by the Registrant in the manner and to the full extent permitted
by Delaware law.
The Company has obtained a directors and officers insurance policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The exhibits required to be filed as part of this registration
statement are listed in the attached Index to Exhibits.
(b) FINANCIAL STATEMENT SCHEDULES. The financial statement schedules of the
Registrant required to be filed as part of this Registration Statement are
listed on the attached index to financial statement schedules.
ITEM 22. UNDERTAKINGS
(A) Undertaking Required by Regulation S-K, Item 512(a).
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act 1933 to reflect;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate,
reflect the fundamental change in the information set forth in the
Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) Undertaking required by Regulation S-K, Item 512(b).
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of a
registrant's annual report pursuant to Section 13(a) or 13(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement in relating to the
Securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-1
<PAGE>
(C) Undertaking required by Regulation S-K, Item 512(e).
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 and Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prosectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(D) Undertakings required by Regulation S-K, Item 512(g).
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statment, by any person
or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment will be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(E) Undertakings required by Regulation S-K, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons pursuant
to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing Form S-4 and has duly caused this Registration Statement
or amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on the 13th day of
February, 1998.
<TABLE>
<S> <C> <C>
AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
Chairman of the Board, President
and Principal Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signatures" constitutes and appoints each of J. Brendan
Barba and Paul M. Feeney his true and lawful attorney-in-fact and agent, each
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and for all intends and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Dated: February 13, 1998 AEP INDUSTRIES INC.
By: /s/ J. BRENDAN BARBA
-----------------------------------------
J. Brendan Barba
Chairman of the Board, President and
Principal Executive Officer
Dated: February 13, 1998 By: /s/ PAUL M. FEENEY
-----------------------------------------
Paul M. Feeney
Executive Vice President, Principal
Financial Officer and Director
Dated: February 13, 1998 By: /s/ LAWRENCE R. NOLL
-----------------------------------------
Lawrence R. Noll
Controller, Principal Accounting
Officer and Director
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
Dated: February 13, 1998 By: /s/ KENNETH AVIA
-----------------------------------------
Kenneth Avia
Director
Dated: February 13, 1998 By: /s/ WILLIAM CARTER
-----------------------------------------
William Carter
Director
Dated: February 13, 1998 By: /s/ PAUL E. GELBARD
-----------------------------------------
Paul E. Gelbard
Director
Dated: February 13, 1998 By: /s/ C. ROBERT KIDDER
-----------------------------------------
C. Robert Kidder
Director
Dated: February 13, 1998 By: /s/ CLIFTON S. ROBERTS
-----------------------------------------
Clifton S. Robins
Director
Dated: February 13, 1998 By: /s/ LEE STEWART
-----------------------------------------
Lee Stewart
Director
Dated: February 13, 1998 By: /s/ SCOTT A. STUART
-----------------------------------------
Scott A. Stuart
Director
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------------- ------------------------------------------------------------------------------------------ -----
<C> <S> <C>
3 (a) Restated Certificate of Incorporation of the Company as filed April 11, 1997 (incorporated
by reference to Exhibit 3(a) to the Quarterly Report on 10-Q for the quarter ended July
31, 1997)................................................................................. *
3 (b) Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 4 to
Registrant's report on Form 8-K, dated October 11, 1996).................................. *
10 (a) 1985 Stock Option Plan of the Company (incorporated by reference to Exhibit 10(mm) to
Amendment No. 2 to Registration Statement on Form S-1 No. 33-2242)........................ *
10 (b) The Employee Profit Sharing and 401(k) Retirement Plan and Trust as adopted March 3, 1993
(incorporated by reference to Exhibit 10(g) to Registrant's Quarterly Report on Form 10-Q
for the period ended January 31, 1993).................................................... *
10 (c) 1995 Stock Option Plan of the Company (incorporated by reference to Exhibit 4 to the
Registration Statement No. 33-58747 on Form S-8).......................................... *
10 (d) 1995 Employee Stock Purchase Plan of the Company (incorporated by reference to Exhibit 4
to the Registration Statement No. 33-58743 on Form S-8)................................... *
10 (e) Lease dated as of March 20, 1990, between the Company and Phillips and Huyler Assoc., L.P.
