<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998.
REGISTRATION NO. 333-60155
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CEX HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
COLORADO 5961 84-1347853
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
CORPORATE EXPRESS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
COLORADO 5961 84-0978360
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
(TABLE OF ADDITIONAL REGISTRANTS APPEARS ON FOLLOWING PAGE)
ONE ENVIRONMENTAL WAY
BROOMFIELD, COLORADO 80021-3416
(303) 664-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JIRKA RYSAVY
CHIEF EXECUTIVE OFFICER
CORPORATE EXPRESS, INC.
ONE ENVIRONMENTAL WAY
BROOMFIELD, COLORADO 80021-3416
(303) 664-2000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
Copies to:
JUSTIN P. KLEIN, ESQ.
GERALD J. GUARCINI, ESQ.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
1735 MARKET STREET, 51ST FLOOR
PHILADELPHIA, PENNSYLVANIA 19103-7599
(215) 665-8500
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness 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 are in compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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9 5/8% Series B Senior
Subordinated Notes due 2008.... $350,000,000 100% $350,000,000 $103,250(3)
Guarantees(2).................... $350,000,000 (2) (2) None
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Pursuant to Rule 457(n), no separate filing fee is required to be paid.
(3) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
<TABLE>
<CAPTION>
PRIMARY
STANDARD
INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFIED IDENTIFICATION
EXACT NAME OF ADDITIONAL REGISTRANTS INCORPORATION CODE NUMBER NUMBER
------------------------------------ --------------- ----------- ---------------
<S> <C> <C> <C>
ASAP Software Express, Inc........................... Illinois 5961 36-3328437
Corporate Express Callcenter Services, Inc........... Delaware 5961 22-8292338
Sofco, Inc........................................... New York 5961 14-1550996
SQP, Inc............................................. New York 5961 14-1680132
Sofco of Ohio, Inc................................... New York 5961 34-1690942
S&O Property, Inc.................................... New York 5961 14-1499350
Epco Packaging Services.............................. Delaware 5961 04-2989953
Hermann Marketing, Inc............................... Missouri 5961 43-1540873
Distribution Resources Co............................ Colorado 5961 84-1015452
Corporate Express Real Estate, Inc................... Delaware 5961 84-1326952
Corporate Express of the East, Inc................... Delaware 5961 84-1248716
Corporate Express of Texas, Inc...................... Delaware 5961 74-1926921
Federal Sales Services, Inc.......................... Virginia 5961 54-1000288
Virginia Impressions Products Co., Inc............... Virginia 5961 54-0619020
Micromagnetic Systems, Inc........................... Virginia 5961 54-1092699
Corporate Express Delivery Systems, Inc.............. Delaware 5961 76-0424426
American Delivery System, Inc........................ Michigan 5961 38-2523356
Corporate Express Distribution Services, Inc......... Michigan 5961 38-1889687
New Delaware Delivery, Inc........................... Delaware 5961 51-0366092
Red Arrow Corporation................................ Missouri 5961 43-0678384
RAC, Inc............................................. Missouri 5961 43-1389320
Red Arrow Spotting Services, Inc..................... Missouri 5961 43-1622097
Red Arrow Trucking Co................................ Missouri 5961 43-1335313
Red Arrow Warehousing, Co............................ Missouri 5961 43-1344561
Rush Trucking, Inc................................... Illinois 5961 43-1409469
Corporate Express Delivery Systems-Intermountain,
Inc................................................ Delaware 5961 86-0809519
Corporate Express Delivery Leasing-Intermountain,
Inc................................................ Delaware 5961 86-0808518
Corporate Express Delivery Systems-Mid-Atlantic,
Inc................................................ Delaware 5961 52-1951978
Corporate Express Delivery Leasing-Mid-Atlantic,
Inc................................................ Delaware 5961 52-1951974
Corporate Express Delivery Systems-Mid-West, Inc..... Delaware 5961 36-4054055
Corporate Express Delivery Leasing-Mid-West, Inc..... Delaware 5961 36-4054057
Corporate Express Delivery Systems-New England,
Inc................................................ Delaware 5961 06-1441914
Corporate Express Delivery Leasing-New England,
Inc................................................ Delaware 5961 06-1441911
Corporate Express Delivery Systems-Northeast, Inc.... Delaware 5961 11-3295386
Corporate Express Delivery Leasing-Northeast, Inc.... Delaware 5961 11-3295385
Corporate Express Delivery Systems-Southeast, Inc.... Delaware 5961 56-1949066
Corporate Express Delivery Leasing-Southeast, Inc.... Delaware 5961 56-1949063
Air Courier Dispatch of New Jersey, Inc.............. Minnesota 5961 22-3096947
Sunbelt Courier, Inc................................. Arkansas 5961 71-0684115
Tricor America, Inc.................................. California 5961 94-2593523
Midnite Express International Courier, Inc........... California 5961 95-3796228
Corporate Express Delivery Systems-Southwest, Inc.... Delaware 5961 76-0486734
Corporate Express Delivery Leasing-Southwest, Inc.... Delaware 5961 76-0486733
Corporate Express Delivery Systems-West Coast,
Inc................................................ Delaware 5961 95-4560129
Corporate Express Delivery Leasing-West Coast,
Inc................................................ Delaware 5961 95-4556544
Corporate Express Delivery Systems-Expedited, Inc.... Delaware 5961 74-2854132
Corporate Express Delivery Leasing-Expedited, Inc.... Delaware 5961 76-0555266
Corporate Express Delivery Administration, Inc....... Nevada 5961 76-0465269
Corporate Express Delivery Management Business
Trust.............................................. Delaware* 5961 51-0363269
Corporate Express Delivery Systems-Air Division,
Inc. .............................................. Delaware 5961 76-0566357
</TABLE>
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* Business Trust
<PAGE> 3
CORPORATE EXPRESS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER LOCATION IN PROSPECTUS
----------- ----------------------
<C> <S> <C>
A INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................. Inside Front Cover Page;
Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information...................................... Summary; Risk Factors;
Selected Consolidated
Financial Data; Pro Forma
Consolidated Financial Data
4. Terms of the Transaction................................. Summary; The Exchange Offer;
Certain Federal Income Tax
Consequences; Description of
the Notes; Plan of
Distribution
5. Pro Forma Financial Information.......................... Summary; Capitalization; Pro
Forma Consolidated Financial
Data
6. Material Contacts with the Company Being Acquired........ *
7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters.................. *
8. Interests of Named Experts and Counsel................... *
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities............................. *
B INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.............. *
11. Incorporation of Certain Information by Reference........ Incorporation of Certain
Documents by Reference
12. Information with Respect to S-2 or S-3 Registrants....... *
13. Incorporation of Certain Information by Reference........ Incorporation of Certain
Documents by Reference
14. Information with Respect to Registrants Other than S-3 or
S-2 Registrants........................................ *
C INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies................ *
16. Information with Respect to S-2 or S-3 Companies......... *
17. Information with Respect to Companies Other Than S-3 or
S-2 Companies.......................................... *
D VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations Are to
be Solicited........................................... *
19. Information if Proxies, Consents or Authorizations Are
Not to be Solicited or in an Exchange Offer............ The Exchange Offer;
Incorporation of Certain
Documents by Reference
</TABLE>
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* Inapplicable
<PAGE> 4
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the time a
final Offering Memorandum is delivered. This Preliminary Offering Memorandum
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be a sale of these securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
SUBJECT TO COMPLETION; DATED SEPTEMBER 21, 1998
PROSPECTUS
, 1998
$350,000,000
CEX HOLDINGS, INC.
OFFER TO EXCHANGE ITS
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
9 5/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
---------------------
The New Notes offered hereby are the obligations of CEX Holdings, Inc. (the
"Issuer"), a direct wholly-owned subsidiary of Corporate Express, Inc. (the
"Parent"). The Parent conducts its business through the Issuer and its numerous
wholly-owned domestic and foreign subsidiaries. The Issuer hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus (as the
same may be amended or supplemented from time to time, the "Prospectus") and in
the accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange up to $350,000,000 aggregate principal amount of its 9 5/8%
Series B Senior Subordinated Notes due 2008 (the "New Notes") for a like
principal amount of its outstanding 9 5/8% Series A Senior Subordinated Notes
due 2008 (the "Old Notes", and together with the New Notes, the "Notes"), of
which $350,000,000 aggregate principal amount are outstanding. Unless the
context requires otherwise, references to the "Company" include the Issuer, the
Parent and all their respective domestic and foreign subsidiaries. All
capitalized terms used herein are defined in the Glossary beginning on page 101.
The New Notes are being offered in order to satisfy certain obligations of
the Issuer and the Guarantors under the Registration Rights Agreement, dated as
of May 29, 1998 (the "Registration Rights Agreement"), among the Issuer, the
Guarantors and the Initial Purchasers. The terms of the New Notes are identical
in all material respects to the respective terms of the Old Notes, except that
(i) the New Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) holders of the New
Notes will generally not be entitled to certain rights, including the payment of
Liquidated Damages, pursuant to the Registration Rights Agreement. In the event
that the Exchange Offer is consummated, any Old Notes which remain outstanding
after consummation of the Exchange Offer and the New Notes issued in the
Exchange Offer will vote together as a single class for purposes of determining
whether holders of the requisite percentage in outstanding principal amount
thereof have taken certain actions or exercised certain rights under the
Indenture.
The New Notes will bear interest at the rate of 9 5/8% per annum, payable
semi-annually on June 1 and December 1 of each year, commencing on December 1,
1998. The New Notes will mature on June 1, 2008. Except as described below, the
New Notes will not be redeemable by the Issuer prior to June 1, 2003. On or
after that date, the New Notes may, subject to certain requirements, be redeemed
at the option of the Issuer, in whole or in part, at the redemption prices set
forth herein, together with accrued and unpaid interest to the date of
redemption. In addition, at any time on or prior to June 1, 2001, the Issuer may
redeem up to 35% of the original principal amount of Notes and any Additional
Notes issued under the Indenture with the net cash proceeds of one or more
Public Equity Offerings at a redemption price equal to 109.625% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of redemption, provided that not less than 65% of the aggregate
principal amount of the Notes and any Additional Notes issued under the
Indenture is outstanding immediately after giving effect to such redemption.
Upon the occurrence of a Change of Control, the Issuer will be required to make
an offer to repurchase the Notes at a purchase price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest and
Liquidated Damages, if any, to the date of repurchase. See "Description of the
Notes."
The New Notes will be guaranteed by the Parent and the Subsidiary
Guarantors on a senior subordinated basis. The New Notes and the guarantees
thereof will be unsecured general obligations of the Issuer and the Guarantors
subordinated in right of payment to all Senior Debt of the Issuer and such
Guarantors. As of August 1, 1998, the Issuer and the Subsidiary Guarantors would
have had outstanding an aggregate principal amount of approximately $446.1
million of Senior Debt which would rank senior in right of payment to the New
Notes and the guarantees, respectively, and the nonguarantor subsidiaries would
have had approximately $93.9 million of indebtedness which would be effectively
senior to the New Notes and the guarantees, respectively. Thus, in total, as of
August 1, 1998 the New Notes would have been subordinated in right of payment to
approximately $540.0 million of indebtedness. As of August 1, 1998, the Parent
had no Senior Debt but had outstanding $325.0 million of Convertible Notes,
which would rank pari passu with the Parent's guarantee of the New Notes but
which would be structurally subordinated to the New Notes.
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD NOTES IN
THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE> 5
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Notes on , 1998.
The Issuer is making the Exchange Offer of the New Notes in reliance on the
position of the staff of the Division of Corporation Finance of the Securities
and Exchange Commission (the "Commission") as set forth in certain interpretive
letters addressed to third parties in other transactions. However, the Issuer
has not sought its own interpretive letter and there can be no assurance that
the staff of the Division of Corporation Finance of the Commission 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 of the Division of Corporation Finance of the Commission, and subject to
the two immediately following sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New 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 New Notes. However, any holder of Old Notes who is an
"affiliate" of the Issuer or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who did not
acquire its Old Notes as a result of market-making or other trading activities,
(a) will not be able to rely on the interpretations of the staff of the Division
of Corporation Finance of the Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Old Notes unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Old Notes for New
Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Issuer, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Issuer may require such holder, as a condition to such holder's
eligibility to participate in the Exchange Offer, to furnish to the Issuer (or
an agent thereof) in writing information as to the number of "beneficial owners"
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) on behalf of whom such holder holds the Old Notes
to be exchanged in the Exchange Offer and evidence that such "beneficial owners"
have made to such holder, and authorized such holder to make to the Issuer on
their behalf via the Letter of Transmittal, the representations referred to in
the preceding sentence. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the Old
Notes for its own account as the result of market-making activities or other
trading activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Issuer believes that
broker-dealers who acquired Old Notes for their own accounts, as a result of
market-making activities or other trading activities ("Participating
Broker-Dealers"), may fulfill their prospectus delivery requirements with
respect to the New Notes received upon exchange of such Old Notes (but not Old
Notes that were acquired other than pursuant to market-making or other trading
activities) with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
during the period referred to below in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Issuer
<PAGE> 6
has agreed that this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of such New Notes for a period ending one year after the Expiration Date
(subject to extension under certain limited circumstances described below) or,
if earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. See "Plan of Distribution." However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Issuer, or cause the Issuer to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer -- Exchange Agent." Any Participating Broker-Dealer
who is an "affiliate" of the Issuer may not rely on such interpretive letters
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. See "The Exchange
Offer -- Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Issuer of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Issuer has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Issuer has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Issuer gives such notice to suspend the
sale of the New Notes, it shall extend the one-year period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Old Notes. The New Notes will be a new issue of
securities for which there currently is no market. Although the Initial
Purchasers have informed the Issuer that they currently intend to make a market
in the New Notes, they are not obligated to do so, and any such market making
may be discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
The Issuer currently does not intend to apply for listing of the New Notes on
any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to all of the existing restrictions upon transfer thereof and the Issuer
will not have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors -- Consequences of a Failure to
Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on , 1998 (such time on such date being
hereinafter called the "Expiration Date"), unless the Exchange Offer is extended
by the Issuer (in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended). Tenders of Old Notes may
be withdrawn at any time
<PAGE> 7
on or prior to the Expiration Date. The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain events and conditions which may be
waived by the Issuer and to the terms and provisions of the Registration Rights
Agreement. Old Notes may be tendered in whole or in part in denominations of
$1,000 and integral multiples thereof. The Issuer has agreed to pay all expenses
of the Exchange Offer. See "The Exchange Offer -- Fees and Expenses." Holders of
the Old Notes whose Old Notes are accepted for exchange will not receive
interest on such Old Notes and will be deemed to have waived the right to
receive any interest on such Old Notes accrued from and after
, 1998. See "The Exchange Offer -- Interest on New Notes."
The Issuer will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE SECRETARY, CORPORATE EXPRESS, INC., 1 ENVIRONMENTAL WAY, BROOMFIELD,
COLORADO 80021, TELEPHONE NUMBER (303) 664-2000. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ,
1998.
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. This summary is qualified in its entirety by, and should be
read in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in or incorporated by reference
in this Prospectus. Unless the context requires otherwise, references to the
"Company" include the Issuer, the Parent and all of their respective domestic
and foreign subsidiaries. References to "fiscal 1992," "fiscal 1993," "fiscal
1994," "fiscal 1995" and "fiscal 1996" shall refer to the Company's fiscal years
ended February 28, 1993, February 28, 1994, February 25, 1995, March 2, 1996 and
March 1, 1997, respectively. References to "fiscal 1997" shall refer to the
eleven month period ended January 31, 1998. The Company recently changed its
fiscal year end to end on the Saturday closest to January 31 of each year. The
Company's headquarters are located at 1 Environmental Way, Broomfield, Colorado
80021, and its telephone number is (303) 664-2000.
THE COMPANY
The Company is a global provider of non-production goods and services to
large corporations that value innovative procurement solutions. The Company
believes it has developed a unique "Corporate Supplier" model which focuses on
providing its customers with a broad array of non-production goods and services
while reducing the customer's overall procurement costs and providing a high
level of customer service. The products and services provided by the Company
include office supplies, computer and imaging supplies, computer desktop
software, office furniture, advertising specialties, custom business forms,
forms management services, printing, cleaning and service supplies, same-day
local delivery services and distribution logistics management. The Company is
increasing its focus on environmental friendly solutions.
The Company has grown internally and through strategic acquisitions to a
global enterprise with locations throughout the United States and in various
international markets. The Company's pro forma net sales for the twelve months
ended January 31, 1998 has increased to $4.1 billion from net sales of $1.1
billion for fiscal 1994.
The Company's target customers are large corporations which the Company
believes increasingly seek to reduce their cost of procuring non-production
goods and services, including the time and effort spent managing functions that
are not considered core to their operations. The Company believes that, as part
of such effort, corporations seek to reduce their number of suppliers in order
to eliminate the internal costs associated with complex and varied ordering
procedures, multiple invoices, multiple deliveries, uneven service levels and
inconsistent product availability. In addition, many large corporations operate
from multiple locations and benefit from selecting suppliers who can provide
service to their national and international locations. The Company markets its
products and services to existing and prospective customers through a direct
sales force and delivers its products and services utilizing approximately 700
world wide locations including over 90 distribution centers and a fleet of over
10,000 owned or contracted vehicles.
CORPORATE SUPPLIER STRATEGY
The Company's Corporate Supplier strategy is designed to reduce its
customers' total costs, including their internal costs incurred in managing the
procurement of non-production goods and services. The Company believes that
customers value the Company's broad product and service offerings, low cost
structure, extensive geographic coverage and delivery capabilities. The Company
also believes that its customers value the high level of service the Company
provides through its account relationship managers, same-day delivery,
customized pricing, product availability, electronic interfaces and customized
reporting.
The Company seeks to continually reduce its merchandise and operating
costs, enabling it to offer its customers competitive prices while increasing
its operating margins. The Company is able to reduce such costs primarily
through utilizing its increasing purchasing power and advanced information
systems. By purchasing most of its products directly from manufacturers in large
volumes and limiting the number of manufacturers represented in its proprietary,
full-color catalog, the Company is able to obtain increasing volume discounts
and allowances from its vendors. The Company believes its information systems
represent a key strategic advantage differentiating the Company from its
competitors while permitting it to achieve cost savings,
1
<PAGE> 9
provide unique capabilities to its customers, and centrally manage its
operations. The Company intends to continue improving and enhancing the
capabilities of its information systems which will enable the Company to further
differentiate its product and service offerings, while increasing its operating
margins.
GROWTH STRATEGY
The Company has historically grown primarily through strategic
acquisitions. The Company believes that it has substantially completed its
infrastructure and, accordingly, its growth strategy is now focused primarily on
internal growth combined with selective strategic acquisitions. The Company
plans to increase sales to existing customers by cross-selling its expanded
product and service offerings and by developing existing customers into
multi-regional, national or international accounts. The Company seeks to attract
new customers, including national and international accounts, through its
marketing efforts and the use of its direct sales force. The Company continues
to expand its product depth, while also expanding its geographic coverage
outside the United States and its sales efforts in all geographic regions.
OPERATING STRATEGY
The Company intends to continue to increase its revenues and profitability
through continued implementation of its Corporate Supplier and growth
strategies, including the following key elements:
Provide a Broad Offering of Products and Services. The Company believes
that large corporations are focused on minimizing their total procurement costs,
including internal costs, by reducing their total number of suppliers to a small
group of reliable and cost-efficient partners. The Company believes that its
broad product and service offerings and extensive distribution network provide
the Company with an important competitive advantage in servicing these large
corporations. Over the last several years, the Company has expanded its product
offerings to include forms printing and management, same-day local delivery
services, distribution logistics management, advertising specialties and
computer and imaging supplies. The Company's extensive product and service
offerings enable it to reduce customer procurement costs, including costs
associated with dealing with multiple vendors, such as multiple invoices,
deliveries, ordering procedures, uneven service levels and inconsistent product
availability, while also fulfilling its customers' broad service and delivery
requirements.
Focus on Large Corporations. The Company believes that its transition from
a regional contract stationer to a full service Corporate Supplier is
substantially complete in the United States and that the Company is positioned
to effectively and profitably service large, multi-location customers. Moreover,
the Company believes that these large customers value the Company's broad
product and service offerings, extensive geographic distribution network, high
customer service levels and sophisticated information systems. Larger customers
typically utilize many of the Company's capabilities, which enhances the
Company's purchasing power and economies of scale. Approximately 90% of the
Fortune 500 companies, including General Motors Corporation, Hewlett-Packard
Company, Oracle Corporation, AT&T Corporation, The Walt Disney Company, IBM
Corporation and Exxon Corporation, order a portion of their required
non-production goods or services from one or more of the Company's business
segments.