(incorporated by reference to Exhibit 10(aa) to the Annual Report on Form 10-K for the
year ended October 31, 1990).............................................................. *
10 (f)(1) Credit Agreement, dated as of October 11, 1996, among the Company, the Morgan Guaranty
Trust Company, as Agent, and the banks party thereto (incorporated by reference to Exhibit
3 to Registrant's report on Form 8-K, dated October 11, 1996)............................. *
10 (f)(2) Amendment No. 1, dated as of October 24, 1997, to the Credit Agreement dated as of October
11, 1996, among the Company, the Morgan Guaranty Trust Company as Agent and the Bank's
party thereto (incorporated by reference to Exhibit 10(f)(2) to Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1997).................................. *
10 (g) Tender Offer to Purchase, dated as of August 10, 1995, (incorporated by reference to
Exhibit (a)(1) as filed on August 10, 1995, with Schedule 13E-4).......................... *
10 (h) Stock Purchase Agreement, dated as of August 2, 1995, between the Company and J. Brendan
Barba (incorporated by reference to Exhibit (c) as filed on August 10, 1995 with Schedule
13E-4).................................................................................... *
10 (i)(1) Purchase Agreement, dated as of June 20, 1996, without exhibits, between the Company and
Borden Inc. (incorporated by reference to Exhibit C-1 to Registrant's report on Form 8-K,
dated June 20, 1996)...................................................................... *
10 (i)(2) Amendment No. 1, dated as of October 11, 1996, to the Purchase Agreement, dated as of June
20, 1996, between the Company and Borden, Inc. (incorporated by reference to Exhibit 1(b)
to Registrant's report on Form 8-K, dated October 11, 1996)............................... *
10 (i)(3) Combined Financial Statements of Borden Global Packaging Operations as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31, 1995
(incorporated by reference to Annex F to Registrant's Proxy Statement, dated September 11,
1996)..................................................................................... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------------------- ------------------------------------------------------------------------------------------ -----
<C> <S> <C>
10 (j)(1) Governance Agreement, dated as of June 20, 1996, without exhibits, between the Company and
Borden, Inc. (incorporated by reference to Exhibit C-2 to Registrant's report on Form 8-K,
dated June 20, 1996)...................................................................... *
10 (j)(2) Amendment No. 1, dated as of October 11, 1996, to the Governance Agreement dated as of
June 20, 1996, between the Company and Borden, Inc. (incorporated by reference to Exhibit
2(b) to Registrant's report on Form 8-K, dated October 11, 1996).......................... *
10 (k) Employment Agreement, dated as of October 11, 1996, between the Company and J. Brendan
Barba (incorporated by reference to Exhibit 10(k) to Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1997).......................................... *
10 (l) Employment Agreement, dated as of October 11, 1996, between the Company and Paul M. Feeney
(incorporated by reference to Exhibit 10(l) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997)................................................... *
10 (m) Purchase Agreement, dated November 14, 1997, among Registrant and J.P. Morgan Securities,
Inc., Morgan Stanley & Co. Incorporated and Salomon Brothers Inc (incorporated by
reference to Exhibit 1 to Registrant's report on Form 8-K, dated November 19, 1997)....... *
10 (n) Registration Rights Agreement, dated as of November 19, 1997, among Registrant and J.P.
Morgan Securities, Inc., Morgan Stanley & Co. Incorporated and Salomon Brothers, Inc
(incorporated by reference to Exhibit 1 to Registrant's report on Form 8-K, dated November
19, 1997)................................................................................. *
10 (o) Indenture, dated as of November 19, 1997, between the Registrant and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 1 to Registrant's report on Form 8-K,
dated November 19, 1997).................................................................. *
10 (p) Agreement for Sale of Business, dated July 18, 1997, between ICI Australia Limited and ICI
Australia Operations PTY Limited as Seller, and Registrant's subsidiary AEP Industries
(Australia) PTY Limited, as Purchaser (incorporated by reference to Exhibit 10(p) to
Registrant's report on Form 10-K for the year ended October 31, 1997)..................... *
23 Consent of Arthur Andersen LLP............................................................
24 Power of Attorney (see "Power of Attorney" on signature page).............................
99 (a) Form of Letter of Transmittal.............................................................
99 (b) Notice of Guaranteed Delivery.............................................................
</TABLE>
- ------------------------
* Incorporated by reference.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-4 of our report dated
December 23, 1997 included in AEP Industries Inc.'s Form 10-K for the year ended
October 31, 1997 and to all references to our Firm included in this Registration
Statement.
Arthur Andersen LLP
Roseland, New Jersey
February 13, 1998
<PAGE>
LETTER OF TRANSMITTAL
FOR
9.875% SENIOR SUBORDINATED NOTES
DUE 2007
OF
AEP INDUSTRIES INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998 (THE "EXPIRATION DATE")
UNLESS EXTENDED BY AEP INDUSTRIES INC.
EXCHANGE AGENT:
THE BANK OF NEW YORK
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
Attn: Corporate Trust Department Attn: Corporate Trust Department
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
</TABLE>
BY FACSIMILE:
(212) 815-5915
Attn: Corporate Trust Department
Telephone: (212) 815-5735
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus, dated ,
1998 (the "Prospectus"), of AEP Industries Inc. (the "Company"), and this Letter
of Transmittal (the "Letter of Transmittal"), which together describe the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
its new 9.875% Senior Subordinated Notes due 2007 (the "Exchange Notes") for
each $1,000 in principal amount of outstanding Senior Subordinated Notes due
2007 (the "Old Notes"). The terms of the Exchange Notes are identical in all
material respects (including principal amount, interest rate and maturity) to
the terms of the Old Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are freely transferable by
holders thereof (except as provided herein or in the Prospectus) and are not
subject to any covenant regarding registration under the Securities Act of 1933,
as amended (the "Securities Act").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
<PAGE>
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
- -------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED AMOUNT PRINCIPAL
HOLDER(S) CERTIFICATE REPRESENTED BY AMOUNT
(PLEASE FILL IN) NUMBER(S)* OLD NOTES* TENDERED**
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. See
instruction 2.
This Letter of Transmittal is to be used either if certificates representing
Old Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Delivery of
documents to the book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer--Procedures for Tendering Old Notes."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
/ / The Depository Trust Company
Account Number _____________________________________________________________
Transaction Code Numbers ___________________________________________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
If Delivered by Book-Entry Transfer:
Account Number _____________________________________________________________
2
<PAGE>
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN
PERSON SIGNING THE LETTER OF TRANSMITTAL
Name _______________________________________________________________________
(Please Print)
Address ____________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Address ____________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF YOU ARE A BROKER DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name _______________________________________________________________________
Address ____________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Any holder who is an "affiliate" of the Company or who has
an arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, or any broker-dealer which
purchased Old Notes from the Company to resell pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act must
comply with the registration and prospectus delivery requirements under the
Securities Act.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of the Old Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Old Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the Old Notes to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
the
3
<PAGE>
book-entry transfer facility. The undersigned further agrees that acceptance of
any and all validly tendered Old Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Rights Agreement (as defined
in the Prospectus) and that the Company shall have no further obligations or
liabilities thereunder except as provided in the first paragraph of Section 2 of
said agreement.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Certain Conditions to the
Exchange Offer." The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company), as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Notes tendered hereby and, in such event, the Old Notes not exchanged
will be returned to the undersigned at the address shown above. In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth under "The Exchange Offer--Certain Conditions to
the Exchange Offer" occurs.