Provide Superior Customer Service. The Company believes that its customers
value the high level of customer service which the Company provides through its
experienced direct sales force, sophisticated information systems and highly
efficient global distribution network. The Company's Corporate Supplier model
enables it to differentiate itself from competitors by offering its customers
important services including reliable delivery, a broad product assortment,
national account service, electronic interfaces, customized reporting and other
customized services. A key element to providing these services is the Company's
advanced computer systems which, when installed or linked to a customer's
systems, provide significant cost savings for both the Company and the customer
and enhanced access to information.
Enhance and Utilize Purchasing Power. The Company believes that the large
volume of its purchases combined with its centralized purchasing and
merchandising operation provides the Company with an important competitive
advantage. The Company continually seeks to reduce its merchandise costs,
enabling it to offer its customers competitive prices while increasing its
margins. By purchasing most of its products directly from manufacturers in large
volumes and limiting the number of manufacturers represented in its
2
<PAGE> 10
catalogs, the Company is increasingly able to improve its vendor terms,
including earning increased volume discounts and allowances.
Consolidate and Upgrade Facilities. The Company has historically grown
internally and through numerous acquisitions of small office products and
service companies. The Company seeks to increase the sales, profitability and
asset productivity of its acquisitions by combining them with the Company's
existing operations, implementing the Company's business model, eliminating
redundant facilities and upgrading certain existing facilities. The process of
integrating acquisitions and consolidating facilities often has certain
short-term adverse effects on operations including, in certain cases, increased
operating costs associated with consolidation or relocation of facilities and a
reduction in sales as smaller, unprofitable accounts are discontinued. Once
completed, however, facility consolidations allow the Company to reduce its
operating costs, enhance its customer service and increase its revenues and
profitability as management's attention shifts from managing the consolidations
to increasing account penetration. Because the Company has completed a majority
of the planned facility consolidations in its domestic office products business
and in several of its international markets, the Company believes that it is now
well-positioned to expand its operating margins over the next several years.
Utilize Proprietary Computer Software and Systems. The Company believes
that its proprietary software and information systems represent key strategic
advantages which enable the Company to achieve cost savings, provide superior
customer service and centrally manage its operations. The Company has made
substantial investments in the development and enhancement of its proprietary
computer software applications and believes that its software and information
systems are the most sophisticated in the industry. During fiscal 1997, the
Company completed the development and implementation of its ISIS computer
software for its national account customers and successfully launched the
internet version of E-Way, its electronic commerce, ordering and fulfillment
system. The Company's proprietary ISIS system utilizes three-tier client/server
architecture that allows customers and suppliers to better communicate with the
Company while providing lower operating costs and streamlined operations.
RECENT DEVELOPMENTS
During April 1998, the Parent purchased 35,000,000 shares of its
outstanding common stock (the "Share Repurchase") at a price of $10.75 per share
pursuant to a Dutch Auction issuer tender offer. The Parent funded the Share
Repurchase through the Issuer's new $1.0 billion Senior Secured Credit Facility
(the "New Credit Facility"), which consists of a $750 million five-year
revolving credit facility and a $250 million seven-year term loan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of the New Credit Facility."
On April 29, 1998, the Issuer commenced a tender offer (the "Tender Offer")
for all of its outstanding $90 million principal amount of 9 1/8% Senior
Subordinated Notes due 2004 (the "9 1/8% Notes"). The Issuer also solicited
consents (the "Consent Solicitation") to certain indenture amendments. The
Consent Solicitation expired on May 13, 1998. The Tender Offer expired on May
28, 1998. The Tender Offer payments, Consent Solicitation payments and related
expenses totalled approximately $94 million.
On May 29, 1998, the Company consummated the sale of $350,000,000 principal
amount of the Old Notes (the "Old Note Offering"). The proceeds of the sale of
the Old Notes were used to repay certain indebtedness under the New Credit
Facility and to fund the Tender Offer and the Consent Solicitation. The amount
of indebtedness repaid under the New Credit Facility was $245,000,000, and as of
August 31, 1998, the Company had $480,597,000 outstanding (which includes
outstanding letters of credit) under the New Credit Facility and an unused
borrowing capacity of $519,403,000.
CORPORATE STRUCTURE
The Parent is a holding company which owns all of the outstanding capital
stock of the Issuer which, through all of its domestic and foreign subsidiaries,
conducts all of the business of the Company. The Issuer is the only material
first-tier subsidiary of the Parent.
3
<PAGE> 11
THE EXCHANGE OFFER
THE EXCHANGE OFFER......... Up to $350,000,000 aggregate principal amount of
New Notes are being offered in exchange for a like
aggregate principal amount of Old Notes. Old Notes
may be tendered for exchange in whole or in part in
denominations of $1,000 or any integral multiple
thereof. The Issuer is making the Exchange Offer in
order to satisfy its obligations under the
Registration Rights Agreement relating to the Old
Notes. For a description of the procedures for
tendering Old Notes, see "The Exchange
Offer -- Procedures for Tendering Old Notes."
EXPIRATION DATE............ 5:00 p.m., New York City time, on
, 1998, unless the Exchange
Offer is extended by the Issuer (in which case the
Expiration Date will be the latest date and time to
which the Exchange Offer is extended). See "The
Exchange Offer -- Terms of the Exchange Offer."
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain conditions
which may be waived by the Issuer in its sole
discretion. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes
being tendered. See "The Exchange
Offer -- Conditions to the Exchange Offer."
OFFER...................... The Issuer reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, (i) to delay the
acceptance of the Old Notes for exchange, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to extend
the Expiration Date of the Exchange Offer and
retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered Old
Notes, or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any
respect. See "The Exchange Offer -- Terms of the
Exchange Offer."
WITHDRAWAL RIGHTS.......... Tenders of Old Notes may be withdrawn at any time
on or prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent in conformity with certain procedures set
forth below under "The Exchange Offer -- Withdrawal
Rights. "
PROCEDURES FOR TENDERING
OLD NOTES.................. Brokers, dealers, commercial banks, trust companies
and other nominees who hold Old Notes through DTC
may effect tenders by book-entry transfer in
accordance with DTC's Automated Tender Offer
Program ("ATOP"). Holders of such Old Notes
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Old Notes. In order for Old Notes to be
tendered by a means other than by book entry
transfer, a Letter of Transmittal must be completed
and signed in accordance with the instructions
contained herein. The Letter of Transmittal and any
other documents required by the Letter of
Transmittal must be delivered to the Exchange Agent
by mail, facsimile, hand delivery or overnight
carrier and either such Old Notes must be delivered
to the Exchange Agent or specified procedures for
guaranteed delivery must be complied with. See "The
Exchange Offer -- Procedures for Tendering Old
Notes."
4
<PAGE> 12
Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent. See "The Exchange Offer -- Exchange
Agent."
RESALES OF NEW NOTES....... The Issuer is making the Exchange Offer in reliance
on the position of the staff of the Division of
Corporation Finance of the Commission as set forth
in certain interpretive letters addressed to third
parties in other transactions. The Issuer has not
sought its own interpretive letter and there can be
no assurance that the staff of the Division of
Corporation Finance of the Commission 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 of the Division of Corporation Finance of
the Commission, and subject to the two immediately
following sentences, the Issuer believes that New
Notes issued pursuant to this Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than a holder who is a
broker-dealer) without further compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that such New 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 New Notes. However, any holder of Old
Notes who is an "affiliate" of the Issuer or who
intends to participate in the Exchange Offer for
the purpose of distributing the New Notes, or any
broker-dealer who did not acquire its Old Notes as
a result of market-making or other trading
activities, (a) will not be able to rely on the
interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption
from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes
acquired for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New Notes, then such
broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resales of such New Notes. Each holder of
Old Notes who wishes to exchange Old Notes for New
Notes in the Exchange Offer will be required to
represent that (i) it is not an "affiliate" of the
Issuer, (ii) any New Notes to be received by it are
being acquired in the ordinary course of its
business, (iii) it has no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the Securities
Act) of such New Notes, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in,
and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such
New Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the Old
Notes for its own account as the result of
market-making activities or other trading
activities and must agree that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
such
5
<PAGE> 13
New Notes. The Letter of Transmittal states that,
by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the
staff of the Division of Corporation Finance of the
Commission in the interpretive letters referred to
above, the Issuer believes that Participating
Broker-Dealers who acquired Old Notes for their own
accounts as a result of market-making activities or
other trading activities may fulfill their
prospectus delivery requirements with respect to
the New Notes received upon exchange of such Old
Notes (but not Old Notes that were acquired other
than pursuant to market-making or other trading
activities) with a prospectus meeting the
requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so
long as it contains a description of the plan of
distribution with respect to the resale of such New
Notes. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection
with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by
such Participating Broker-Dealer for its own
account as a result of market-making or other
trading activities. Subject to certain provisions
set forth in the Registration Rights Agreement and
to the limitations described below under "The
Exchange Offer -- Resales of New Notes," the Issuer
has agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection
with resales of such New Notes for a period ending
one year after the Expiration Date (subject to
extension under certain limited circumstances) or,
if earlier, when all such New Notes have been
disposed of by such Participating Broker-Dealer.
See "Plan of Distribution." Any Participating
Broker-Dealer who is an "affiliate" of the Issuer
may not rely on such interpretive letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. See "The
Exchange Offer -- Resales of New Notes."
EXCHANGE AGENT............. The exchange agent with respect to the Exchange
Offer is The Bank of New York (the "Exchange
Agent"). The addresses, and telephone and facsimile
numbers, of the Exchange Agent are set forth in
"The Exchange Offer -- Exchange Agent" and in the
Letter of Transmittal.
USE OF PROCEEDS............ The Issuer will not receive any cash proceeds from
the issuance of the New Notes offered hereby. See
"Use of Proceeds."
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........... Holders of Old Notes should review the information
set forth under "Certain Federal Income Tax
Consequences" prior to tendering Old Notes in the
Exchange Offer.
6
<PAGE> 14
THE OFFERING
ISSUER..................... CEX Holdings, Inc.
PARENT..................... Corporate Express, Inc.
COMPANY.................... The Parent, the Issuer and all of their respective
domestic and foreign Subsidiaries.
SECURITIES OFFERED......... $350,000,000 aggregate principal amount of Series B
9 5/8% Senior Subordinated Notes due 2008.
MATURITY DATE.............. June 1, 2008.
INTEREST RATE; PAYMENT
DATES...................... The New Notes will bear interest at the rate of
9 5/8% per annum from the date of issuance, payable
semi-annually on June 1 and December 1 of each
year, commencing December 1, 1998.
GUARANTEES................. The New Notes will be guaranteed by the Parent and
will be guaranteed by the Issuer's Subsidiaries and
any future Subsidiaries, other than Receivables
Subsidiaries, Finance Subsidiaries, Excluded
Subsidiaries, Foreign Subsidiaries and Unrestricted
Subsidiaries (such guaranteeing Subsidiaries being
referred to collectively as the "Subsidiary
Guarantors" and, together with the Parent, the
"Guarantors") on a senior subordinated basis.
RANKING.................... The New Notes will be subordinated in right of
payment to existing and future Senior Debt of the
Issuer, including indebtedness incurred under the
New Credit Facility. The guarantees of the Parent
and the Subsidiary Guarantors (the "Guarantees")
will be subordinated to the prior payment in full
of all Senior Debt of the Parent and the Subsidiary
Guarantors. As of August 1, 1998 the Issuer and the
Subsidiary Guarantors would have had outstanding an
aggregate principal amount of approximately $446.1
million of Senior Debt which would rank senior in
right of payment to the Notes and guarantees,
respectively, and the nonguarantor subsidiaries
would have had approximately $93.9 million of
indebtedness which would be effectively senior to
the Notes and the guarantees, respectively. Thus,
in total, as of August 1, 1998, the New Notes would
have been subordinated in right of payment to
approximately $540.0 million of indebtedness. As of
August 1, 1998, the Parent had no Senior Debt but
had outstanding $325.0 million of Convertible Notes
which would rank pari passu with the Parent's
guarantee of the New Notes, but which would be
structurally subordinated to the New Notes. See
"Description of the Notes -- Subordination."
OPTIONAL REDEMPTION........ Except as described below, the New Notes will not
be redeemable by the Issuer prior to June 1, 2003.
On or after that date, the New Notes may, subject
to certain requirements, be redeemed at the option
of the Issuer, in whole or in part, at the
redemption prices set forth herein, together with
accrued and unpaid interest to the date of
redemption. In addition, at any time on or before
June 1, 2001, the Issuer may redeem up to 35% of
the aggregate principal amount of the Notes and any
Additional Notes issued under the Indenture with
the net cash proceeds of one or more Public Equity
Offerings at a redemption price equal to 109.625%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to
the date of redemption, provided that not less than
65% of the aggregate principal amount of the Notes
and any
7
<PAGE> 15
Additional Notes issued under the Indenture is
outstanding immediately after giving effect to such
redemption. See "Description of the Notes --
Optional Redemption."
CHANGE OF CONTROL.......... Upon an occurrence of a Change of Control, the
Issuer will be required to make an offer to
repurchase the New Notes at a price equal to 101%
of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase. The
Issuer may be prohibited from making such
repurchase either because sufficient funds are not
available at the time of the Change of Control, or
because restrictions in the New Credit Facility or
under the Company's debt instruments existing at
such time prohibit the Issuer from making such
repurchase. The Indenture provides that prior to
making an offer to repurchase the New Notes upon a
Change of Control, the Issuer must repay the
outstanding indebtedness under the New Credit
Facility (or any replacement thereof) or obtain
consents from the lenders thereunder to permit the
repurchase of the Notes. As a result of the
adoption of a Shareholder Rights Plan on January
14, 1998, it is unlikely that a "change of control"
would occur without the approval of the board of
directors of the Company. See "Risk
Factors -- Inability to Purchase Notes upon a
Change of Control" and "Description of
Notes -- Certain Covenants."
CERTAIN COVENANTS.......... The Indenture contains certain covenants that
impose limitations on, among other things:
(i) the incurrence of additional indebtedness;
(ii) the issuance of Disqualified Capital Stock
by the Issuer and its subsidiaries;
(iii) the making of certain Restricted Payments.
The Indenture does not prohibit the Issuer
from paying dividends to the Parent for the
purpose of making certain principal and
interest payments on the Convertible Notes.
In addition, the Indenture permits the
Issuer and the Subsidiary Guarantors to
make Investments in (i) non-guarantor
subsidiaries that are Wholly Owned Foreign
Subsidiaries engaged in a Related Business
and (ii) other non-guarantor subsidiaries;
provided that, after giving effect to the
Investment in such other non-guarantor
subsidiary, (1) no event of default shall
have occurred under the Indenture, (2) the
aggregate of all Restricted Investments
made under the Indenture to the date of the
proposed Investment, with certain
exceptions, does not exceed the sum of (x)
$50.0 million, and (y) an amount, not to
exceed $65.5 million, related to
Investments made prior to the date of
original issuance of the Old Notes; See
"Description of Notes -- Certain
Covenants -- Limitation on Restricted
Payments";
(iv) the imposition of restrictions on the
payments of dividends and other payment
restrictions affecting subsidiaries. There
are no provisions under existing
indebtedness of the Issuer or the
Subsidiary Guarantors that restrict the
Subsidiary Guarantors' ability to pay
dividends to the Issuer;
8
<PAGE> 16
(v) the incurrence of liens;
(vi) transactions with affiliates; and
(vii) the consummation of certain mergers,
consolidations or sales of assets. The
Indenture provides that in lieu of making
an offer to repurchase the Notes with the
proceeds of an Asset Sale, the Issuer or a
Subsidiary Guarantor may (a) with certain
exceptions, make Permitted Investments or
acquire assets or property for any Related
Business, or (b) with certain exceptions,
retire other indebtedness of the Issuer and
its Subsidiaries which is either senior in
right of payment to the New Notes or
permitted to be incurred under provisions
of the Indenture. Asset sales that are
material to the Company, as a whole, are
approved by the board of directors of the
Company. See "Description of
Notes -- Certain Covenants -- Limitation on
Sale of Assets and Subsidiary Stock."
EVENTS OF DEFAULT AND
REMEDIES................... The Indenture provides that upon the occurrence of
an event of default thereunder (including, without
limitation, upon the failure to repurchase the New
Notes when required upon the occurrence of a Change
of Control or an Asset Sale), either the trustee
under the Indenture or holders of at least 25% in
aggregate principal amount of the outstanding Notes
may, subject to certain limitations related to
Senior Debt under the New Credit Facility, declare
all principal and interest on the Notes immediately
due and payable. See "Description of
Notes -- Events of Default and Remedies."
USE OF PROCEEDS............ The Issuer will not receive any cash proceeds in
the Exchange Offer. The Issuer used the net
proceeds of the offering of the Old Notes to repay
indebtedness under the New Credit Facility and to
fund the Tender Offer and the Consent Solicitation.
See "Use of Proceeds."
NO PERSONAL LIABILITY OF
DIRECTORS, OFFICERS,
EMPLOYEES AND
STOCKHOLDERS............. The Indenture provides that no direct or indirect
stockholder, employee, officer or director, as
such, past, present or future of the Issuer, the
Guarantors or any successor entity shall have any
personal liability in respect of the obligations of
the Issuer or the Guarantors under the Indenture or
the Notes solely by reason of his or its status as
such stockholder, employee, officer or director.
The Company has been advised that it is the opinion
of the Commission that the indemnification
described in the preceding sentence may be
unenforceable in that it is against public policy.
For more complete information regarding the New Notes, including
definitions of certain capitalized terms used above, see "Description of Notes."
RISK FACTORS
Holders should consider carefully the information set forth under the
caption "Risk Factors," and all other information set forth in this Prospectus
in deciding whether to tender their Old Notes in the Exchange Offer.
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<PAGE> 17
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated historical and pro forma
financial data of the Company. The summary consolidated financial data for each
of fiscal years 1994, 1995 and 1996 and the eleven months ended January 31, 1998
has been derived from the audited consolidated financial statements of the
Company and the related notes thereto. The summary consolidated financial data
for the eleven months ended February 1, 1997 and the six month periods ended
August 2, 1997 and August 1, 1998 has been derived from the unaudited
consolidated financial statements of the Company. The Pro Forma As Adjusted
financial data for the twelve months ended January 31, 1998 and the Pro Forma
financial data for the six months ended August 1, 1998 have been derived from
the Unaudited Pro Forma Consolidated Financial Data and related notes thereto
included elsewhere herein. The data presented below should be read in
conjunction with the Company's Annual Report on Form 10-K, the Quarterly Reports
on Form 10-Q and the Current Report on Form 8-K filed July 29, 1998, each
incorporated by reference herein, the Unaudited Pro Forma Consolidated Financial
Data and the related notes thereto included elsewhere herein, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
TWELVE MONTHS
ELEVEN MONTHS ENDED ENDED
FISCAL YEAR ------------------------- -------------
------------------------------------ FEBRUARY 1, JANUARY 31, JANUARY 31,
1994 1995 1996 1997(1) 1998 1998(2)
---------- ---------- ---------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $1,145,151 $1,890,639 $3,196,056 $2,911,189 $3,573,311 $4,076,035
Gross profit............... 289,790 467,321 778,310 705,830 840,003 968,943
Warehouse operating and
selling expenses......... 219,213 342,581 562,879 508,676 605,243 689,826
Corporate general and
administrative
expenses................. 29,624 49,742 95,101 87,793 105,055 120,580
Merger and other non-
recurring charges(4)..... -- 36,838 19,840 19,841 14,890 10,400
Operating profit........... 40,953 38,160 100,490 89,520 114,815 148,137
Interest expense, net...... 16,915 17,968 26,949 24,550 38,115 88,972
Income from continuing
operations............... 16,237 6,776 41,996 35,708 44,404 35,013
Pro forma income per share
from continuing
operations -- Basic(5)..... $ 0.20 $ 0.06 $ 0.33 $ 0.28 $ 0.34 $ 0.25
Pro forma income per share
from continuing
operations -- Diluted(5)... $ 0.19 $ 0.06 $ 0.31 $ 0.26 $ 0.32 $ 0.24
Weighted average common
shares outstanding:
Basic...................... 75,400 104,162 121,901 121,612 131,423 140,021
Diluted.................... 79,026 110,408 130,029 129,749 137,858 146,707
<CAPTION>
PRO FORMA
SIX MONTHS
SIX MONTHS ENDED ENDED
----------------------- -----------
AUGUST 2, AUGUST 1, AUGUST 1,
1997(1) 1998(1) 1998(3)
---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $1,846,538 $2,226,222 $2,226,222
Gross profit............... 434,328 517,249 517,249
Warehouse operating and
selling expenses......... 321,183 363,087 363,087
Corporate general and
administrative
expenses................. 55,379 66,873 66,873
Merger and other non-
recurring charges(4)..... 333 -- --
Operating profit........... 57,433 87,289 87,289
Interest expense, net...... 18,825 35,436 46,554
Income from continuing
operations............... 24,674 28,087 21,305
Pro forma income per share
from continuing
operations -- Basic(5)..... $ 0.19 $ 0.23 $ 0.20
Pro forma income per share
from continuing
operations -- Diluted(5)... $ 0.19 $ 0.22 $ 0.19
Weighted average common
shares outstanding:
Basic...................... 127,268 121,142 107,873
Diluted.................... 133,015 125,156 111,887
</TABLE>
<TABLE>
<CAPTION>
AT AUGUST 1, 1998
-----------------
ACTUAL(7)
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 30,327
Total assets.............................................. 2,454,942
Total Issuer debt(6)...................................... 930,278
Total debt................................................ 1,255,278
Total stockholders' equity................................ 575,056
</TABLE>
- ------------------------------
(1) The summary unaudited consolidated financial data for the six months ended
August 1, 1998 and August 2, 1997 and the eleven months ended February 1,
1997 have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contain all
adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the results of operations for this period.
(2) Pro forma to give effect to (i) the results of Data Documents Incorporated
("DDI") for the period beginning February 2, 1997 and ending immediately
prior to the acquisition of DDI by the Company on November 26, 1997 and (ii)
the unaudited results of the Company for the one month period ended March 1,
1997; adjusted to reflect (a) the Share Repurchase and the New Credit
Facility and (b) the sale of the Old Notes and the anticipated application
of the net proceeds therefrom.
(3) Pro forma to give effect to the Share Repurchase, the New Credit Facility
and the sale of the Old Notes and the application of the net proceeds
therefrom as if they were completed at the beginning of the fiscal year
1997. See "Use of Proceeds."
(4) Merger and other non-recurring charges in the eleven months ended January
31, 1998 include acquisition costs incurred by DDI in connection with the
DDI acquisition, the continued integration of delivery services and certain
provisions for reductions in workforce and facility closures at other
locations. Merger and other non-recurring charges in prior periods relate
primarily to the mergers with Sofco, HMI, Nimsa and UT in fiscal 1996 and
Delivery and Young in fiscal 1995 and include, among other things, costs to
complete the acquisitions, costs of merging and closing redundant
facilities, and costs associated with personnel reductions and centralizing
certain administrative functions.
(5) Pro forma income from continuing operations reflects the additional taxes
that would be incurred to treat a subchapter S acquisition as if the
acquired company was a C corporation. Pro forma income per share from
continuing operations is calculated by dividing pro forma income from
continuing operations, after preferred stock dividend requirements of Young
of $432,000 for fiscal 1994, by basic and diluted weighted common shares
outstanding.
(6) Excludes $325 million principal amount of the Parent's 4 1/2% Convertible
Notes due July 2000 (the "Convertible Notes").
(7) Balance Sheet Data at August 1, 1998 includes the share repurchase, the New
Credit Facility and the sale of the Old Notes which were completed during
the six months ended August 1, 1998. See "Use of Proceeds."
(8) EBITDA represents net income before net interest expense, income tax
expense, depreciation and amortization expense and merger and other non-
recurring charges. The Company has presented EBITDA because it is commonly
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance, leverage and liquidity and to determine
a company's ability to service debt. However, EBITDA should not be
considered in isolation or as a substitute for net income (loss), cash flow
from continuing operations or other data prepared in accordance with
generally accepted accounting principles or as a measure of the Company's
profitability or liquidity. EBITDA for the pro forma as adjusted twelve
months ended January 31, 1998, the six months ended August 2, 1997 and
August 1, 1998 and the pro forma six months ended August 1, 1998 was
$234,518,000, $90,337,000, $126,800,000 and $126,800,000, respectively. For
the pro forma as adjusted twelve months ended January 31, 1998, the ratios
of Issuer Debt to EBITDA, Consolidated Net Debt to EBITDA and EBITDA to Net
Interest Expense were 3.8x, 5.0x and 2.6x, respectively. For the pro forma
six months ended August 1, 1998, the ratios of Issuer Debt to EBITDA,
Consolidated Net Debt to EBITDA and EBITDA to Net Interest Expense were
3.7x, 4.8x and 2.7x, respectively. Consolidated EBITDA as defined in the
Indenture for the pro forma as adjusted twelve months ended January 31,
1998, the six months ended August 2, 1997 and August 1, 1998 and the pro
forma six months ended August 1, 1998 was $262,878,000, $103,492,000,
$145,746,000 and $145,746,000, respectively.
10
<PAGE> 18
RISK FACTORS
Prospective investors should consider carefully the specific factors set
forth below, as well as the other information included in this Prospectus,
before deciding to tender their Old Notes in the Exchange Offer.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS: THIS PROSPECTUS INCLUDES
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (SECTION 27A OF THE SECURITIES ACT AND SECTION 21E
OF THE EXCHANGE ACT). THE COMPANY WISHES TO ENSURE THAT ALL SUCH FORWARD-LOOKING
STATEMENTS ARE ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS PURSUANT TO THE
SAFE HARBOR ESTABLISHED IN SUCH ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION,
CERTAIN STATEMENTS UNDER "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "THE BUSINESS," MAY
CONSTITUTE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS SENIOR
MANAGEMENT TEAM. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY
ARE BASED ON VARIOUS EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS AND
THEY ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
DUE TO THOSE UNCERTAINTIES AND RISKS, PROSPECTIVE PARTICIPANTS IN THE EXCHANGE
OFFER ARE URGED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS."
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE THIS "SAFE-HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS" TO REFLECT FUTURE DEVELOPMENTS.
The Company hereby identifies the following important factors, among
others, which could cause its results to differ from any results which might be
projected, forecasted or estimated in any such forward-looking statements: risks
associated with the substantial leverage of the Company, subordination of the
Notes, restrictive debt covenants, enforceability of guarantees, integration of
acquisitions, acceptance of the Company's expanded product and service
offerings, dependence on systems, dependence on acquisitions for additional
growth, international expansion, as well as other factors described elsewhere in
this Prospectus.
Leverage. The Company has substantial indebtedness. As of August 1, 1998,
on a pro forma basis giving effect to the Share Repurchase, the New Credit
Facility and the Old Note Offering and the application of the net proceeds
therefrom, the Company had total consolidated indebtedness of approximately $1.3
billion. On a pro forma as adjusted basis (as described in the Unaudited Pro
Forma Consolidated Financial Data), the Company's ratio of earnings to fixed
charges was 1.6 to 1 for the latest six months ended August 1, 1998. Subject to
the restrictions in the New Credit Facility and the Indenture, the Company and
its subsidiaries may incur additional indebtedness from time to time to finance
capital expenditures and acquisitions and for other general corporate purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of the New Credit
Facility" and "Description of the Notes."
11
<PAGE> 19
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including: (i) the Company may be more
vulnerable to economic downturns and other adverse developments and more limited
in its ability to withstand competitive pressures than its competitors that are
not as leveraged; (ii) the possible limitation in the future on the Company's
ability to obtain additional financing for working capital, acquisitions,
capital expenditures, debt service requirements or other purposes; (iii) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of the principal of and interest on its indebtedness, thereby
reducing funds available for operations and capital additions; (iv) certain of
the Company's borrowings, primarily the borrowings under the New Credit
Facility, will be at variable rates of interest which could cause the Company to
be vulnerable to increases in interest rates; (v) the Notes will mature after
substantially all of the Issuer's and the Parent's respective other
indebtedness, including all borrowings under the New Credit Facility and the
Convertible Notes; and (vi) the Company's leveraged status may affect its
ability to make acquisitions in the future.
The Company's ability to make scheduled payments of the principal of, or
interest on, or to refinance, its indebtedness, including the Notes, will depend
on its future operating performance and cash flow, which are subject to
prevailing economic conditions, prevailing interest rate levels, and financial,
competitive, business and other factors, many of which are beyond the Company's
control, as well as the availability of borrowings under the New Credit Facility
or successor facilities. However, based upon the current and anticipated level
of operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility, will be adequate to meet
its anticipated cash requirements for working capital, capital expenditures,
interest payments and scheduled principal payments. There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels. If the Company is unable to generate sufficient cash flow
from operations in the future to service its indebtedness, it may be required to
refinance all or a portion of its indebtedness, including the Notes, or to
obtain additional financing or to dispose of material assets or operations. The
New Credit Facility and the Indenture restrict the Company's ability to sell
assets and/or use the proceeds therefrom. There can be no assurance that any
such refinancing or asset sales would be possible under the Company's debt
instruments existing at such time, that the proceeds which the Company could
realize from such refinancing or asset sales would be sufficient to meet the
Company's obligations then due or that any additional financing could be
obtained.
Ranking; Foreign Subsidiaries. The Notes will be general unsecured
obligations of the Issuer and will be subordinated in right of payment to all
current and future Senior Debt of the Issuer. The Notes will be guaranteed by
the Parent and will be guaranteed by the Subsidiary Guarantors, which consist of
all of the Company's present and future Subsidiaries, other than Receivables
Subsidiaries, Finance Subsidiaries, Excluded Subsidiaries, Foreign Subsidiaries
and Unrestricted Subsidiaries. The Guarantees will be general unsecured
obligations of the Parent and the Subsidiary Guarantors, as the case may be, and
will be subordinated in right of payment to all current and future Senior Debt
of the Parent and the Subsidiary Guarantors. As of August 1, 1998, the Issuer
and the Subsidiary Guarantors would have had approximately $446.1 million of
Senior Debt which would rank senior in right of payment to the Notes and
Guarantees, respectively, and the nonguarantor subsidiaries would have had
approximately $93.9 million of indebtedness which would be effectively senior to
the Notes and the guarantees. Thus, in total, as of August 1, 1998 the New Notes
would have been subordinated in right of payment to approximately $540.0 million
of indebtedness. As of August 1, 1998, the Parent had no Senior Debt but had
outstanding $325.0 million of Convertible Notes, which would rank pari passu
with the Notes, but which would be structurally subordinated to the Notes. By
reason of such subordination, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Parent,
Issuer or any of the Subsidiary Guarantors, or upon a default in payment with
respect to, or the acceleration of, any Senior Debt, the holders of such Senior
Debt must be paid in full before the holders of the Notes may be paid. Moreover,
under certain circumstances, if any non-payment default exists with respect to
certain Senior Debt, the Issuer may not make any payment on the Notes for a
specified time, unless such default is cured or waived, any acceleration of such
Senior Debt has been rescinded or such Senior Debt has been paid in full. See
"Description of Notes -- Subordination." The approximately $1.2 million
principal amount of 9 1/8% Notes remaining outstanding after the Tender Offer,
and any additional pari passu debt that the Issuer may issue, would be entitled
to share ratably with the
12
<PAGE> 20
holders of the Notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Issuer.
The Company conducts certain of its foreign operations through Foreign
Subsidiaries. The Foreign Subsidiaries will not, and future Foreign Subsidiaries
are not expected to, guarantee the Notes. Consequently, any right of the Company
or the Subsidiary Guarantors to receive the assets of any such Foreign
Subsidiary upon such Foreign Subsidiary's liquidation or reorganization (and the
consequent right of the holders of the Notes to participate in the distribution
of the proceeds of those assets) effectively will be subordinated by operation
of law to the claims of such Foreign Subsidiary's creditors (including trade
creditors) and holders of its preferred stock.
Rapid Expansion; Integration of Acquisitions. Through numerous acquisitions
completed since 1991, the Company significantly increased the scope of its
operations from a regional operation in Colorado to operations throughout the
United States, Canada, the United Kingdom, Australia, New Zealand, Germany,
France, Italy, Ireland and Switzerland. The majority of these acquisitions have
occurred since 1994. There can be no assurance that the Company's management and
financial controls, personnel, computer systems and other corporate support
systems will be adequate to manage the increase in the size and scope of the
Company's operations and acquisition activity.
An important part of the Company's strategy is to integrate its
acquisitions in North America into its operations. Such integration of
operations is an ongoing, continuous process for the Company and the Company has
not fully integrated all of its acquired businesses into existing operations.
There can be no assurance that the Company will successfully integrate recent
and future acquisitions into its existing operations. Recent acquisitions may
not achieve sales, profitability or asset productivity commensurate with the
Company's more mature regions. In addition, acquisitions involve a number of
special risks, including adverse short-term effects on the Company's reported
operating results, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of acquired
intangible assets and risks associated with unanticipated problems or legal
liabilities, some or all of which could have a material adverse effect on the
Company's operations and financial performance.
International Expansion. To date, the Company has acquired or made
investments in companies in Canada, Australia, the United Kingdom, Germany,
France, New Zealand, Italy, Ireland and Switzerland. The Company anticipates
that such international expansion will continue in the future. The Company's
existing Foreign Subsidiaries are not, and future Foreign Subsidiaries will not
be, guarantors of the obligations under the Notes. Over time, the Company plans
to implement appropriate aspects of the Company's business model in its
international operations, including creating in-stock catalogs, consolidating
warehouses, upgrading information systems, acquiring companies offering
complementary products and services and focusing on larger customers and
national and international accounts. Expansion into international markets may
involve additional risks relating to implementing key aspects of the Company's
business model, as well as risks relating to fluctuations in currency exchange
rates, new and different legal, tax, accounting and regulatory requirements,
difficulties in staffing and managing foreign operations, operating difficulties
and other factors. In addition, the Company's results may be negatively affected
by competitive or operating difficulties arising out of the evolving integration
of Europe into a single economic unit.
Expanded Product and Service Offerings. The Company has significantly
expanded its product and service offerings through the acquisition of Richard
Young Journal, Inc. ("Young"), a computer products distributor, U.S. Delivery
Systems, Inc. ("Delivery") and United TransNet, Inc. ("UT"), same-day local
delivery companies, ASAP Software Express, Inc. ("ASAP"), a direct reseller of
computer software and provider of related services, Hermann Marketing, Inc.
("HMI"), an advertising specialties distributor, Sofco-Mead, Inc. ("Sofco"), a
janitorial and cleaning supplies distributor and DDI, a designer and provider of
custom business forms, pressure-sensitive label products and forms management
systems. Certain complementary products now offered by the Company, such as
computer software, have lower gross profit margins than the products
traditionally sold by the Company. To the extent such lower gross profit margins
cannot be offset by lower operating expenses associated with such products, the
Company would expect that operating profit as a percentage of consolidated net
sales would decline. The Company intends to continue to make
13
<PAGE> 21
additions to its product and service offerings in the future. Moreover, the
addition by the Company to its product and service offerings presents certain
risks and uncertainties involving the Company's relative unfamiliarity with
these new products and services and the market for such new products and
services. There can be no assurance that the Company will be successful in
developing or integrating these or other additions, or that its existing
customers will accept such additions, to the products and services currently
offered by the Company. In addition, the Company's delivery services business
has experienced, and may continue to experience, significant fluctuations in
operating performance as it consolidates operations and introduces new systems,
procedures and controls in its efforts to stabilize and standardize operations.
This business sector has recently experienced significant changes in management
and there is no assurance that the new management will be successful in
improving operating performance or in maintaining current operating margins.
This business sector may become subject to unionization efforts or have its
existing relationships with independent contractors challenged or altered,
thereby potentially increasing the Company's operating costs with respect to
this business sector.
Dependence on Systems. The Company continues to develop its computer
software and has implemented its national accounts system. The Company's ISIS
software is being developed to incorporate three-tier client/server architecture
that is expected to permit customers and suppliers to better communicate with
the Company. ISIS is intended to give the Company the ability to more readily
customize its product offerings, operating procedures and customer services.
This is expected to give the Company the ability to integrate various product
and service offerings, enabling it to reduce procurement costs for its customers
and add value as a service provider. There can be no assurance that the
Company's goals with respect to the systems will be attained or that the
Company's existing systems (or systems acquired by the Company in connection
with business acquisitions) will not experience difficulties as a result of the
advent of the year 2000. See "Impact of the Year 2000." Pending full
introduction of the ISIS upgrades, which could take longer than expected,
various of the Company's operations will be dependent upon different hardware or
software operating systems which may be costly to maintain or integrate.
Further, the Company anticipates that ongoing modifications to its computer
systems such as the introduction of the new release of ISIS will continue to be
made in the future and such modifications may cause disruptions in operations,
delay the integration of acquisitions, or cost more to design, implement or
operate than currently budgeted. Any such disruptions, delays or costs could
have a material adverse effect on the Company's operations and financial
performance. Although the Company uses computers which have been reliable to
date, it does not currently have redundant computer systems or redundant
dedicated communication lines linking one of its computers to each regional
warehouse.
Impact of the Year 2000. The Company's ISIS computer software has been
designed with the Year 2000 issue in mind, and the Company believes that such
software is Year 2000 compliant. However, the Company utilizes many different
computer systems to process and summarize business transactions. The Company is
continuing the evaluation of its various operating systems and determining the
additional remediation efforts required to ensure its computer systems will
properly utilize dates beyond December 31, 1999. Preliminary results of this
assessment have revealed that remediation efforts required will vary from system
to system. The Company presently believes that with modifications to existing
software and conversion to new software for those sites which it believes may be
effected, the Year 2000 issue can be mitigated. However, if such modifications
are not made, or are not timely completed, the Year 2000 issue could have a
material adverse effect on the operations of the Company. The total estimated
cost of the Year 2000 project, which will utilize both external and internal
resources to reprogram or replace and test the software for Year 2000
modifications, is estimated to be between $6,000,000 and $8,000,000 and is being
funded through operating cash flows. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Impact of the Year 2000."
Dependence on Acquisitions for Future Growth. An element of the Company's
business strategy is to pursue strategic acquisitions that either expand or
complement its business. Acquisitions have historically constituted a principal
component of growth in revenue and operating income. There can be no assurance
that the Company will be able to identify and acquire acceptable acquisition
candidates on terms favorable to it and in a timely manner to the extent
necessary to fulfill its expansion plans. A substantial portion of the
14
<PAGE> 22
Company's capital resources could be used for these acquisitions. Consequently,
the Company may require additional debt or equity financing for future
acquisitions, which additional financing may not be available on favorable
terms, if at all. As the Company proceeds with its acquisition strategy, it will
continue to encounter the risks associated with the integration of acquisitions
described above.
Substantial Competition. The Company, in many of its product lines and
services, operates in a highly competitive environment. The Company's principal
competitors in North America for office supplies and computer products are
regional and national contract stationers, including the contract stationer
operations of office products superstores, large direct resellers,
privately-held companies that generally operate in only one location and
distributors of business software for personal computers. In Europe and
Australia, the Company's competitors include primarily local and regional
contract stationers and, to a limited extent, national and multi-country
contract stationers. In the delivery services sector, the Company has numerous
competitors, certain of which have service offerings which are similar to the
Company's and others which provide different types or levels of service. Each of
the Company's major product and service categories are within fragmented
industries which are currently experiencing a trend toward consolidation.
Certain of the Company's competitors have greater financial resources than the
Company. In addition, there may be increasing competition for acquisition
candidates and there can be no assurance that acquisitions will continue to be
available on favorable terms, if at all.
Effect of Price Fluctuations. Certain of the Company's product offerings,
including paper products, have been and are expected to continue to be subject
to significant price fluctuations due to inflationary and other market
conditions. The Company generally is able to pass such increased costs on to its
customers through price increases, although it may not be able to adjust its
prices immediately. Significant increases in paper, fuel and other costs in the
future could materially affect the Company's profitability if these costs cannot
be passed on to customers on a timely basis, if at all.
Dependence on Key Management. The Company's success will continue to depend
to a significant extent on its executive officers and other key management,
including the principal officers of the Company's various operating
subsidiaries. For a description of the Company's executive officers, see
"Management." The Company has entered into employment agreements with certain
executive officers and certain of such principal officers. There can be no
assurance that the Company will be able to retain its executive officers and key
personnel or attract additional qualified members of management in the future.