By tendering, each holder of Old Notes represents that the Exchange Notes
acquired in the exchange will be obtained in the ordinary course of such
holder's business, that such holder has no arrangement with any person to
participate in the distribution of such Exchange Notes, that such holder is not
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and that such holder is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. Any holder of Old Notes using
the Exchange Offer to participate in a distribution of the Exchange Notes (i)
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in its interpretive letter with respect
to Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (ii) must comply with the registration and prospectus requirements
of the Securities Act in connection with a secondary resale transaction.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act;
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged and registered in
the name of the undersigned shall be delivered to the undersigned at the address
shown below the signature of the undersigned.
4
<PAGE>
TENDER HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
________________________________________________________________________________
________________________________________________________________________________
Signature(s) of Holder(s)
Dated ______________, 1998 Area Code and Telephone Number
(___)___________________
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES. IF
SIGNATURE IS BY A TRUSTEE, EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT,
OWNER OF A CORPORATION OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE
CAPACITY, PLEASE SET FORTH THE FULL TITLE OF SUCH PERSON.) SEE INSTRUCTION 3.
Name(s) ________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No. (___)_______________________________________________
Taxpayer Identification No. ____________________________________________________
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature ___________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
Address ________________________________________________________________________
Name of Firm ___________________________________________________________________
Area Code and Telephone No. (___)_______________________________________________
Dated _______________________________, 1998
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by this Letter of Transmittal, to the Exchange
Agent at its address set forth above on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received on
or prior to the Expiration Date, a letter, telegram or facsimile transmission
(receipt confirmed
6
<PAGE>
by telephone and an original delivered by guaranteed overnight courier) from an
Eligible Institution setting forth the name and address of the tendering holder,
the names in which the Old Notes are registered and, if possible, the
certificate numbers of the Old Notes to be tendered, and stating that the tender
is being made thereby and guaranteeing that within three business days after the
Expiration Date, the Old Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of the notice of guaranteed delivery ("Notice
of Guaranteed Delivery") which may be used by Eligible Institutions for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Old Notes submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender, and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly
7
<PAGE>
withdrawn Old Notes promptly following receipt of notice of withdrawal. If Old
Notes have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn Old Notes or
otherwise comply with the book-entry transfer facility procedure. All questions
as to the validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such book
entry transfer facility specified by the holder) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under the caption "Procedures for Tendering Old Notes" in the
Prospectus at any time on or prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS;
GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holder of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the Old Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes, for the holder of such Old Notes; or (ii) for the
account of an Eligible Institution.
8
<PAGE>
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in whole
or in part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated above for further
instructions.
7. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exchange (or other
payee) is required to provide a correct taxpayer identification number ("TIN"),
generally the holder's Social Security or Federal employer identification
number, and certain other information on Substitute Form W-9, which is provided
under "Important Tax Information" below, and to certify that the holder (or
other payee) is not subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the holder (or other payee)
to a $50 penalty imposed by the Internal Revenue Service and 31% Federal income
tax backup withholding on payments made in connection with the Exchange Notes.
The box in Part 3 of the Substitute Form W-9 may be checked if the holder (or
other payee) has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part 3 is checked and a TIN is
not provided by the time any payment is made in connection with the Exchange
Notes, 31% of all such payments will be withheld until a TIN is provided.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to AEP Industries Inc., 125 Phillips Avenue,
South Hackensack, New Jersey 07606, attention: Corporate Secretary (telephone:
201-641-6600).
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
9
<PAGE>
IMPORTANT TAX INFORMATION
Under United States Federal income tax law, a holder of Old Notes whose Old
Notes are accepted for exchange xmay be subject to backup withholding unless the
holder provides The Bank of New York (as payor) (the "Paying Agent"), through
the Exchange Agent, with either (i) such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 attached hereto, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such holder of
Old Notes is awaiting a TIN) and that (A) the holder of Old Notes has not been
notified by the Internal Revenue Service that such holder is subject to backup
withholding as a result of a failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder of Old Notes that such
holder is no longer subject to backup withholding; or (ii) an adequate basis for
exemption from backup withholding. If such holder of Old Notes is an individual,
the TIN is such holder's social security number. If the Paying Agent is not
provided with the correct taxpayer identification number, the holder of Old
Notes may be subject to certain penalties imposed by the Internal Revenue
Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt recipient, the holder must submit a Form W-8, signed under penalties
of perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Paying Agent. See the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Old Notes or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Old Notes has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near future. If the box in Part 3 is
checked, the holder of Old Notes or other payee must also complete the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding. Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the Paying
Agent will withhold 31% of all payments made prior to the time a properly
certified TIN is provided to the Paying Agent.