In addition, the success of certain of the Company's acquisitions may depend, in
part, on the Company's ability to retain management personnel of the acquired
companies. The loss of the services of any key managers could have a material
adverse effect upon the Company's business. The Company does not maintain any
key man life insurance.
Restrictive Debt Covenants. The Indenture and the New Credit Facility
contain a number of significant covenants that, among other things, restrict the
ability of the Company to dispose of assets, incur additional indebtedness or
amend certain debt instruments (including the Indenture), pay dividends, create
liens on assets, enter into sale and leaseback transactions, make investments,
loans or advances, make acquisitions, engage in mergers or consolidations,
change the business conducted by the Company or its subsidiaries, or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. See "Description of the Notes." In addition, under the New Credit
Facility, the Company is required to comply with specified financial ratios and
tests, including minimum interest coverage ratios, leverage ratios below a
specified maximum, minimum net worth levels and minimum ratios of inventory to
senior debt. See "Description of the New Credit Facility."
The Company's ability to comply with such agreements may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any such covenants or restrictions could result in a
default under the New Credit Facility or the Indenture, which would permit the
senior lenders, or the holders of the Notes, or both, as the case may be, to
declare all amounts borrowed thereunder to be due and payable, together with
accrued and unpaid interest, and the commitments of the senior lenders to make
further extensions of credit under the New Credit Facility could be terminated.
If the
15
<PAGE> 23
Company is unable to repay its indebtedness to its senior lenders, such lenders
could proceed against the collateral securing such indebtedness.
The Guarantors and the Enforceability of the Guarantees. The Parent and the
Subsidiary Guarantors will guarantee the Issuer's obligations under the Notes.
The Guarantees will be limited to the extent necessary so as not to result in a
fraudulent conveyance. Nevertheless, the obligations of each Guarantor under its
Guarantee may be subject to review under state or federal fraudulent transfer
laws. Under such laws, if in a lawsuit by an unpaid creditor or representative
of creditors of a Guarantor (such as a trustee in bankruptcy for such Guarantor
as debtor in possession), a court were to find that, at the time such Guarantor
incurred its obligations under its Guarantee, it either (i) was insolvent, (ii)
was rendered insolvent, (iii) was engaged in a business or transaction for which
its remaining unencumbered assets constituted unreasonably small capital, or
(iv) intended to incur or believed that it would incur debts beyond its ability
to pay as such debts matured, such court could avoid such Guarantor's Guarantee
and its obligations thereunder, and direct the return of any amounts paid
thereunder to the Guarantor or to a fund for the benefit of its creditors.
Moreover, regardless of the factors identified in the foregoing clauses (i)
through (iv), the court could avoid the Guarantee and direct such repayment if
it found that the Guarantee was entered into with actual intent to hinder,
delay, or defraud the Guarantor's creditors. The measure of insolvency for
purposes of the foregoing will vary depending on the law of the jurisdiction
being applied. Generally, however, an entity would be considered insolvent if
the sum of its debts (including contingent or unliquidated debts) is greater
than all of its property at a fair valuation or if the present fair salable
value of its assets is less than the amount that will be required to pay its
liability on its existing debts as they become absolute and matured.
Inability to Purchase Notes Upon a Change of Control. Upon a Change of
Control, the Issuer will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of repurchase. However, there can be
no assurance that sufficient funds will be available at the time of any Change
of Control to make any required repurchases of Notes tendered, or that
restrictions in the New Credit Facility or under the Company's debt instruments
existing at such time will allow the Issuer to make such required purchases.
Notwithstanding these provisions, the Issuer could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of the Notes -- Repurchase of Notes at the Option of the
Holder Upon a Change of Control."
Absence of Public Market for Notes. The Old Notes have not been registered
under the Securities Act or any state securities law and, unless so registered,
may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and any applicable state securities laws.
Although the New Notes may be resold or otherwise transferred by the
holders (who are not affiliates of the Company) without compliance with the
registration requirements under the Securities Act, they will be new securities
for which there is currently no established trading market. The Issuer does not
intend to apply for listing of the New Notes on a national securities exchange
or for quotation of the New Notes on an automated dealer quotation system.
Although the Initial Purchasers in the offering of the Old Notes have informed
the Issuer that they currently intend to make a market in the New Notes, they
are not obligated to do so, and any such market-making, if initiated, may be
discontinued at any time without notice. The liquidity of any market for the New
Notes will depend upon the number of holders of the Notes, the interest of
securities dealers in making a market in the New Notes and other factors.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the New Notes. If an active trading market for the New Notes does not
develop, the market price and liquidity of the New Notes may be adversely
affected. If the New Notes are traded, they may trade at a discount from their
face value, depending upon prevailing interest rates, the market for similar
securities, the performance of the Company and certain other factors. The
liquidity of, and trading markets for, the New Notes may also be adversely
affected by general declines in the market for non-investment grade debt. Such
declines may adversely affect the liquidity of, and trading markets for, the New
Notes independent of the financial performance of, or prospects for, the
Company.
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<PAGE> 24
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with provisions of Rule 144 under the Securities Act.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the New Notes. There can be no assurance that the market, if any, for
the New Notes will not be subject to similar disruptions. Any such disruptions
may have an adverse effect on the holders of the New Notes.
Consequences of a Failure to Exchange Old Notes. The Old Notes have not
been registered under the Securities Act or any state securities laws and
therefore may not be offered, sold or otherwise transferred except in compliance
with the registration requirements of the Securities Act and any other
applicable securities laws, or pursuant to an exemption therefrom or in a
transaction not subject thereto, and in each case in compliance with certain
other conditions and restrictions. Old Notes which remain outstanding after
consummation of the Exchange Offer will continue to bear a legend reflecting
such restrictions on transfer. In addition, upon consummation of the Exchange
Offer, holders of Old Notes which remain outstanding will not be entitled to any
rights to have such Old Notes registered under the Securities Act or to any
similar rights under the Registration Rights Agreement (subject to certain
limited exceptions). The Issuer does not intend to register under the Securities
Act any Old Notes which remain outstanding after consummation of the Exchange
Offer (subject to such limited exceptions, if applicable). To the extent that
Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Old Notes could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
Indenture.
Exchange Offer Procedures. Subject to the conditions set forth under "The
Exchange Offer -- Conditions to the Exchange Offer," delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(i) certificates for Old Notes or a book-entry confirmation of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC, including an
Agent's Message if the tendering holder does not deliver a Letter of
Transmittal, (ii) a completed and signed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees or, in the case of a book-entry
transfer, an Agent's Message in lieu of the Letter of Transmittal, and (iii) any
other documents required by the Letter of Transmittal. Therefore, holders of Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is not under a duty to
give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange.
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<PAGE> 25
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Issuer and the Guarantors
entered into the Registration Rights Agreement with the Initial Purchasers,
pursuant to which the Issuer and the Guarantors agreed to file and to use its
commercially reasonable efforts to cause to become effective with the Commission
a registration statement with respect to the exchange of the Old Notes for notes
with terms identical in all material respects to the terms of the Old Notes. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Issuer and the Guarantors under the Registration Rights Agreement. The form
and terms of the New Notes are the same as the form and terms of the Old Notes
except that the New Notes have been registered under the Securities Act and will
not provide for any increase in the interest rate thereon. In that regard, the
Old Notes provide, among other things, that if a registration statement relating
to the Exchange Offer has not been filed by , 1998 and
declared effective by , 1998, Liquidated Damages will be
payable on the Old Notes. Upon consummation of the Exchange Offer, holders of
Old Notes will not be entitled to any Liquidated Damages thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Risk Factors -- Consequences of a Failure to
Exchange Old Notes" and "Description of Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the 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 ("DTC") who desires to
deliver such Old Notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
The Issuer hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $350,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Issuer will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $350,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in denominations of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $350,000,000
aggregate principal amount of the Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors -- Consequences
of a Failure to Exchange Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
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<PAGE> 26
Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER BASED ON
SUCH HOLDERS OWN FINANCIAL POSITIONS AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Issuer
(in which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
The Issuer expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Issuer determines, in its reasonable judgment, that any of the
events or conditions referred to under "-- Conditions to the Exchange Offer"
have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered pursuant
to the Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their tendered Old Notes as described under "-- Withdrawal Rights," and
(iv) to waive any condition or otherwise amend the terms of the Exchange Offer
in any respect. If the Exchange Offer is amended in a manner determined by the
Issuer to constitute a material change, or if the Issuer waives a material
condition of the Exchange Offer, the Issuer will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
holders of the Old Notes, and the Issuer will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Issuer may choose to make any public announcement and
subject to applicable law, the Issuer shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Issuer will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "-- Withdrawal Rights") promptly after the Expiration Date.
Subject to the conditions set forth under "-- Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder does not
deliver a Letter of Transmittal, (ii) a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, or,
in the case of a book-entry transfer, an Agent's Message in lieu of the Letter
of Transmittal, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders at the same time, and will depend upon when certificates for
Old Notes, book-entry confirmations with respect to Old Notes and other required
documents are received by the Exchange Agent.
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<PAGE> 27
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"-- Procedures for Tendering Old Notes -- Book-Entry Transfer." The term
"Agent's Message" means a message transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Issuer may enforce such Letter
of Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Issuer will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Issuer gives oral or
written notice to the Exchange Agent of the Issuer's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Issuer for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering holders. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever,
acceptance for exchange or the exchange of any Old Notes tendered pursuant to
the Exchange Offer is delayed (whether before or after the Issuer's acceptance
for exchange of Old Notes) or the Issuer extends the Exchange Offer or is unable
to accept for exchange or exchange Old Notes tendered pursuant to the Exchange
Offer, then, without prejudice to the Issuer's rights set forth herein, the
Exchange Agent may, nevertheless, on behalf of the Issuer and subject to Rule
14e-1(c) under the Exchange Act, retain tendered Old Notes and such Old Notes
may not be withdrawn except to the extent tendering holders are entitled to
withdrawal rights as described under "-- Withdrawal Rights."
Pursuant to the Letter of Transmittal, or the Agent's Message, as the case
may be, a holder of Old Notes will warrant and agree in the Letter of
Transmittal or pursuant to the Agent's Message that it has full power and
authority to tender, exchange, sell, assign and transfer Old Notes, that the
Issuer will acquire good, marketable and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
the Old Notes tendered for exchange are not subject to any adverse claims or
proxies. The holder also will warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Issuer or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
Valid Tender
Except as set forth below, in order for Old Notes to be validly tendered by
book-entry transfer, an Agent's Message or a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
in either case any other documents required by the Letter of Transmittal, must
be delivered to the Exchange Agent by mail, facsimile, hand delivery or
overnight carrier at one of the Exchange Agent's addresses set forth under
"-- Exchange Agent" on or prior to the Expiration Date and either (i) such Old
Notes must be tendered pursuant to the procedures for book-entry transfer set
forth below or (ii) the guaranteed delivery procedures set forth below must be
complied with.
Except as set forth below, in order for Old Notes to be validly tendered by
a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile (Eligible Institutions only), hand
delivery or overnight carrier at one of the Exchange Agent's addresses set forth
under "-- Exchange Agent" on or prior to the Expiration Date and either (i) such
Old Notes must be delivered to the Exchange Agent on or prior to the Expiration
Date or (ii) the guaranteed delivery procedures set-forth below must be complied
with.
If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
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<PAGE> 28
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY, SERVICE IS RECOMMENDED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent and DTC have confirmed that any Direct Participant in
DTC's book-entry transfer facility system may utilize DTC's ATOP procedures to
tender Old Notes. The Exchange Agent will establish an account with respect to
the Old Notes at DTC for purposes of the Exchange Offer within two business days
after the date of this Prospectus. Any Direct Participant may make a book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's Message
or a completed and signed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other documents required by the Letter of
Transmittal must in any case be delivered to and received by the Exchange Agent
at one of its addresses set forth under "-- Exchange Agent" on or prior to the
Expiration Date, or the guaranteed delivery procedure set forth below must be
complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees
Certificates for the Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate
for the Old Notes is registered in a name other than that of the person
surrendering the certificate or (b) such holder completes the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" in the Letter
of Transmittal. In the case of (a) or (b) above, such certificates for Old Notes
must be duly endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein): (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association (an "Eligible Institution"), unless surrendered
on behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
Guaranteed Delivery
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
the certificates for such Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent on or prior to the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, such Old Notes may nevertheless be tendered, provided that all
of the following guaranteed delivery procedures are complied with:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of Transmittal,
is received by the Exchange Agent, as provided below, on or prior to the
Expiration Date; and
(c) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or
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<PAGE> 29
facsimile thereof), with any required signature guarantees and any other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
date of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of New Notes might not be made to all tendering holders at the same time, and
will depend upon when Old Notes, book-entry confirmations with respect to Old
Notes and other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Issuer upon the terms and subject to the conditions
of the Exchange Offer.
Determination of Validity
All questions as to the form of documents, validity, eligibility (including
time of receipt) and acceptance for exchange of any tendered Old Notes will be
determined by the Issuer, in its sole discretion, whose determination shall be
final and binding on all parties. The Issuer reserves the absolute right, in its
sole and absolute discretion, to reject any and all tenders determined by it not
to be in proper form or the acceptance of which, or exchange for, may, in the
opinion of counsel to the Issuer, be unlawful. The Issuer also reserves the
absolute right, subject to applicable law, to waive any of the conditions of the
Exchange Offer as set forth under "-- Conditions to the Exchange Offer" or any
condition or irregularity in any tender of Old Notes of any particular holder
whether or not similar conditions or irregularities are waived in the case of
other holders.
The interpretation by the Issuer of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Issuer, any affiliates or assigns of the
Issuer, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in tenders or incur any liability for
failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Issuer,
proper evidence satisfactory to the Issuer, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF NEW NOTES
The Issuer is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Issuer has not sought its own
interpretive letter and there can be no assurance that the staff of the Division
of Corporation Finance of the Commission 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 of the Division of
Corporation Finance of the Commission, and subject to
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<PAGE> 30
the two immediately following sentences, the Issuer believes that New Notes
issued pursuant to this Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New 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 New Notes. However, any holder of Old Notes who is an
"affiliate" of the Issuer or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who did not
acquire its Old Notes as a result of market-making or other trading activities
(a) will not be able to rely on the interpretations of the staff of the Division
of Corporation Finance of the Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Old Notes unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Old Notes for New
Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Issuer, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
In addition, the Issuer may require such holder, as a condition to such holder's
eligibility to participate in the Exchange Offer, to furnish to the Issuer (or
an agent thereof) in writing information as to the number of "beneficial owners"
(within the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such
holder holds the Old Notes to be exchanged in the Exchange Offer and evidence
that such "beneficial owners" have made to such holder, and authorized such
holder to make to the Issuer on their behalf via the Letter of Transmittal, the
representations referred to in the preceding sentence. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Issuer believes that Participating Broker-Dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities may fulfill their prospectus delivery requirements with
respect to the New Notes received upon exchange of such Old Notes but not Old
Notes that were acquired other than pursuant to market-making or other trading
activities with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
during the period referred to below in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Issuer has agreed that this Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such New Notes for a period ending
one year after the Expiration Date (subject to extension under certain limited
circumstances described below) or, if earlier, when all such New Notes have been
disposed of by such Participating Broker-Dealer. See "Plan of Distribution."
However, a Participating Broker-Dealer who intends to use this Prospectus in
connection with the resale of New Notes received in exchange for Old Notes
pursuant to the Exchange Offer must notify the Issuer, or cause the Issuer to be
notified, on or prior to the
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<PAGE> 31
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "-- Exchange Agent." Any Participating Broker-Dealer who is an "affiliate"
of the Issuer may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Issuer of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Issuer has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Issuer has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Issuer gives such notice to suspend the
sale of the New Notes, it shall extend the one-year period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Issuer has given notice that the sale of New
Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "-- Procedures
for Tendering Old Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Old Notes, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written or facsimile transmission. Withdrawals of tenders of Old Notes
may not be rescinded. Old Notes properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer, but may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described above under "-- Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Issuer, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Issuer, any affiliate or assign of the Issuer, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Old Notes which have been tendered but which are
withdrawn will be returned to the holder thereof promptly after withdrawal.
24
<PAGE> 32
INTEREST ON NEW NOTES
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after ,
1998. Accordingly, such holders of Old Notes as of the record date for the
payment of interest on , 1998 will be entitled to receive interest
on the New Notes issued in exchange therefor accrued from and after
, 1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Issuer will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exists
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the
staff of the Division of Corporation Finance of the Commission which
permits the New 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 broker-dealers and any such holder which is an
"affiliate" of the Issuer within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to participate in the
distribution of such New Notes; or
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected
to impair its ability to proceed with the Exchange Offer, or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement or proceedings shall have been initiated or, to the knowledge of
the Issuer, threatened for that purpose or any governmental approval has
not been obtained, which approval the Issuer shall, in its sole discretion,
deem necessary for the consummation of the Exchange Offer as contemplated
hereby.
If the Issuer determines in its reasonable judgement that any of the
foregoing events or conditions has occurred or exists or has not been satisfied,
it may, subject to applicable law, terminate the Exchange Offer (whether or not
any Old Notes have theretofore been accepted for exchange) or may waive any such
condition or otherwise amend the terms of the Exchange Offer in any respect. If
such waiver or amendment constitutes a material change to the Exchange Offer,
the Issuer will promptly disclose such waiver or amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes and will extend the Exchange Offer to the extent required by Rule
14e-1 under the Exchange Act.
25
<PAGE> 33
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Delivery of the Letters of Transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section Grand Level
Jackie Warren New York, New York 10286
Attention: Reorganization Section
Jackie Warren
</TABLE>
Confirm By Telephone:
(212) 815-5924
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 815-6339
------------------------------------------------------
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Issuer has agreed to 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 Issuer 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 Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes 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 a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with 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.
The Issuer will not make any payment to brokers, dealers or other nominees
soliciting acceptances of the Exchange Offer.
26
<PAGE> 34
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes certain United States Federal income
tax considerations associated with the exchange of Old Notes for New Notes and
the ownership and disposition of New Notes. This summary applies only to
beneficial owners of Old Notes who acquired such Old Notes at the initial
offering from Initial Purchasers for the original offering price therefor and
who acquire New Notes pursuant to the Exchange Offer. This summary is based upon
existing United States Federal income tax law, which is subject to change,
possibly with retroactive effect. This summary does not discuss all aspects of
United States Federal income taxation that may be relevant to particular holders
in the context of their specific investment circumstances or certain types of
holders subject to special treatment under such laws (including, for example,
financial institutions, insurance companies, broker-dealers, persons having a
functional currency other than the United States dollar, United States
expatriates, tax-exempt organizations, controlled foreign corporations related
to the Company through stock ownership and holders (whether actual or
constructive) of 10% or more of the total combined voting power of all classes
of stock of the Company). In addition, this summary does not discuss any
foreign, state or local tax considerations and assumes that holders of the New
Notes will hold the New Notes as "capital assets" (generally, property held for
investment). Prospective holders of New Notes should consult their tax advisors
regarding the United States Federal, state, local, and foreign income and other
tax considerations of the exchange of Old Notes for New Notes and the ownership
and disposition of the New Notes.
For purposes of this summary, a "United States holder" is an individual who
is a citizen or resident of the United States, a corporation or partnership
created or organized under the laws of the United States or any state or
political subdivision thereof, or a person or other entity who is otherwise
subject to United States Federal income taxation on a net income basis in
respect of income derived from the New Notes.
Exchange Offer
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an exchange or other taxable event for United States Federal
income tax purposes because, under United States Treasury regulations, the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. As a result, the holders of Old Notes will not recognize taxable gain or
loss upon the exchange of such Old Notes for the New Notes, and any such holder
will have the same tax basis and holding period in the New Notes as it had in
the Old Notes immediately before the exchange.
United States Holders
Interest payable on the New Notes will be includible in the income of a
United States holder at the time accrued or received in accordance with such
holder's regular method of accounting for United States Federal income tax
purposes.
A United States holder will recognize a capital gain or loss upon the sale
or other disposition of a New Note in an amount equal to the difference between
the amount realized from such disposition (exclusive of any amount paid for
accrued interest not previously included in income, which amount will be taxable
as ordinary income) and the holder's adjusted tax basis in the New Note. Such
capital gain or loss will be long-term capital gain or loss if the holder has
held the New Note for more than one year at the time of disposition. Holders of
New Notes that are individuals are generally entitled to preferential treatment
for net long-term capital gains.
Non-United States Holders
An investment in the New Notes by a non-United States holder generally will
not give rise to any United States Federal income tax consequences, unless the
interest received or any gain recognized on the sale or
27
<PAGE> 35
other disposition of the New Notes by such holder is treated as effectively
connected with the conduct by such holder of trade or business in the United
States, or, in the case of gains derived by an individual, such individual is
present in the United States for 183 days or more and certain other requirements
are met.
In order to avoid back-up withholding of 31% on payments of interest and
principal made by United States payors, a non-United States holder of the New
Notes must generally complete, and provide the payor with, an Internal Revenue
Service Form W-8 ("Certificate of Foreign Status"), or other documentary
evidence, certifying that such holder is an exempt foreign person.
USE OF PROCEEDS
The Issuer will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes in exchange for
the Old Notes as described in the Prospectus, the Issuer will receive Old Notes
in like principal amount. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled.
The gross proceeds from the offering of the Old Notes ($350,000,000), were
used to repay indebtedness under the New Credit Facility and to fund the Tender
Offer and the Consent Solicitation.
28
<PAGE> 36
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at August 1, 1998 and includes the Share Repurchase, the New Credit
Facility and the sale of the Old Notes and the Tender Offer, all of which were
completed during the six months ended August 1, 1998. The following table should
be read in conjunction with the Company's Annual Report on Form 10-K, the
Quarterly Reports on Form 10-Q and the Current Report on Form 8-K filed July 29,
1998, each incorporated by reference herein, the Unaudited Pro Forma
Consolidated Financial Data and related notes thereto included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AS OF
AUGUST 1, 1998
--------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 30,327
==========
Total debt (including current portion):
New Credit Facility -- revolver........................... 196,705
New Credit Facility -- term loan.......................... 249,375
9 5/8% Series A Senior Subordinated Notes due 2008........ 350,000
9 1/8% Senior Subordinated Notes due 2004................. 1,200
Other indebtedness........................................ 120,325
Capital lease obligations................................. 12,673
----------
Total Issuer debt................................. $ 930,278
4 1/2% Convertible Notes due 2000......................... 325,000
----------
Total debt........................................ 1,255,278
Total stockholders' equity.................................. 575,056
----------
Total capitalization.............................. $1,830,334
==========
</TABLE>
29
<PAGE> 37
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Financial Data has been
prepared by the Company's management and should be read in conjunction with the
notes thereto, the Company's Annual Report on Form 10-K, the Quarterly Reports
on Form 10-Q and the Current Report on Form 8-K filed July 29, 1998, each
incorporated by reference herein, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Unaudited Pro Forma
Consolidated Statement of Operations for the twelve months ended January 31,
1998 combines the audited results of the Company for the eleven months ended
January 31, 1998, the unaudited results of the Company for the one month ended
March 1, 1997 and the unaudited results of DDI for the period beginning February
2, 1997 and ending immediately prior to the acquisition of DDI by the Company on
November 26, 1997. Results for DDI for the period from the date DDI was acquired
by the Company to January 31, 1998 are included in the Company's results for the
eleven months ended January 31, 1998 and for the six month period ended August
1, 1998. The Pro Forma As Adjusted data reflects adjustments to give effect to
the Share Repurchase and the New Credit Facility and the Old Notes Offering and
the application of the net proceeds therefrom as described under the caption
"Use of Proceeds" as if each of such had occurred at the beginning of the stated
period. The Unaudited Pro Forma Consolidated Financial Data are not necessarily
indicative of the Company's results of operations which would have been obtained
had the transactions actually occurred at the beginning of the period presented,
nor are they necessarily indicative of the results of future operations.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 1, 1998
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
SIX MONTHS SIX MONTHS
ENDED ENDED
AUGUST 1, AUGUST 1,
1998(1) ADJUSTMENTS 1998
---------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $2,226,222 $ $2,226,222
Cost of sales............................................ 1,708,973 1,708,973
---------- ------- ----------
Gross profit........................................... 517,249 -- 517,249
Warehouse operating and selling expenses................. 363,087 363,087
Corporate general and administrative expenses............ 66,873 66,873
---------- ----------
Operating profit....................................... 87,289 87,289
Interest expense, net.................................... 35,436 11,118(2) 46,554
Other income............................................. 858 858
---------- ------- ----------
Income before income tax expense....................... 52,711 (11,118) 41,593
Income tax expense....................................... 23,667 (4,336)(3) 19,331
---------- ------- ----------
Income before minority interest income................. 29,044 (6,782) 22,262
Minority interest expense................................ 957 957
---------- ------- ----------
Income from continuing operations...................... $ 28,087 $(6,782) $ 21,305
========== ======= ==========
Income per share from continuing operations -- Basic..... $ 0.23 $ 0.20
Income per share from continuing operations -- Diluted... $ 0.22 $ 0.19
Weighted average common shares outstanding:
Basic.................................................. 121,142 107,873
Diluted................................................ 125,156 111,887
OTHER DATA:
Ratio of earnings to fixed charges....................... 1.6x
</TABLE>
30
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ENDED AUGUST
1, 1998
(1) The six month period ended August 1, 1998 includes the results of DDI for
the entire period and reflects the repurchase of 35,000,000 shares of common
stock pursuant to the Share Repurchase, and the repayment of the Old Credit
Facility (as defined herein) which occurred during the period.
(2) To reflect (i) the net impact on interest expense of $7,763,000 resulting
from the repurchase of 35,000,000 shares of common stock at $10.75 per share
and the repayment of $170,240,000 on the Old Credit Facility, both of which
were funded using proceeds of the New Credit Facility, and (ii) the net
impact on interest expense of $3,355,000 resulting from the sale of the
$350,000,000 Old Notes at an interest rate of 9 5/8% and the application of
the net proceeds therefrom to retire $88,800,000 of 9 1/8% Notes pursuant to
the Tender Offer and repay $245,000,000 on the New Credit Facility as if all
transactions were completed at the beginning of the period, exclusive of the
loss of $1,810,000 ($1,104,000 net of tax) related to the deferred financing
costs of the Old Credit Facility and the loss of $7,339,000 ($4,477,000 net
of tax) related to the early retirement of 9 1/8% Notes, both of which were
recorded during the six months ended August 1, 1998 as extraordinary items.
(3) Tax effects of the pro forma adjustments.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMPANY DDI PRO FORMA AS ADJUSTED
------------------------- 298 TWELVE TWELVE
ELEVEN MONTHS ONE MONTH DAYS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, MARCH 1, NOVEMBER 26, JANUARY 31, JANUARY 31,
1998 1997 1997 ADJUSTMENTS 1998 ADJUSTMENTS 1998
------------- --------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $3,573,311 $284,867 $217,857 $ $4,076,035 $ $4,076,035
Cost of sales.................. 2,733,308 212,387 159,839 1,558(1) 3,107,092 3,107,092
---------- -------- -------- ------- ---------- -------- ----------
Gross profit................. 840,003 72,480 58,018 (1,558) 968,943 -- 968,943
Warehouse operating and selling
expenses..................... 605,243 54,203 29,794 586(2) 689,826 689,826
Corporate general and
administrative expenses...... 105,055 7,307 5,501 2,717(3) 120,580 120,580
Merger and other nonrecurring
charges(4)................... 14,890 -- -- (4,490)(5) 10,400 -- 10,400
---------- -------- -------- ------- ---------- -------- ----------
Operating profit............. 114,815 10,970 22,723 (371) 148,137 -- 148,137
Interest expense, net.......... 38,115 2,399 7,827 (4,078)(6) 44,263 44,709(8) 88,972
Other income................... 842 92 934 934
---------- -------- -------- ------- ---------- -------- ----------
Income before income tax
expense.................... 77,542 8,663 14,896 3,707 104,808 (44,709) 60,099
Income tax expense............. 34,457 2,921 6,256 754(7) 44,388 (17,437)(7) 26,951
---------- -------- -------- ------- ---------- -------- ----------
Income before minority
interest income............ 43,085 5,742 8,640 2,953 60,420 (27,272) 33,148
Minority interest income....... 1,319 546 -- 1,865 1,865
---------- -------- -------- ------- ---------- -------- ----------
Income from continuing
operations................. $ 44,404 $ 6,288 $ 8,640 $ 2,953 $ 62,285 $(27,272) $ 35,013
========== ======== ======== ======= ========== ======== ==========
Income per share from
continuing
operations -- Basic.......... $ 0.34 $ 0.80 $ 0.44 $ 0.25
Income per share from
continuing
operations -- Diluted........ $ 0.32 $ 0.78 $ 0.42 $ 0.24
Weighted average common shares
outstanding:
Basic........................ 131,423 10,740 140,021 140,021
Diluted...................... 137,858 11,018 146,707 146,707
OTHER DATA:
Ratio of earnings to fixed
charges...................... 1.5x
</TABLE>
31
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ENDED JANUARY
31, 1998
(1) To conform DDI inventory from a LIFO basis valuation to a FIFO basis
valuation ($1,502,000) and to conform the accounting for spare parts to be
consistent with the Company's accounting policies and to record additional
depreciation related to the write-up of buildings to fair value.
(2) To record additional depreciation related to the write-up of equipment to
fair value.
(3) To record amortization of goodwill related to the DDI acquisition on a
straight-line basis over 40 years. The net purchase price was allocated as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets, excluding cash acquired..................... $ 75,365
Property, plant and equipment, net.......................... 52,487
Other assets................................................ 20,591
Goodwill.................................................... 130,438
Liabilities assumed......................................... (112,938)
---------
Purchase price, net of cash acquired........................ $ 165,943
=========
</TABLE>
Total goodwill, included in the fair value of assets acquired, of
$130,438,000 includes transaction and other direct costs of such
acquisition of $1,672,000 and purchase accounting adjustments of
$8,659,000, net of related deferred taxes.
(4) Merger and other non-recurring charges include the acquisition costs
incurred by DDI, the continued integration of delivery services and certain
provisions for reductions in workforce and facility closures at other
locations.
(5) To adjust for the direct incremental external costs incurred by DDI which
include primarily investment banking fees. Such costs were paid by DDI
subsequent to the acquisition.
(6) To adjust for interest expense related to the revaluation of the DDI 13.5%
Senior Subordinated Notes from a historical carrying value of approximately
$60,500,000 to a current fair value of $69,575,000 based on market interest
rates at the date of the acquisition.
(7) Tax effects of the pro forma adjustments.
(8) To reflect (i) the net impact on interest expense of $34,932,000 resulting
from the repurchase of 35,000,000 shares of common stock at $10.75 per share
pursuant to the Share Repurchase and the repayment of $170,240,000 on the
Old Credit Facility, both of which were funded using proceeds from the New
Credit Facility, and (ii) the net impact on interest expense of $9,777,000
resulting from the sale of the $350,000,000 Old Notes at an interest rate of
9 5/8% and the application of the net proceeds therefrom to retire
88,800,000 of 9 1/8% Notes pursuant to the Tender Offer and repay
$245,000,000 of the New Credit Facility, exclusive of the loss of $1,810,000
($1,104,000 net of tax) related to the deferred financing costs of the Old
Credit Facility and the loss of $7,339,000 ($4,477,000 net of tax) related
to the early retirement of 9 1/8% Notes, both of which were recorded during
the six months ended August 1, 1998 as extraordinary items.
32
<PAGE> 40
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for fiscal 1994, 1995,
1996 and 1997 have been derived from the Company's consolidated financial
statements which have been audited by independent auditors. The Selected
Consolidated Financial Data for the six months ended August 1, 1998 and August
2, 1997, the eleven months ended February 1, 1997 and fiscal 1993 and 1992 is
derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited Consolidated Financial Statements and, in the opinion of management,
contain all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for these periods. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company incorporated by reference herein. The Company has never paid a cash
dividend on its Common Stock and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future because it intends to retain its
earnings to finance the expansion of its business and for general corporate
purposes.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Net sales.................................... $420,030 $520,956 $1,145,151 $1,890,639 $3,196,056
Cost of sales(2)............................. 323,922 402,142 855,361 1,417,366 2,417,746
Merger related inventory provisions(3)....... -- 1,146 -- 5,952 --
-------- -------- ---------- ---------- ----------
Gross profit............................. 96,108 117,668 289,790 467,321 778,310
Warehouse operating and selling expenses..... 76,056 97,054 219,213 342,581 562,879
Corporate general and administrative
expenses................................... 12,408 13,063 29,624 49,742 95,101
Merger and other nonrecurring charges(4)..... 2,592 1,928 -- 36,838 19,840
-------- -------- ---------- ---------- ----------
Operating profit......................... 5,052 5,623 40,953 38,160 100,490
Interest expense, net........................ 4,972 5,014 16,915 17,968 26,949
Other income (expense)....................... (993) (104) 562 1,786 244
-------- -------- ---------- ---------- ----------
Income (loss) before income taxes........ (913) 505 24,600 21,978 73,785
Income tax expense........................... 1,567 2,316 8,294 13,766 33,649
-------- -------- ---------- ---------- ----------
Income (loss) before minority interest... (2,480) (1,811) 16,306 8,212 40,136
Minority interest (income) expense........... -- 152 69 1,436 (1,860)
-------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations............................. (2,480) (1,963) 16,237 6,776 41,996
Loss from discontinued operations(5)......... 4,571 712 327 1,225 --
-------- -------- ---------- ---------- ----------
Income (loss) before extraordinary
item................................... (7,051) (2,675) 15,910 5,551 41,996
Extraordinary item(6)........................ -- (1,169) 586 -- --
-------- -------- ---------- ---------- ----------
Net income (loss)........................ $ (7,051) $ (3,844) $ 16,496 $ 5,551 $ 41,996
======== ======== ========== ========== ==========
Pro forma income (loss)(7)............... $ (7,390) $ (5,124) $ 15,769 $ 5,140 $ 40,281
======== ======== ========== ========== ==========
Pro forma net income (loss) per
share -- Basic:(8)
Continuing operations.................... $ (0.10) $ 0.20 $ 0.06 $ 0.33
Discontinued operations.................. (0.02) 0.00 (0.01) --
Extraordinary item....................... (0.02) 0.00 -- --
-------- ---------- ---------- ----------
Net income (loss).................... $ (0.14) $ 0.20 $ 0.05 $ 0.33
======== ========== ========== ==========
Pro forma net income (loss) per share --
Diluted:(8)
Continuing operations.................... $ (0.10) $ 0.19 $ 0.06 $ 0.31
Discontinued operations.................. (0.02) 0.00 (0.01) --
Extraordinary item....................... (0.02) 0.00 -- --
-------- ---------- ---------- ----------
Net income (loss).................... $ (0.14) $ 0.19 $ 0.05 $ 0.31
======== ========== ========== ==========
OTHER DATA:(1)
Ratio of earnings to fixed charges(9)........ -- 1.1x 2.1x 1.8x 2.4x
Subsidiary Non-Guarantors -- net sales....... -- -- $ 1,694 $ 238,200 $ 565,126
Subsidiary Non-Guarantors -- net income...... -- -- $ 1 $ 3,771 $ 144
BALANCE SHEET DATA:(1)
Working capital.............................. $ 50,771 $ 96,880 $ 166,421 $ 253,693 $ 393,653
Total assets................................. 160,510 446,189 645,309 1,023,365 1,843,977
Long-term debt and capital lease
obligations................................ 52,375 177,523 188,340 163,399 633,250
Shareholders' equity and redeemable
preferred(10).............................. 39,584 116,363 259,325 521,776 693,607
Weighted average common shares outstanding:
Basic.................................... 47,740 75,400 104,162 121,901
Diluted.................................. 47,740 79,026 110,408 130,029
<CAPTION>
ELEVEN MONTHS ENDED SIX MONTHS ENDED
------------------------- -----------------------
FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1,
1997 1998 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Net sales.................................... $2,911,189 $3,573,311 $1,846,538 $2,226,222
Cost of sales(2)............................. 2,205,359 2,733,308 1,412,210 1,708,973
Merger related inventory provisions(3)....... -- -- -- --
---------- ---------- ---------- ----------
Gross profit............................. 705,830 840,003 434,328 517,249
Warehouse operating and selling expenses..... 508,676 605,243 321,183 363,087
Corporate general and administrative
expenses................................... 87,793 105,055 55,379 66,873
Merger and other nonrecurring charges(4)..... 19,841 14,890 333 --
---------- ---------- ---------- ----------
Operating profit......................... 89,520 114,815 57,433 87,289
Interest expense, net........................ 24,550 38,115 18,825 35,436
Other income (expense)....................... 152 842 342 858
---------- ---------- ---------- ----------
Income (loss) before income taxes........ 65,122 77,542 38,950 52,711
Income tax expense........................... 30,728 34,457 15,798 23,667
---------- ---------- ---------- ----------
Income (loss) before minority interest... 34,394 43,085 23,152 29,044
Minority interest (income) expense........... (1,314) (1,319) (1,522) 957
---------- ---------- ---------- ----------
Income (loss) from continuing
operations............................. 35,708 44,404 24,674 28,087
Loss from discontinued operations(5)......... -- -- -- --
---------- ---------- ---------- ----------
Income (loss) before extraordinary
item................................... 35,708 44,404 24,674 28,087
Extraordinary item(6)........................ -- -- -- (5,581)
---------- ---------- ---------- ----------
Net income (loss)........................ $ 35,708 $ 44,404 $ 24,674 $ 22,506
========== ========== ========== ==========
Pro forma income (loss)(7)............... $ 33,993 $ 44,404 $ 24,674 $ 22,506
========== ========== ========== ==========
Pro forma net income (loss) per
share -- Basic:(8)
Continuing operations.................... $ 0.28 $ 0.34 $ 0.19 $ 0.23
Discontinued operations.................. -- -- -- --
Extraordinary item....................... -- -- -- (0.04)
---------- ---------- ---------- ----------
Net income (loss).................... $ 0.28 $ 0.34 $ 0.19 $ 0.19
========== ========== ========== ==========
Pro forma net income (loss) per share --
Diluted:(8)
Continuing operations.................... $ 0.26 $ 0.32 $ 0.19 $ 0.22
Discontinued operations.................. -- -- -- --
Extraordinary item....................... -- -- -- (0.04)
---------- ---------- ---------- ----------
Net income (loss).................... $ 0.26 $ 0.32 $ 0.19 $ 0.18
========== ========== ========== ==========
OTHER DATA:(1)
Ratio of earnings to fixed charges(9)........ 2.4x 2.2x 2.2x 1.9x
Subsidiary Non-Guarantors -- net sales....... $ 509,734 $ 716,013 $ 347,933 $ 584,722
Subsidiary Non-Guarantors -- net income...... $ 430 $ 204 $ 246 $ 9,512
BALANCE SHEET DATA:(1)
Working capital.............................. $ 360,619 $ 517,476 $ 373,800 $ 533,739
Total assets................................. 1,816,434 2,349,659 1,880,107 2,454,942
Long-term debt and capital lease
obligations................................ 608,680 763,243 618,289 1,190,845
Shareholders' equity and redeemable
preferred(10).............................. 667,006 932,433 722,727 575,056
Weighted average common shares outstanding:
Basic.................................... 121,612 131,423 127,268 121,142
Diluted.................................. 129,749 137,858 133,015 125,156
</TABLE>
33
<PAGE> 41
- ------------------------------
(1) The HMI acquisition (effective January 30, 1997), the Sofco acquisition
(effective January 24, 1997), the UT acquisition (effective November 8,
1996), the Nimsa acquisition (effective October 31, 1996), the Delivery
acquisition (effective March 1, 1996), the Young acquisition (effective
February 27, 1996) and the Lucas Bros., Inc. ("Lucas") acquisition
(effective November 30, 1993) were accounted for as poolings of interests
and, accordingly, the HMI, Sofco, UT, Nimsa, Delivery, Young and Lucas
accounts and results are included for all applicable periods.
(2) Cost of sales includes occupancy and delivery expenses.
(3) Reflects the write-down to fair market value of certain inventory which the
Company decided to eliminate from its product line.
(4) Merger and other non-recurring charges in fiscal 1997 include the
acquisition costs incurred by DDI, the continued integration of delivery
services and certain provisions for reductions in workforce and facility
closures at other locations. Merger and other nonrecurring charges in prior
fiscal years relate primarily to the mergers with Sofco, HMI, Nimsa and UT
in fiscal 1996, Delivery and Young in fiscal 1995 and Lucas in fiscal 1993
and include, among other things, costs to complete the acquisitions, costs
of merging and closing redundant facilities and costs associated with
personnel reductions and centralizing certain administrative functions.
(5) In fiscal 1995, Sofco adopted a plan to discontinue Sofco-Eastern, Inc; and
in February 1993, Lucas adopted a plan to discontinue its retail
operations.