The holder of Old Notes is required to give the Paying Agent the TIN (e.g.,
social security number or employer identification number) of the record owner of
the Old Notes. If the Old Notes are in more than one name or are not in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
10
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PAYOR'S NAME: THE BANK OF NEW YORK, AS PAYING AGENT
<S> <C> <C>
SUBSTITUTE PART I--PLEASE PROVIDE YOUR Social Security number(s)
FORM W-9 TIN IN THE BOX AT RIGHT AND or
CERTIFY BY SIGNING AND Employer Identification
DATING BELOW. Number(s)
-----------------------------
----------------------------------------------------------
PART 2--CERTIFICATION--Under penalties of perjury, I
certify that:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be
issued for me), and
(2) I am not subject to backup withholding because: (a) I
am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service (IRS) that I
DEPARTMENT OF THE TREASURY am subject to backup withholding as a result of a
INTERNAL REVENUE SERVICE failure to report all interest or dividends, or (c)
the IRS has notified me that I am no longer subject to
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION
NUMBER ("TIN")
backup withholding.
Certification Instructions--You must cross out item (2)
above if you have been notified by the IRS that you are
currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
Signature PART 3--
Date Awaiting TIN / /
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHHOLDING OF 31% OF
ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all reportable cash payments made to me thereafter will be withheld until I
provide a taxpayer identification number.
<TABLE>
<S> <C>
---------------------------------------------------------- -----------------------------
Signature Date
</TABLE>
11
<PAGE>
FORM OF GUARANTEED DELIVERY
NOTICE OF GUARANTEED DELIVERY FOR
AEP INDUSTRIES INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of AEP Industries Inc. (the "Company") made pursuant to the
Prospectus, dated , 1998 (the "Prospectus"), if certificates for the
outstanding 9.875% Senior Notes Due 2007 of the Company (the "Old Notes") are
not immediately available or if the procedure for book-entry transfer cannot be
completed on a timely basis or time will not permit all required documents to
reach the Company prior to 5:00 p.m., New York City time, on the Expiration Date
of the Exchange Offer. Such form may be delivered or transmitted by telegram,
telex, facsimile transmission, mail or hand delivery to The Bank of New York
(the "Exchange Agent") as set forth below. In addition, in order to utilize the
guaranteed delivery procedure to tender Old Notes pursuant to the Exchange
Offer, a completed, signed and dated Letter of Transmittal (or facsimile
thereof) must also be received by the Exchange Agent prior to 5:00 p.m., New
York City time, on the Expiration Date. Capitalized terms not defined herein are
defined in the Prospectus.
DELIVERY TO: The Bank of New York, EXCHANGE AGENT
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
Attn: Corporate Trust Department Attn: Corporate Trust Department
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
</TABLE>
BY FACSIMILE:
(212) 815-5915
Attn: Corporate Trust Department
Telephone: (212) 815-5735
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the Issuer
the principal amount of Old Notes set forth below, pursuant to the guaranteed
delivery procedure described in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus.
1
<PAGE>
Principal Amount of Old Notes Tendered:*
<TABLE>
<S> <C>
$
Certificate Nos. (if available): If Old Notes will be delivered by
book-entry transfer to The Depository
Trust Company, provide account number.