(6) Reflects extraordinary loss related to a write-off of an unamortized
discount on debt in fiscal 1993, extraordinary gain related to the
repurchase by the Company of $10 million principal amount of the 9 1/8%
Notes in fiscal 1994. Extraordinary losses include the write-off of
deferred financing costs related to the terminated Old Credit Facility and
the early retirement of the 9 1/8% Notes which were both recorded in the
six months ended August 1, 1998.
(7) Pro forma net income reflects the additional taxes that would be incurred
to treat a subchapter S acquisition as if the acquired company was a C
corporation.
(8) Pro forma net income (loss) per share is calculated by dividing pro forma
income (loss), after preferred stock dividend requirements of Young of
$432,000 and $1,500,000 for fiscal 1994 and fiscal 1993, respectively, by
basic and diluted weighted common shares outstanding, respectively. Fiscal
1993 basic and diluted pro forma net loss per share includes preferred
shares as if they had been converted as of the beginning of the year. These
shares converted automatically upon the completion of the Company's initial
public offering in fiscal 1994.
(9) The ratio of earnings to fixed charges is calculated by dividing earnings,
defined as income from continuing operations before income taxes and
minority interest plus fixed charges less capitalized interest, by fixed
charges, defined as interest expense plus capitalized interest and the
interest portion of rent expense. Fiscal 1992 earnings were lower than
total fixed charges resulting in a less than one-to-one ratio of earnings
to fixed charges, consequently, additional earnings of $913,000 would have
been required to attain a ratio of one-to-one.
(10) Redeemable preferred was converted to common stock in fiscal 1994.
34
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto contained in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended August 1,
1998, the Annual Report on Form 10-K for the transition period from March 2,
1997 to January 31, 1998 and the Current Report on Form 8-K filed July 29, 1998,
each incorporated by reference herein. Some of the information presented in this
Prospectus constitutes forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions within the bounds of
the Company's knowledge of its business and operations, there can be no
assurance that actual results of the Company's operations and acquisition
activities and their effect on the Company's results of operations will not
differ materially from its expectations. See "Disclosure Regarding
Forward-Looking Statements."
GENERAL
The Company has grown primarily through a series of acquisitions including
the acquisition of HMI on January 30, 1997, Sofco on January 24, 1997, UT on
November 8, 1996, Nimsa on October 31, 1996, Delivery on March 1, 1996, and
Young on February 27, 1996, all of which were accounted for as pooling of
interests transactions. Accordingly, the Consolidated Financial Statements have
been restated to include the accounts and operations of Sofco, HMI, Nimsa,
Delivery and Young for all periods prior to the mergers. The accompanying
financial statements have been restated to include the operations of UT
effective March 3, 1996 and Nimsa effective from its formation in fiscal 1995.
Reference to fiscal 1997 refers to the eleven-month period ended January 31,
1998 for the Company. Reference to fiscal 1996 refers to the year ended March 1,
1997 for the Company and all pooled companies. Reference to fiscal 1995 refers
to the year ended March 2, 1996 for the Company, Delivery, Young, and Sofco, to
the year ended December 31, 1995 for HMI, and to the year ended June 30, 1996
for Nimsa. Reference to the fiscal year 1994 and prior fiscal years refers to
the February year end for the Company, to the December 31 year end for Delivery
and HMI, to the May 31 year end for Sofco, and to the September 30 year end for
Young. During fiscal 1997 the Company changed its fiscal year end from February
28 to January 31 in order to better align its fiscal year with its customers'
and competitors' fiscal calendars and to reduce the seasonality between
quarters. The fiscal 1997 period refers to the eleven months ended January 31,
1998.
During fiscal 1997, the Company continued to increase the scope of its
operations throughout the United States, Canada, Germany, and Italy, and entered
new markets with acquisitions in Ireland and Switzerland. Substantial emphasis
was placed in fiscal 1997 on expanding and improving international operations
and improving operations in the services segment. The Company continued to
execute its Corporate Supplier strategy and expanded the depth and breadth of
its product offerings as well as its geographic presence through 31 acquisitions
during fiscal 1997.
During fiscal 1998, the Company will place emphasis on internal growth
through continued implementation of the Corporate Supplier business model. The
Corporate Supplier business model reflects the Company's plan to reduce the
total procurement cost of non-production goods and services for customers. The
key elements of the Corporate Supplier model are the broad offering of products
and services, global coverage for selected products and services, a
comprehensive distribution and logistics network, information systems that
integrate the complete product and service offering while linking suppliers to
customers and procurement management and consulting for customers. The Company
also plans to increase sales to existing customers by cross-selling its expanded
product and service offerings and developing existing customers into
international, national or multi-regional accounts.
International markets historically have higher gross profit margins and
higher operating costs than the Company experiences domestically. Certain
products now offered by the Company, such as computer software, have lower gross
profit margins and lower operating costs than the products traditionally sold by
the Company. In addition, the acquisition of companies with break-even or
marginal operating results or the costs
35
<PAGE> 43
of consolidating acquired business units with the Company may impact the
operating margins and profitability of the Company.
The Company currently operates in two main sectors: product distribution
(which includes office products, computer supplies, forms production and
management, desktop software, promotional products and cleaning and service
supplies) and services (primarily same-day delivery), with the majority of its
revenue and cash flow attributable to the product distribution business.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's Consolidated Statements of Operations bear to net sales for the
periods indicated:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED SIX MONTHS ENDED
FISCAL YEAR ------------------------- ---------------------
--------------------- FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1,
1994 1995 1996 1997 1998 1997 1998
----- ----- ----- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 74.7 75.0 75.6 75.8 76.5 76.5 76.8
Merger related inventory
provisions....................... -- 0.3 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Gross profit..................... 25.3 24.7 24.4 24.2 23.5 23.5 23.2
Warehouse operating and selling
expenses......................... 19.1 18.1 17.6 17.5 17.0 17.4 16.3
Corporate general and
administrative expenses.......... 2.6 2.6 3.0 3.0 2.9 3.0 3.0
Merger and other nonrecurring
charges.......................... -- 1.9 0.6 0.7 0.4 0.0 --
----- ----- ----- ----- ----- ----- -----
Operating profit................. 3.6 2.1 3.2 3.0 3.2 3.1 3.9
Interest expense, net.............. 1.5 1.0 0.8 0.8 1.0 1.0 1.5
Other income....................... 0.0 0.1 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Income before income taxes....... 2.1 1.2 2.4 2.2 2.2 2.1 2.4
Income tax expense................. 0.7 0.7 1.1 1.1 1.0 0.8 1.1
----- ----- ----- ----- ----- ----- -----
Income before minority
interest....................... 1.4 0.5 1.3 1.1 1.2 1.3 1.3
Minority interest (income)
expense.......................... 0.0 0.1 (0.0) (0.1) (0.0) 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations..................... 1.4 0.4 1.3 1.2 1.2 1.3 1.3
Loss from discontinued
operations....................... 0.0 0.1 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Income before extraordinary item... 1.4 0.3 1.3 1.2 1.2 1.3 1.3
Extraordinary (gain) loss.......... (0.0) -- -- -- -- -- 0.3
----- ----- ----- ----- ----- ----- -----
Net income....................... 1.4% 0.3% 1.3% 1.2% 1.2% 1.3% 1.0%
===== ===== ===== ===== ===== ===== =====
Pro forma net income (1)......... 1.4% 0.3% 1.3% 1.2% 1.2% 1.3% 1.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
- ------------------------------
(1) Pro forma net income reflects the tax impact for a subchapter S acquisition
as if the acquired company was a C corporation.
SIX MONTHS ENDED AUGUST 1, 1998 AND AUGUST 2, 1997
Net Sales. Consolidated net sales increased 20.9% to $1,118,162,000 in the
three months ended August 1, 1998 from $925,084,000 in the three months ended
August 2, 1997 and increased 20.6% to $2,226,222,000 from $1,846,538,000 for the
respective six-month periods. Net sales for the Company's product distribution
segment increased 29.3% to $931,004,000 in the three months ended August 1, 1998
from $720,130,000 in the same period last year, and increased 29.8% to
$1,844,661,000 from $1,420,749,000 for the respective six-month periods. Net
sales for the services segment decreased 8.7% to $187,158,000 in the three
months ended August 1, 1998 from $204,954,000 in the same period last year and
decreased 10.4% to $381,561,000 from $425,789,000 in the respective six-month
periods. The overall increases were primarily attributable to strong internal
growth reflecting increased market penetration in the Company's product
distribution segment, the acquisition of DDI completed on November 26, 1997,
increased international sales and increased sales of computer software. The
decline in the services segment reflects the disposition of certain
non-strategic businesses, the effect of consolidating or closing facilities, and
the elimination of low margin customers.
36
<PAGE> 44
International operations accounted for 19.8% of consolidated net sales, or
$221,724,000, in the three months ended August 1, 1998 and 18.7% of consolidated
net sales, or $173,242,000, in the same period last year and 19.9% of
consolidated net sales, or $443,651,000, for the six months ended August 1, 1998
compared to 18.8% of net sales, or $347,932,000, for the same period last year.
This growth is primarily attributable to expansion in Germany, Italy, Ireland,
and Switzerland and strong internal growth in Canada and France.
Gross Profit. Cost of sales includes merchandise, occupancy and delivery
costs. Gross profit as a percentage of sales was 23.2% for the three months
ended August 1, 1998 and 23.4% for the same period last year compared to 23.2%
and 23.5% for the respective six-month periods. The slight decrease in the gross
profit percentage reflects increased gross profit margins in the domestic office
products business primarily attributed to enhanced vendor programs offset by
lower gross profit margins in the services segment and international operations.
The decrease in the services segment gross profit margins is primarily
attributable to consolidation costs, increases in driver and vehicle related
costs, and reductions in pricing. The decrease in the international gross profit
margins primarily reflects expansions in Switzerland and Italy which have lower
gross profit margins on their product mix compared to the product mix
traditionally sold by the Company, and lower gross profit margins in the United
Kingdom due to continuation of inefficiencies resulting from facility and system
integration and the addition of certain lower margin accounts.
Warehouse Operating and Selling Expenses. Warehouse operating and selling
expenses primarily include labor and administrative costs associated with
operating regional warehouses and sales offices, selling expenses including
commissions related to the Company's direct sales force, and warehouse
consolidation and relocation costs and expenses. Warehouse operating and selling
expenses as a percentage of sales decreased to 16.1% for the three months ended
August 1, 1998 from 17.3% for the same period last year and decreased to 16.3%
from 17.4% for the respective six-month periods. The improvement in operating
expenses as a percentage of net sales primarily reflects the Company's efforts
to leverage and streamline its operations, including the elimination of
redundant facilities and positions.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses include the central expense incurred to provide
corporate oversight and support for regional operations, goodwill amortization
and certain depreciation. Consolidated corporate general and administrative
expenses increased slightly to 3.0% of net sales in the three months ended
August 1, 1998 from 2.9% in the three months ended August 2, 1997 (the increase
of 0.1% reflects increased goodwill amortization expense primarily from the DDI
acquisition) and were consistent at 3.0% of net sales for the respective
six-month periods. Consolidated corporate general and administrative expenses
increased to $33,771,000 in the three months ended August 1, 1998 from
$26,618,000 in the three months ended August 2, 1997 and to $66,873,000 from
$55,712,000 for the respective six-month periods reflecting increased support
for the Company's expanded operations.
Operating Profit. Consolidated operating profit increased to $45,446,000,
or 4.1% of net sales, for the three months ended August 1, 1998 from
$29,480,000, or 3.2% of net sales, in the same period last year. Consolidated
operating profit increased to $87,289,000, or 3.9% of net sales, for the six
months ended August 1, 1998 from $57,433,000, or 3.1% of net sales, in the same
period last year. Operating profit for the product distribution segment
increased to $47,010,000, or 5.0% of product distribution net sales, in the
three months ended August 1, 1998 from $23,478,000, or 3.3% in the three months
ended August 2, 1997, and increased to $86,908,000, or 4.7% from $45,261,000, or
3.2% for the corresponding six-month periods. The increase in operating profit
as a percentage of net sales for the product distribution segment primarily
reflects successful consolidation of operations which decreased expenses and
continued focus on vendor support. Operating losses for the services segment of
$1,564,000, or 0.8% of services net sales, in the three months ended August 1,
1998 compared to operating profit of $6,002,000, or 2.9% in the three months
ended August 2, 1997, and operating profit decreased to $381,000, or 0.1% of
services net sales, from $12,172,000, or 2.9% in the corresponding six-month
periods. The decrease in operating profit as a percentage of net sales for the
services segment reflects lower than expected performance at several delivery
locations, expenses related to integration projects, enhanced employee benefit
plans, and investments to hire and relocate many new members of the management
team, partially offset by cost savings from the elimination of redundant
personnel.
37
<PAGE> 45
Operating profit for international operations increased to 2.4% of
international net sales in the three months ended August 1, 1998 from 1.2% in
the three months ended August 2, 1997, and to 2.5% from 1.0% in the respective
six-month periods, primarily reflecting improved performance in Australia,
Germany and Canada, partially offset by reduced operating profits in the United
Kingdom reflecting business disruptions from prior consolidation efforts.
Interest Expense. Net interest expense of $21,787,000 in the three months
ended August 1, 1998 increased from $9,530,000 in the three months ended August
2, 1997 and to $34,578,000 from $18,483,000 in the respective six-month periods
primarily due to issuance of the new $350,000,000 9 5/8% Notes and increased
borrowings under the new Senior Secured Credit Facility to fund the borrowings
to finance the repurchase of common stock.
Minority Interest. Minority interest expense of $761,000 in the three
months ended August 1, 1998 compares to $612,000 in the three months ended
August 2, 1997, and expense of $957,000 compares to income of $1,522,000 in the
corresponding six-month periods. Minority interest for the current year reflects
a 47.6% minority interest in Corporate Express Australia and in the prior period
it also reflects a 49.0% minority interest in Corporate Express United Kingdom.
The Company acquired the remaining ownership interest in Corporate Express
United Kingdom in June 1997.
Extraordinary Item. The extraordinary loss of $4,477,000, net of tax of
$2,862,000, in the three months ended August 1, 1998 represents the cost of
early repayment of the 9 1/8% Senior Subordinated Notes Series B due 2004. The
extraordinary loss of $5,581,000 in the six months ended August 1, 1998 also
includes $1,104,000, net of tax of $706,000, reflecting the first quarter
write-off of deferred financing costs related to the early extinguishment of the
Company's former Senior Credit Facility.
Net Income. Excluding the extraordinary item, net income of $12,275,000 in
the three months ended August 1, 1998 compared to $12,264,000 for the three
months ended August 2, 1997 and increased to $28,087,000 from $24,674,000 in the
corresponding six-month periods. Including the extraordinary item, net income of
$7,798,000 in the three months ended August 1, 1998 compared to $12,264,000 for
the three months ended August 2, 1997 and $22,506,000 compared to $24,674,000 in
the corresponding six-month periods. The increase in the effective tax rate
primarily reflects increased amortization of non-deductible goodwill and the
absence of operating loss carryforwards which were recorded in prior year
periods.
Other. Goodwill at August 1, 1998 of $856,680,000 increased from
$847,544,000 at January 31, 1998 reflecting net additions from acquisitions
offset by current year amortization.
The inventory balance at August 1, 1998 of $269,535,000 increased
$18,427,000 from $251,108,000 at January 31, 1998 as a result of acquired
inventories and inventory growth to support increased sales.
Accrued purchase costs at August 1, 1998 of $8,968,000 decreased by
$410,000 from the January 31, 1998 balance of $9,378,000, reflecting acquisition
additions of $1,840,000 and usage of $2,250,000.
The accrued merger and related costs balance at August 1, 1998 of
$10,323,000 decreased by $5,189,000 from the January 31, 1998 balance of
$15,512,000, reflecting current period usage.
ELEVEN MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
Net Sales. Consolidated net sales increased 22.7% to $3,573,311,000 in the
eleven months ended January 31, 1998 from $2,911,189,000 in the same
eleven-month period last year. Net sales for the Company's product distribution
segment increased 26.6% to $2,816,244,000 in the current eleven-month fiscal
period from $2,224,203,000 in the same eleven-month period last year while net
sales for its service segment increased 10.2% to $757,067,000 from $686,986,000
in the same periods. These increases were primarily attributable to 31
acquisitions in the eleven months ended January 31, 1998, the full year impact
of 100 acquisitions completed in fiscal 1996, and strong internal growth
reflecting increased market penetration in the Company's products distribution
business. This growth was partially offset by the elimination of low margin
customers, the effect of closing or consolidating facilities, and the
disposition of certain non-strategic businesses.
38
<PAGE> 46
International operations accounted for 18.8% of total sales or $671,567,000
in the eleven months ended January 31, 1998 and 17.5% of total sales or
$509,734,000 in the same eleven-month period last year. The Company expanded its
international operations in Germany, Italy and Canada in the eleven months ended
January 31, 1998 and entered markets in Ireland and Switzerland.
Gross Profit. Cost of sales includes merchandise, occupancy and delivery
costs. Consolidated gross profit as a percentage of sales was 23.5% for the
eleven months ended January 31, 1998 compared to 24.2% for the same period in
the prior year. The gross profit percentage of sales for the product
distribution segment was 23.9% in the eleven months ended January 31, 1998 and
23.8% in the same eleven-month period last year. The gross profit percentage in
the services segment was 21.9% in the eleven months ended January 31, 1998
compared to 25.7% in the same eleven-month period last year. The decrease in the
gross profit percentage in the services segment is attributable to consolidation
costs, increases in driver and vehicle related costs, and pricing concessions.
Also affecting gross profit were lower international gross margins primarily as
a result of increased competitive pressures and increased computer software
sales (with lower gross margins), all of which were partially offset by
increased vendor rebates as a result of improved programs.
Warehouse Operating and Selling Expenses. Warehouse operating and selling
expenses primarily include labor and administrative costs associated with
operating regional warehouses and sales offices, selling expenses including
commissions related to the Company's direct sales force, and warehouse
consolidation and relocation costs and expenses. Warehouse operating and selling
expenses decreased as a percentage of sales to 17.0% in the eleven months ended
January 31, 1998 from 17.5% in the same eleven-month period last year. This
decrease is primarily attributable to the Company's efforts to leverage and
streamline its operations, including the elimination of redundant facilities and
positions.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses include the central expense incurred to provide
corporate oversight and support for regional operations, goodwill amortization
and depreciation. Corporate general and administrative expenses increased to
$105,055,000 in the eleven months ended January 31, 1998 from $87,793,000 in the
same eleven-month period last year reflecting the Company's expanded operations.
As a percentage of net sales, corporate general and administrative expenses
decreased to 2.9% in the current period from 3.0% in the prior period. This
decrease reflects the Company's efforts to leverage these expenses over expanded
operations, partially offset by increased goodwill amortization.
Merger and Other Nonrecurring Charges. During the eleven months ended
January 31, 1998, the Company recorded $14,890,000 in net merger and other
nonrecurring charges. The charge includes $4,485,000 of transaction costs
incurred by DDI in connection with its merger with the Company, costs related to
the continued integration of the delivery service business and certain
provisions for reductions in the workforce and facility closures at other
locations including the planned closure of 34 facilities and reduction of 722
employees. These exit plans are expected to be completed by the end of fiscal
1998.
Operating Profit. Consolidated operating profit increased 28.3% to
$114,815,000 or 3.2% of net sales for the eleven months ended January 31, 1998
compared to operating profit of $89,520,000 or 3.0% of net sales in the same
period last year. Before merger related and other nonrecurring charges,
operating profit increased to $129,705,000 in the current period from
$109,361,000 in the prior period due largely to internal growth and improved
operating efficiencies. Before merger related and other nonrecurring charges,
operating profit for the product distribution segment increased 42.0% to
$112,961,000 or 4.0% of net product distribution sales in the current fiscal
period from $79,549,000 or 3.6% of net sales in the same period last year.
Operating profit before nonrecurring charges for the services segment decreased
to $16,744,000 or 2.2% of net service sales in the current fiscal period from
$29,812,000 or 4.3% of net service sales in the prior fiscal period. The
decrease in operating profit for the services segment reflects poor performance
at several delivery locations and expenses related to integration projects,
partially offset by the cost savings from the elimination of redundant
personnel. Operating profit before nonrecurring charges for international
operations increased 114.0% to 2.0% of net international sales in the current
eleven-month fiscal period from 1.2% of net international sales in the prior
eleven-month fiscal period reflecting improved performance in Australia and
Canada, partially offset by decreased operating profits in the United Kingdom.
International operating profit before nonrecurring charges
39
<PAGE> 47
accounted for 11.7% of total product distribution operating profit in the
current fiscal period and 7.8% in the prior fiscal period.
Interest Expense. Net interest expense of $38,115,000 in the eleven months
ended January 31, 1998 increased from $24,550,000 in the prior eleven-month
fiscal period. This increase reflects increased borrowings under the Company's
previous credit facility (the "Old Credit Facility"), interest on acquired debt,
and the sale in June 1996 of $325,000,000 aggregate principal amount of the
Convertible Notes. The proceeds from the sale of the Convertible Notes and
borrowings under the Old Credit Facility were used to fund acquisitions and
provide the additional working capital required as a result of increased
business and for general corporate purposes.
Minority Interest. Minority interest income of $1,319,000 in the eleven
months ended January 31, 1998 compares to income of $1,314,000 in the prior
eleven-month fiscal period, reflecting a 47.6% minority interest in Corporate
Express Australia and a 49.0% minority interest in Corporate Express United
Kingdom through June 1997. The Company acquired a majority ownership interest in
Corporate Express Australia in May 1995 and a majority ownership interest in
Corporate Express United Kingdom in December 1995. In June 1997, the Company
acquired the remaining 49.0% ownership interest in Corporate Express United
Kingdom.
Net Income. Net income of $44,404,000 in the eleven months ended January
31, 1998 increased 24.4% from net income of $35,708,000 in the prior
eleven-month fiscal period. This increase reflects the increased profits from
the Company's mature product distribution operations, the lower merger and other
nonrecurring charges recorded in the current eleven-month fiscal period and
corporate expense leverage offset in part by higher goodwill amortization. The
Company experienced an effective tax rate of 44.4% in the fiscal 1997 period
compared to 47.2% in the fiscal 1996 period. The tax rate for both periods
reflects certain non-deductible merger costs and certain non-deductible
goodwill.
Other. The net accounts receivable balance at January 31, 1998 of
$616,574,000 increased $122,375,000 from $494,199,000 at March 1, 1997 primarily
as a result of acquired receivables and internal sales growth in existing
regions. The allowance for doubtful accounts as a percentage of consolidated
accounts receivable was 2.4% and 2.6% at the end of the fiscal 1997 and fiscal
1996 periods, respectively. The Company's historical bad debt write-offs have
been very low due to the high credit quality of its customers, resulting from
the Company's focus on large corporations, and the fact that in certain
acquisitions the seller guarantees acquired receivables.
The inventory balance at January 31, 1998 of $251,108,000 increased
$63,550,000 from $187,558,000 at March 1, 1997 primarily as a result of acquired
inventories and inventory growth to support increased sales.
Goodwill at January 31, 1998 of $847,544,000 increased $175,577,000 from
$671,967,000, reflecting additions from acquisitions of $197,250,000 (primarily
attributable to the DDI acquisition) offset by current year amortization of
$21,087,000 and reversals of $586,000.
The accounts payable trade balance at January 31, 1998 of $354,915,000
increased $62,874,000 from $292,041,000 at March 1, 1997 primarily as a result
of acquired trade payables and increased inventory purchases to support sales
growth.
Accrued purchase costs at January 31, 1998 of $9,378,000 decreased by
$3,510,000 from the March 1, 1997 balance of $12,888,000. This decrease reflects
acquisition additions of $6,365,000, payments of $9,289,000, and reversals of
$586,000 reducing previously recorded goodwill.
FISCAL YEARS 1996 AND 1995
Net Sales. Consolidated net sales increased 69.0% to $3,196,056,000 in
fiscal 1996 from $1,890,639,000 in fiscal 1995. Net sales for the Company's
product distribution segment increased 57.4% to $2,436,296,000 in fiscal 1996
from $1,548,175,000 in fiscal 1995 while net sales for its service segment
increased 121.9% to $759,760,000 from $342,464,000 in the same periods. These
increases were primarily attributable to 100 acquisitions in fiscal 1996 of
which 77 were product based companies (48 domestic and 29 international) and 23
were service based companies (21 domestic and two international) and the
acquisition of UT, which was
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accounted for as a pooling of interests with operations from March 3, 1996
(prior year results were immaterial). Also contributing to the sales increase
was strong internal growth reflecting increased market penetration in product
distribution.
International operations accounted for 17.7% of total sales or $565,126,000
in fiscal 1996 and 12.6% of total sales or $238,201,000 in fiscal 1995. The
Company expanded its international operations in fiscal 1996 to include
operations in New Zealand, Germany, France, and Italy.
Gross Profit. Cost of sales includes merchandise, occupancy and delivery
costs. Consolidated gross profit as a percentage of sales was 24.4% for fiscal
1996 compared to 24.7% for fiscal 1995. Included in cost of sales in fiscal 1995
is a merger related inventory provision of $5,952,000, representing 0.3% of
sales. In fiscal 1995, the Company made the decision to expand to new product
categories, while discontinuing certain low-end products, to standardize core
product lines and to eliminate certain inventory historically maintained for
specific customers and wrote certain inventory down to its fair market value.
Impacting the declining gross profit percentage in fiscal 1996 was the addition
of a desktop software line of products which has substantially lower gross
profit margins, and decreased gross margins in the delivery business.
The gross profit percentage of sales for the product distribution segment
was 24.0% in fiscal 1996 and 23.8% in fiscal 1995 (excluding the merger related
inventory provision). The increase reflects gross margin improvement in all of
the domestic office product distribution operations which was partially offset
by lower margin sales from an acquired desktop software distributor. The
improvement in domestic office product distribution gross profit is due, in
part, to the expanded usage of the Company's proprietary, full color catalog
resulting in fewer wholesaler purchases and increased vendor rebates. The gross
profit percentage in the services segment was 25.5% in fiscal 1996 compared to
30.8% in fiscal 1995. The decrease in the gross profit percentage in the service
segment is primarily attributable to the acquisition of UT which had lower gross
profit margins than other delivery services operations.
Warehouse Operating and Selling Expenses. Warehouse operating and selling
expenses primarily include labor and administrative costs associated with
operating regional warehouses and sales offices, selling expenses and
commissions related to the Company's direct sales force, and warehouse
assimilation costs. Warehouse operating and selling expenses decreased as a
percentage of sales to 17.6% in fiscal 1996 from 18.1% in fiscal 1995. This
decrease is primarily attributable to the Company's efforts to leverage and
streamline its operations and to the software distribution operation and UT,
both of which have lower operating expenses as a percentage of sales.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased to $95,101,000 in fiscal 1996 from $49,742,000
in fiscal 1995, reflecting the Company's expanded operations. As a percentage of
net sales, corporate general and administrative expenses increased to 3.0% in
fiscal 1996 from 2.6% in fiscal 1995. This increase reflects increased goodwill
amortization resulting from purchase acquisitions in fiscal 1995 and fiscal 1996
and costs associated with developing a larger corporate staff to support
acquisition efforts and expanded operations, including an expanded information
system staff.
Merger and Other Nonrecurring Charges. During fiscal 1996, the Company
recorded $19,840,000 in net merger and other non-recurring charges primarily in
conjunction with the acquisitions of Nimsa, UT, Sofco and HMI. Of the total
charge, a net $12,366,000 was recorded in the third quarter and $7,474,000 was
recorded in the fourth quarter of fiscal 1996. The third quarter charge is
comprised of merger and other nonrecurring charges primarily in conjunction with
the acquisitions of UT and Nimsa, offset by $7,571,000 in adjustments to the
merger and other nonrecurring charge established in the fourth quarter of fiscal
1995. The fiscal 1995 charge included an exit plan for the integration of the
newly acquired delivery business into the Company's core product distribution
business. In the third quarter of fiscal 1996, nine months after the creation of
the original exit plan, the Company acquired UT, approximately doubling its
delivery services capacity. At that time, the Company adopted a new plan to
integrate the delivery services business separate from the core product
distribution business. In connection with the new exit plan, the Company
evaluated its facility and personnel requirements and identified duplicate
facilities consistent with the new plan. As a result of this new plan, the
closure of thirteen delivery facilities and five distribution facilities,
incorporated in the original fiscal 1995 plan, was superseded. The third quarter
fiscal 1996 charge includes the planned closure of
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115 facilities and reduction of approximately 485 employees. The fourth quarter
fiscal 1996 charge primarily reflects the actual costs of completing the
acquisitions of Sofco and HMI. (See Note 4 to the Consolidated Financial
Statements).
Operating Profit. Consolidated operating profit was $100,490,000, or 3.2%
of net sales, in fiscal 1996, compared to operating profit of $38,160,000, or
2.1% of net sales, in fiscal 1995. Before merger related and other nonrecurring
charges, operating profit increased 48.6% to $120,330,000 in fiscal 1996 from
$80,950,000 in fiscal 1995, reflecting increased acquisitions, internal growth
and improved operating efficiencies. Before merger related and other
nonrecurring charges, operating profit for the product distribution segment
increased 52.1% to $88,802,000, or 3.6% of net sales, in fiscal 1996 from fiscal
1995 operating profit of $58,394,000 or 3.8% of net sales. Operating profit
before nonrecurring charges for the service segment increased 39.8% to
$31,528,000, or 4.1% of net sales, in fiscal 1996 from $22,556,000, or 6.6% of
net sales, in fiscal 1995. The decrease in operating profit for the service
segment as a percentage of sales reflects the results of UT which had lower
operating margins, poor performance at several delivery locations and expenses
related to consolidation projects. Operating profit before nonrecurring charges
for international operations decreased to 1.1% of net international sales in
fiscal 1996 from 3.9% of net international sales in fiscal 1995 reflecting
operating losses in Australia related to warehouse consolidation projects and
expansion to new European markets, partially offset by increased operating
profits in Canada. International operating profit before nonrecurring charges
accounted for 6.8% of total office products operating profit in fiscal 1996 and
15.8% of total office products operating profit in fiscal 1995.
Interest Expense. Net interest expense of $26,949,000 in fiscal 1996
increased from $17,968,000 in fiscal 1995. This increase reflects increased
borrowings under the Old Credit Facility and the sale of $325,000,000 aggregate
principal amount of the Convertible Notes. The proceeds from the sale of the
Convertible Notes were used to fund acquisitions and provide the additional
working capital required as a result of increased business and general corporate
purposes.
Minority Interest. Minority interest income of $1,860,000 in fiscal 1996
compares to an expense of $1,436,000 in fiscal 1995, reflecting a 47.6% minority
interest in the operating losses at Corporate Express Australia partially offset
by a 49.0% minority interest in operating profits in Corporate Express United
Kingdom.
Net Income. Net income of $41,996,000 in fiscal 1996 compares to net income
of $5,551,000 in fiscal 1995. This increase reflects the increased profits from
the Company's more mature operations, the lower merger and other nonrecurring
charges recorded in fiscal 1996 and the purchase acquisitions. The Company
experienced an effective tax rate of 45.6% in fiscal 1996 compared to 62.6% in
fiscal 1995. The fiscal 1995 tax rate reflects certain non-deductible merger
costs, the utilization of certain net operating losses ("NOLs"), and certain
non-deductible goodwill. The fiscal 1996 tax rate reflects certain
non-deductible merger costs and certain non-deductible goodwill. The principal
reason the 1995 effective tax rate exceeds the 1996 rate is the higher level of
non-deductible merger costs in fiscal 1995.
FISCAL YEARS 1995 AND 1994
Net Sales. Net sales increased 65.1% to $1,890,639,000 in fiscal 1995 from
$1,145,151,000 in fiscal 1994. Net sales in the product distribution segment
increased 67.4% to $1,548,175,000 in fiscal 1995 from $924,886,000 in fiscal
1994, while the service segment increased 55.5% to $342,464,000 from
$220,265,000 in the same periods. These increases were primarily attributable to
51 acquisitions, of which 28 were product based companies (17 domestic and 11
international), seven were repurchases of computer product franchises by Young,
and 16 were service based companies principally in the delivery services
business (all domestic). Also contributing to the sales increase was the
inclusion of the results of operations of acquisitions accounted for as
purchases during fiscal 1995 and internal growth.
Gross Profit. Consolidated gross profit as a percentage of sales was 24.7%
for fiscal 1995 compared to 25.3% for fiscal 1994. Included in cost of sales for
fiscal 1995 is a merger related inventory provision of $5,952,000. The gross
profit percentage, excluding the merger related inventory provision was 25.0% in
fiscal 1995. The gross profit percentage in product distribution, excluding the
merger related inventory provision was
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23.8% in fiscal 1995 compared to 23.9% in fiscal 1994 and services segment gross
profit percentage was 30.8% in fiscal 1995 compared to 31.3% in fiscal 1994.
Decreases in services are primarily attributable to increased delivery costs
resulting from unusually severe weather in the Northeast.
Warehouse Operating and Selling Expenses. Warehouse operating and selling
expenses decreased as a percentage of sales to 18.1% in fiscal 1995 from 19.1%
in fiscal 1994. This decrease reflects cost savings as a result of the
implementation of the Corporate Express business model at certain regional
warehouses, which includes centralizing certain administrative functions. Also
contributing to this decrease is a reduction of approximately $3,100,000 in
Delivery compensation expense which was eliminated in fiscal 1995 pursuant to
agreements made in connection with companies acquired in poolings of interest
acquisitions.
Corporate General and Administrative Expenses. As a percentage of net
sales, corporate general and administrative expenses were 2.6% in both fiscal
1995 and fiscal 1994. Expenses increased to $49,742,000 in fiscal 1995 from
$29,624,000 in fiscal 1994, reflecting the Company's expanded operations.
Merger and Other Nonrecurring Charges. During the fourth quarter of fiscal
1995, the Company recorded $36,838,000 in merger and other nonrecurring charges
(in addition to $5,952,000 in merger related inventory provisions) primarily in
conjunction with the acquisitions of Delivery and Young. The charges include the
actual costs of completing the acquisitions and additional costs associated with
a plan to integrate the combined companies' operations. The major activities
associated with the plan include merging various Delivery and Young facilities
into Company locations, closing duplicate facilities and centralizing certain
administrative functions. These merger and other nonrecurring charges include
merger transaction related costs of $13,273,000; severance and employee
termination costs of $7,457,000 (representing approximately 760 employees);
facility closure and consolidation costs of $9,693,000; and other asset
write-downs and costs of $6,415,000. Of the $36,838,000 charges, $7,724,000 are
non-cash charges.
Operating Profit. Operating profit of $38,160,000 in fiscal 1995 compares
to operating profit of $40,953,000 in fiscal 1994. Operating profit before
nonrecurring charges for product distribution increased to $58,394,000 in fiscal
1995 from $29,811,000 in fiscal 1994. This increase reflects the contribution of
acquired companies and increased regional operating profits at the Company's
other regional operations. Operating profit before nonrecurring charges for
services increased to $22,556,000, or 6.6% of net sales, in fiscal 1995 from
$11,142,000, or 5.1% of net sales, in fiscal 1994.
Interest Expense. Net interest expense increased to $17,968,000 in fiscal
1995 from $16,915,000 in fiscal 1994. Increases due to the elimination of the
0.5% per annum additional illiquidity payment of the 9 1/8% Notes effective upon
completion of a registered exchange offer in March 1995 and principal reductions
on the line of credit using funds from the public offerings of Common Stock
completed in March 1995 and September 1995 were offset by higher levels of
Delivery, Young and HMI debt outstanding as a result of their increased
borrowings to fund acquisitions and to provide the additional working capital
required as a result of increased business. On February 27, 1996, the Company
borrowed on its line of credit and repaid in full, as required under its terms,
the Young revolving line of credit balance of $10,809,000 which bore interest at
prime plus 1.25%, the Young subordinated debt of $11,930,000 which bore interest
at 17.5% and debt payable to the selling shareholders of $10,834,000 which bore
interest at 9.75%. The Delivery bank credit facility became due as of the
acquisition date due to a change of control provision. This facility was amended
to expire on May 31, 1996 to provide time for the Company to renegotiate its
primary bank revolver, which has been completed and the Delivery credit facility
has been repaid. See "Liquidity and Capital Resources."
Extraordinary Item. The extraordinary gain of $586,000, net of tax, in the
second quarter of fiscal 1994 related to the repurchase of $10,000,000 principal
amount of the 9 1/8% Notes.
Net Income. Net income of $5,551,000 in fiscal 1995 decreased compared to a
net income of $16,496,000 in fiscal 1994. This decrease reflects the merger and
other nonrecurring charges recorded in fiscal 1995 offset by contributions from
purchase acquisitions and increased profits from the Company's more mature
operations. The pre-tax profitability is reduced by an increase in the effective
tax rate to 62.6% in fiscal 1995 from 33.7% in fiscal 1994. The fiscal 1995 tax
rate reflects certain non-deductible merger costs, international tax rates, the
utilization of certain NOLs, and certain non-deductible goodwill. The fiscal
1994 tax rate
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included the utilization of certain NOLs and certain non-deductible goodwill.
The principal reason the 1995 effective tax rate exceeds the 1994 effective tax
rate is the non-deductibility of certain merger costs. The fiscal 1994 period
included in net income an extraordinary gain of $586,000, net of tax, related to
the repurchase of $10,000,000 principal amount of the 9 1/8% Notes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through internally
generated funds and borrowings from commercial banks and has financed its
acquisitions through the use of such funds and the issuance of equity and debt
securities.
On February 5, 1998 the Company announced a Dutch Auction issuer tender
offer to purchase for cash up to 35,000,000 shares of its issued and outstanding
common stock, par value $.0002 per share. The terms of the tender offer invited
the Company's shareholders to tender up to 35,000,000 shares of the Company's
common stock to the Company at prices not greater than $11.50 nor less than
$10.00 per share, as specified by the tendering shareholders. On April 10, 1998,
the Company closed the tender offer and purchased 35,000,000 shares tendered at
a price of $10.75 per share. Shares tendered at prices in excess of the purchase
price and shares not purchased because of proration were returned to
shareholders. The Company funded the purchase of such shares and the payment of
related fees and expenses through the New Credit Facility. The New Credit
Facility consists of a $250,000,000 seven-year term loan and a $750,000,000
five-year revolving credit facility. The New Credit Facility is guaranteed by
substantially all domestic subsidiaries of the Company and is collateralized by
all tangible and intangible property of the guarantors including inventory and
accounts receivables. At the borrower's option interest rates are at a base rate
or a Eurodollar rate plus an applicable margin determined by a leverage ratio as
defined in the loan agreements. The term loan's interest rate ranges from 0.25%
to 0.75% above the revolving loan interest rate. The Company is subject to usual
covenants customary for this type of facility including financial covenants. The
available funds may be used for general corporate purposes, including permitted
acquisitions and permitted share repurchases including the Share Repurchase and
other share repurchases. As of August 31, 1998, the Company had $480,597,000
outstanding (which includes outstanding Letters of Credit) under the New Credit
Facility and an unused borrowing capacity of $519,403,000.
The Company Board of Directors has recently authorized the repurchase of
shares of common stock from time to time in open market transactions, block
purchases, privately negotiated transactions and otherwise, at prevailing
prices. Financing for such purchases is available through the New Credit
Facility, as well as from cash flow from operations. In addition to the
35,000,000 shares repurchased on April 10, 1998 (described above), the Company
has repurchased (through August 31, 1998) approximately 2,473,000 shares in
total, of which 430,000 shares were purchased in the second fiscal quarter of
1998, and the balance was purchased in August 1998.
On April 22, 1998 the Company's Old Credit Facility was replaced and paid
in full with proceeds from the New Credit Facility. Approximately $1,810,000 of
deferred financing costs related to the Old Credit Facility were expensed in the
first quarter of fiscal 1998 and are shown as an extraordinary item of
$1,104,000, net of tax of $706,000.
On May 29, 1998 the Company issued $350,000,000 principal amount of the Old
Notes. The Old Notes are guaranteed by all material domestic subsidiaries of the
Company and are subordinated in right of payment to all senior debt. On or after
June 1, 2003 through maturity the Old Notes may be redeemed at the option of the
Company, in whole or in part, at redemption rates ranging from 104.813% to 100%.
At any time on or before June 1, 2001 the Company may redeem up to 35% of the
notes with the net cash proceeds of one or more Public Equity Offerings at a
redemption price equal to 109.625% of the principal amount thereof, subject to
certain restrictions. Semi-annual interest payments are due on June 1 and
December 1 commencing on December 1, 1998. A portion of the proceeds from the
sale of the Old Notes was used to retire the 9 1/8% Notes pursuant to the Tender
Offer and the Consent Solicitation and to repay a portion of the New Credit
Facility. As a result of the early extinguishment of the 9 1/8% Notes, the
Company incurred an extraordinary loss of $7,339,000 ($4,477,000 net of tax).