Total Principal Amount Represented by
Old Notes Certificates(s):
$ Account Number
</TABLE>
- ------------------------
* Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
- --------------------------------------------------------------------------------
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
<TABLE>
<S> <C>
X
X
SIGNATURE(S) OF OWNERS(S) OR AUTHORIZED DATE
SIGNATORY
</TABLE>
Area Code and Telephone Number:
- ---------------------------------------------
Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on
certificates for Old Notes or on a security position listing, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrators, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
<TABLE>
<S> <C>
Name(s): ------------------------------------------------------------
- -- ------------------------------------------------------------
- -- ------------------------------------------------------------
- -- ------------------------------------------------------------
- -- ------------------------------------------------------------
Capacity: ------------------------------------------------------------
- -- ------------------------------------------------------------
Address(es): ------------------------------------------------------------
------------------------------------------------------------
- -- ------------------------------------------------------------
</TABLE>
2
<PAGE>
The undersigned, a member of a registered national securities exchange, or a
member of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United States,
hereby guarantees that the certificates representing the principal amount of Old
Notes tendered hereby in proper form for transfer, or timely confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at The
Depository Trust Company pursuant to the procedures set forth in "The Exchange
Offer Guaranteed Delivery Procedures" section of the Prospectus, together with a
properly completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof) with any required signature guarantee and any other documents
required by the Letter of Transmittal, will be received by the Exchange Agent at
the address set forth above, no later than five New York Stock Exchange trading
days after the date of execution hereof.
<TABLE>
<S> <C>
Name of Firm Authorized Signature
Address Title
Name
Zip Code (Please Type or Print)
Area Code and Tel. No. () Dated:
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
9.875% SENIOR SUBORDINATED NOTES
DUE 2007
IN EXCHANGE FOR NEW
9.875% SENIOR SUBORDINATED NOTES DUE 2007
OF
AEP INDUSTRIES INC.
Registered holders of outstanding 9.875% Senior Subordinated Notes due 2007
(the "Old Notes") who wish to tender their Old Notes in exchange for a like
principal amount of new 9.875% Senior Subordinated Notes due 2009 (the "Exchange
Notes") and whose Old Notes are not immediately available or who cannot deliver
their Old Notes and Letter of Transmittal (and any other documents required by
the Letter of Transmittal) to The Bank of New York (the "Exchange Agent") prior
to the Expiration Date, may use this Notice of Guaranteed Delivery or one
substantially equivalent hereto. This Notice of Guaranteed Delivery may be
delivered by hand or sent by facsimile transmission (receipt confirmed by
telephone and an original delivered by guaranteed overnight courier) or mail to
the Exchange Agent. See "The Exchange Offer--Procedure for Tendering Old Notes"
in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
Attn: Corporate Trust Department Attn: Corporate Trust Department
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
</TABLE>
BY FACSIMILE:
(212) 815-5915
Attn: Corporate Trust Department
Telephone: (212) 815-5735
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION
VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old Notes indicated
below, upon the terms and subject to the conditions contained in the Prospectus,
dated , 1998, of AEP Industries Inc. (the "Prospectus"), receipt of which
is hereby acknowledged.
DESCRIPTION OF SECURITIES TENDERED
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
REGISTERED HOLDER AS
IT APPEARS ON THE
NAME OF OLD NOTES CERTIFICATE NUMBER(S) OF PRINCIPAL AMOUNT OF
TENDERING HOLDER (PLEASE PRINT) OLD NOTES TENDERED OLD NOTES TENDERED
<S> <C> <C> <C>
-------------------- -------------------- -------------------- --------------------
-------------------- -------------------- -------------------- --------------------
-------------------- -------------------- -------------------- --------------------
-------------------- -------------------- -------------------- --------------------
</TABLE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-l5 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth above, the certificates representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility), together with a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees, and any other documents required by the Letter of
Transmittal within three business days after the Expiration Date (as defined in
the Prospectus and the Letter of Transmittal).
Name of Firm: __________________________________________________________________
(Authorized Signature)
Title: _________________________________________________________________________
Address: _______________________________________________________________________
(Zip Code)
Name: __________________________________________________________________________
(Please type or print)
Area Code and Telephone
No.:(___)___________________ Date: _________________________, 1998
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
OLD NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
5