The Company settled an interest rate hedging contract based on
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$300,000,000 of U.S. Treasury notes related to the completed Old Note Offering.
The cost of the settlement of the contract was $7,271,000 and will be amortized
over the ten-year term of the Notes as an adjustment to the effective interest
rate of the debt instrument bringing the effective interest rate to 9.83%.
During the eleven months ended January 31, 1998, the Company invested
$24,572,000 net cash and approximately 14,895,000 shares of common stock in its
acquisition program. Total liabilities assumed in connection with these
acquisitions were $171,928,000. In addition, the Company made payments of
approximately $8,797,000 and issued approximately 252,000 shares of common stock
related to acquisitions completed in prior fiscal years.
During the six months ended August 1, 1998 and the eleven months ended
January 31, 1998, the Company had capital expenditures of $46,878,000 and
$82,959,000, respectively, for warehouse reconfigurations, computer systems and
software, telecommunications equipment, delivery vehicles, leasehold
improvements and investments in facilities. The Company continues to invest in
advanced facilities, the development of its proprietary computer software, and
the upgrade of its computer systems.
Significant uses of cash in the six months ended August 1, 1998 were as
follows: repurchase of common stock of $383,980,000, capital expenditures of
$46,878,000, cash paid for acquisitions of $25,664,000, debt issuance costs of
$32,188,000, net payments on lines of credit of $61,497,000 and other uses of
$2,246,000, partially offset by net proceeds from debt of $510,966,000, and
operating activities of $27,452,000. Significant uses of cash in the eleven
months ended January 31, 1998 were as follows: capital expenditures of
$82,959,000, cash paid for acquisitions of $33,369,000, net debt repayments of
$10,393,000, retirement of DDI bonds of $62,178,000, and net other uses of
$2,168,000, partially offset by cash provided by net borrowings on lines of
credit of $122,376,000, operating activities of $26,916,000, proceeds from the
sale of assets of $21,100,000, issuance of common stock of $8,104,000, and
issuance of subsidiary common stock of $2,434,000.
The Company expects net capital expenditures for fiscal 1998 of
approximately $80,000,000 comprised of approximately $59,000,000 to be used for
upgrading and enhancing its information systems and telecommunications equipment
and approximately $21,000,000 for warehouse reconfigurations and equipment.
Actual capital expenditures for fiscal 1998 may be greater or less than expected
amounts.
The Company continues to make substantial investments in the development
and enhancement of its proprietary computer software applications. During fiscal
1997, the Company completed the development and implementation of its ISIS
computer software for its national account customers and successfully launched
the internet version of E-Way, its electronic commerce, ordering and fulfillment
system. The Company began amortizing its ISIS national account software and
E-way in fiscal 1997 over a seven-year and five-year life, respectively, on a
straight-line basis. All costs associated with the maintenance and production of
its ISIS national account software are being expensed as incurred. The
integrated multi-divisional version of the ISIS software (non-national accounts)
continues to be developed and is currently in beta test mode at two operating
divisions. The Company anticipates that the ISIS multi-divisional software will
be implemented at all existing domestic office products distribution centers by
the end of fiscal 2002.
During fiscal 1996, the Company acquired, for a net cash purchase price of
$241,846,000 and 5,542,000 shares of common stock, 77 office products
distributors and 23 service companies. Of these 100 acquisitions, 86 were
accounted for as purchases and 14 were accounted for as immaterial poolings of
interest. In addition, the Company acquired UT, which was accounted for as a
pooling of interests with financial results included from March 3, 1996 for
6,332,000 shares of common stock. Total liabilities assumed in connection with
these acquisitions were $282,777,000 (including accounts payable and assumed
debt). In addition, the Company made payments of approximately $13,984,000
related to prior acquisitions. Included in the net cash purchase price of
$241,846,000 is the purchase of ASAP, a computer software distribution company,
in May 1996 for approximately $98,000,000 in cash offset by cash acquired of
approximately $14,000,000.
On June 24, 1996, the Parent issued $325,000,000 aggregate principal amount
of Convertible Notes which are structurally subordinated to the Notes. The notes
are convertible into the Parent's common stock at a conversion price of $33.33
per share, subject to adjustments under certain conditions. A portion of the
proceeds from the sale of the Convertible Notes was used to repay a previous
credit facility and an acquisition
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note payable with the remaining proceeds being used to fund acquisitions and for
other general corporate purposes.
Cash and cash equivalents increased by $24,686,000 in fiscal 1996. This
increase reflects proceeds of $325,000,000 from issuance of the Convertible
Notes, net borrowings on lines of credit of $104,382,000 and cash from
operations of $25,753,000, offset by capital expenditures of $119,639,000,
payments for acquisitions of $255,830,000, repayment of debt of $64,893,000 and
net other additions of $9,913,000. Net cash provided by operating activities of
$25,753,000 reflects cash generated by net income plus non-cash expenses,
primarily depreciation and amortization, offset by an increase in accounts
receivable, inventories, and accrued liabilities reflecting increased sales. The
repayment of debt is primarily debt of acquired operations.
During fiscal 1995, the Company purchased 45 companies for a net cash
purchase price of $96,971,000 and newly issued securities representing a 52.5%
interest in Corporate Express Australia for a net cash outlay of $98,000
($16,785,000 purchase price less cash acquired of $16,687,000). The Company also
repurchased seven computer product franchises for $21,187,000. Total liabilities
assumed in connection with these acquisitions were $118,447,000 (including
accounts payable and assumed debt). In addition, the Company made payments of
approximately $6,044,000 related to acquisitions completed in fiscal 1994.
During fiscal 1995, the Company sold its high-end furniture business for
$4,362,000, which was acquired as part of the acquisition of Joyce
International, Inc.'s office products division ("Joyce"). The sale was
contemplated at the time of the Joyce acquisition and was reflected in the
financial statements accordingly.
Cash and cash equivalents increased by $14,314,000 in fiscal 1995. This
increase reflects net proceeds from the sale of common stock of $449,288,000
(primarily from the March and September 1995 public offerings) offset by the
purchase of common stock held by OfficeMax, Inc. for $195,831,000, net payments
on the line of credit of $18,871,000, payments for capital expenditures during
fiscal 1995 of $53,124,000, cash paid for acquisitions of $124,300,000, cash
used in operating activities and repayment of debt of $99,838,000 and net other
additions of $56,990,000. Net cash used in operating activities of $16,433,000
reflects cash generated by net income plus non-cash expenses offset by an
increased investment in accounts receivable and inventories reflecting increased
sales and the introduction of the Company's catalog into acquired operations.
The repayment of debt includes the repayment of debt of acquired companies.
The Parent and each of the Subsidiary Guarantors have fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal and interest on the Notes. These guarantees are expressly subordinate
to all Senior Debt of the Issuer, the Parent and the guarantor subsidiaries,
including the New Credit Facility. Substantially all of the Issuer's income and
cash flow is generated by it's subsidiaries. As a result, funds necessary to
meet the Issuer's debt service obligations are provided in large part by
distributions or advances from its subsidiaries. Under certain circumstances,
contractual and legal restrictions, as well as the financial condition and
operating requirements of the Issuer's subsidiaries, could limit the Issuer's
ability to obtain cash from its subsidiaries for the purpose of meeting its debt
service obligations, including the payment of principal and interest on the
Notes. In addition, certain of the Issuer's subsidiaries are not included among
the guarantor subsidiaries and such subsidiaries will not be obligated with
respect to the Notes. As a result, the claims of creditors of such non-guarantor
subsidiaries will effectively have priority with respect to the assets and
earnings of such companies over the claims of creditors of the Issuer, including
holders of the Notes.
The Company believes that the borrowing capacity under the New Credit
Facility, together with proceeds from future debt and equity financings, in
addition to the Company's cash on hand, capital resources and cash flows from
operations, will be sufficient to fund the Company's ongoing operations,
anticipated capital expenditures and acquisition activity for the next twelve
months. However, actual capital needs may change, particularly in connection
with acquisitions which the Company may complete in the future.
INFLATION
Certain of the Company's product offerings, particularly paper products,
have been and are expected to continue to be subject to significant price
fluctuations due to inflationary and other market conditions. The Company
generally is able to pass such increased costs on to its customers through price
increases, although it
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may not be able to adjust its prices immediately. Significant increases in
paper, fuel and other costs in the future could materially affect the Company's
profitability if these costs cannot be passed on to customers. In general, the
Company does not believe that inflation has had a material effect on its results
of operations in recent years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
SEASONALITY AND QUARTERLY RESULTS
The Company's product distribution business is subject to seasonal
influences. In particular, net sales and profits in the United States, Canada
and Europe are typically lower in the summer months due to lower levels of
business activity. Because cost of sales includes delivery and occupancy
expenses, gross profit as a percentage of net sales may be impacted by seasonal
fluctuations in net sales, higher delivery costs during inclement weather, and
the acquisition of less efficient operations. Quarterly results may be
materially affected by the timing of acquisitions and the timing and magnitude
of acquisition integration costs. Therefore, the operating results for any three
month period are not necessarily indicative of the results that may be achieved
for any subsequent fiscal quarter or for a full fiscal year.
Revenues and profit margins from the Company's local delivery services are
subject to seasonal variations. Prolonged inclement weather can have an adverse
impact on the Company's business to the extent that transportation and
distribution channels are disrupted.
ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," in the fourth quarter of fiscal 1998.
SFAS No. 131 will supersede the business segment disclosure requirements
currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments and provides guidance regarding what
constitutes a reportable operating segment. The Company is currently evaluating
disclosures under SFAS No. 131 compared to current disclosures.
The Company is required to adopt the disclosure requirements of SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits,"
in the fourth quarter of fiscal 1998. SFAS No. 132 revises disclosure
requirements for such pension and postretirement benefit plans to, among other
things, standardize certain disclosures and eliminate certain other disclosures
no longer deemed useful. SFAS No. 132 does not change the measurement or
recognition criteria for such plans.
On March 4, 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1 providing guidance on accounting for the
costs of computer software developed or obtained for internal use. The effective
date of this pronouncement is for fiscal years beginning after December 15,
1998. The Company is in the process of reviewing its current policies of
accounting for costs associated with internal software development projects and
how they may be affected by SOP 98-1. The Company believes its current policies
are materially consistent with the SOP, however, the ultimate impact on the
Company's future results of operations has not yet been determined.
IMPACT OF THE YEAR 2000
The Year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system/job failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar business activities.
The Company's ISIS computer software has been designed with the Year 2000
issue in mind, and the Company believes it is Year 2000 compliant; however, the
Company utilizes many different systems and software programs to process and
summarize business transactions. The Company is continuing the evaluation of its
various operating systems and determining the additional remediation efforts
required to ensure its computer systems will properly utilize dates beyond
December 31, 1999. Preliminary results of this assessment have revealed that
remediation efforts required will vary from system to system. For example, it
appears some
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systems will not require any additional programming efforts, while others may
require significant programming changes.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
For those systems identified as non-compliant, the Company has begun and,
in certain cases, completed remediation efforts. The Company will utilize both
internal and external resources to reprogram, or replace, and test the software
for Year 2000 modifications. The Company plans to complete the Year 2000 project
before January 31, 1999. The total estimated cost of the Year 2000 project is
estimated to be between $6,000,000 and $8,000,000 and is being funded through
operating cash flows. These costs are not expected to be material to the
Company's consolidated results of operations. Of the total project cost,
approximately $2,000,000 is attributable to the purchase of new software or
equipment which will be capitalized. The remaining $4,000,000 to $6,000,000 will
be expensed as incurred. In a number of instances, the Company may decide to
install new software or upgraded versions of current software programs which are
Year 2000 compliant. In these instances, the Company may capitalize certain
costs of the new system in accordance with current accounting guidelines.
The Company presently believes that with modifications to existing software
and conversions to new software for those sites which it believes may be
effected, the Year 2000 issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 issue
could have a material adverse effect on the operations of the Company.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
MARKET RISK
The Company is primarily exposed to currency exchange-rate risk with
respect to its transactions and net assets denominated in Canadian and
Australian Dollars, U.K. Pound Sterling, French Francs, German Marks, Irish
Pounds, Swiss Francs and Italian Lira. Business activities in various currencies
expose the Company to the risk that the eventual net dollar cash inflows
resulting from transactions with foreign customers and suppliers denominated in
foreign currencies may be adversely affected by changes in currency exchange
rates.
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BUSINESS
OVERVIEW
The Company is a leading global provider of non-production goods and
services to large corporations that value innovative procurement solutions. The
Company believes it has developed a unique "Corporate Supplier" model which
focuses on providing its customers with a broad array of non-production goods
and services while reducing the customer's overall procurement costs and
providing a high level of customer service. The products and services provided
by the Company include office supplies, computer and imaging supplies, computer
desktop software, office furniture, advertising specialties, custom business
forms, forms management services, printing, cleaning and service supplies,
same-day local delivery services and distribution logistics management.
The Company has grown internally and through strategic acquisitions to a
global enterprise with locations throughout the United States and in various
international markets. The Company's pro forma net sales for the twelve months
ended January 31, 1998 has increased to $4.1 billion from net sales of $1.1
billion for fiscal 1994.
The Company's target customers are large corporations which the Company
believes increasingly seek to reduce their cost of procuring non-production
goods and services, including the time and effort spent managing functions that
are not considered core to their operations. The Company believes that, as part
of such effort, corporations seek to reduce their number of suppliers in order
to eliminate the internal costs associated with complex and varied ordering
procedures, multiple invoices, multiple deliveries, uneven service levels and
inconsistent product availability. In addition, many large corporations operate
from multiple locations and benefit from selecting suppliers who can provide
service to their national and international locations. The Company markets its
products and services to existing and prospective customers through a direct
sales force and delivers its products and services utilizing approximately 700
world wide locations including over 90 distribution centers and a fleet of over
10,000 owned or contracted vehicles.
CORPORATE SUPPLIER STRATEGY
The Company's Corporate Supplier strategy is designed to reduce its
customers' total costs, including their internal costs incurred in managing the
procurement of non-production goods and services. The Company believes that
customers value the Company's broad product and service offerings, low cost
structure, extensive geographic coverage and delivery capabilities. The Company
also believes that its customers value the high level of service the Company
provides through its account relationship managers, same-day delivery,
customized pricing, product availability, electronic interfaces and customized
reporting.
The Company seeks to continually reduce its merchandise and operating
costs, enabling it to offer its customers competitive prices while increasing
its operating margins. The Company is able to reduce such costs primarily
through utilizing its increasing purchasing power and advanced information
systems. By purchasing most of its products directly from manufacturers in large
volumes and limiting the number of manufacturers represented in its proprietary,
full-color catalog, the Company is able to obtain increasing volume discounts
and allowances from its vendors. The Company believes its information systems
represent a key strategic advantage differentiating the Company from its
competitors while permitting it to achieve cost savings, provide unique
capabilities to its customers, and centrally manage its operations. The Company
intends to continue improving and enhancing the capabilities of its information
systems which will enable the Company to further differentiate its product and
service offerings, while increasing its operating margins.
GROWTH STRATEGY
The Company has historically grown primarily through strategic
acquisitions. The Company believes that it has substantially completed its
infrastructure and, accordingly, its growth strategy is now focused primarily on
internal growth combined with selective strategic acquisitions. The Company
plans to increase sales to existing customers by cross-selling its expanded
product and service offerings and by developing existing customers into
multi-regional, national or international accounts. The Company seeks to attract
new customers, including national and international accounts, through its
marketing efforts and the use of its direct
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sales force. The Company continues to expand its product depth, while also
expanding its geographic coverage outside the United States and its sales
efforts in all geographic regions.
OPERATING STRATEGY
The Company intends to continue to increase its revenues and profitability
through continued implementation of its Corporate Supplier and growth
strategies, including the following key elements:
Provide a Broad Offering of Products and Services. The Company believes
that large corporations are focused on minimizing their total procurement costs,
including internal costs, by reducing their total number of suppliers to a small
group of reliable and cost-efficient partners. The Company believes that its
broad product and service offerings and extensive distribution network provide
the Company with an important competitive advantage in servicing these large
corporations. Over the last several years, the Company has expanded its product
offerings to include forms printing and management, same-day local delivery
services, distribution logistics management, advertising specialties and
computer and imaging supplies. The Company's extensive product and service
offerings enable it to reduce customer procurement costs, including costs
associated with dealing with multiple vendors, such as multiple invoices,
deliveries, ordering procedures, uneven service levels and inconsistent product
availability, while also fulfilling its customers' broad service and delivery
requirements.
Focus on Large Corporations. The Company believes that its transition from
a regional contract stationer to a full service Corporate Supplier is
substantially complete in the United States and that the Company is positioned
to effectively and profitably service large, multi-location customers. Moreover,
the Company believes that these large customers value the Company's broad
product and service offerings, extensive geographic distribution network, high
customer service levels and sophisticated information systems. Larger customers
typically utilize many of the Company's capabilities, which enhances the
Company's purchasing power and economies of scale. Approximately 90% of the
Fortune 500 companies, including General Motors Corporation, Hewlett-Packard
Company, Oracle Corporation, AT&T Corporation, The Walt Disney Company, IBM
Corporation and Exxon Corporation, order a portion of their required
non-production goods or services from one or more of the Company's business
segments.
Provide Superior Customer Service. The Company believes that its customers
value the high level of customer service which the Company provides through its
experienced direct sales force, sophisticated information systems and highly
efficient global distribution network. The Company's Corporate Supplier model
enables it to differentiate itself from competitors by offering its customers
important services including reliable delivery, a broad product assortment,
national account service, electronic interfaces, customized reporting and other
customized services. A key element to providing these services is the Company's
advanced computer systems which, when installed or linked to a customer's
systems, provide significant cost savings for both the Company and the customer
and enhanced access to information.
Enhance and Utilize Purchasing Power. The Company believes that the large
volume of its purchases combined with its centralized purchasing and
merchandising operation provides the Company with an important competitive
advantage. The Company continually seeks to reduce its merchandise costs,
enabling it to offer its customers competitive prices while increasing its
margins. By purchasing most of its products directly from manufacturers in large
volumes and limiting the number of manufacturers represented in its catalogs,
the Company is increasingly able to improve its vendor terms, including earning
increased volume discounts and allowances.
Consolidate and Upgrade Facilities. The Company has historically grown
internally and through numerous acquisitions of small office products and
service companies. The Company seeks to increase the sales, profitability and
asset productivity of its acquisitions by combining them with the Company's
existing operations, implementing the Company's business model, eliminating
redundant facilities and upgrading certain existing facilities. The process of
integrating acquisitions and consolidating facilities often has certain
short-term adverse effects on operations including, in certain cases, increased
operating costs associated with consolidation or relocation of facilities and a
reduction in sales as smaller, unprofitable accounts are discontinued. Once
completed, however, facility consolidations allow the Company to reduce its
operating
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costs, enhance its customer service and increase its revenues and profitability
as management's attention shifts from managing the consolidations to increasing
account penetration. Because the Company has completed a majority of the planned
facility consolidations in its domestic office products business and in several
of its international markets, the Company believes that it is well-positioned to
expand its operating margins over the next several years.
Utilize Proprietary Computer Software and Systems. The Company believes
that its proprietary software and information systems represent key strategic
advantages which enable the Company to achieve cost savings, provide superior
customer service and centrally manage its operations. The Company has made
substantial investments in the development and enhancement of its proprietary
computer software applications and believes that its software and information
systems are the most sophisticated in the industry. The Company's proprietary
software is protected under general copyright law and the Company is pursuing
patent protection with respect to certain features of the software. In most
instances, the Company uses confidentiality agreements with third parties to
protect disclosure of its proprietary software. During fiscal 1997, the Company
completed the development and implementation of its ISIS computer software for
its national account customers and successfully launched the internet version of
E-Way, its electronic commerce, ordering and fulfillment system. The Company's
proprietary ISIS system utilizes three-tier client/server architecture that
allows customers and suppliers to better communicate with the Company while
providing lower operating costs and streamlined operations.
INDUSTRY OVERVIEW
In many non-production goods and services business sectors, including
office products and same-day local delivery, competition is fragmented and
includes many small local or regional providers. The Company believes that the
desire of large corporations to reduce their procurement costs by decreasing
their number of suppliers to a small group of reliable and cost-effective
partners will continue to cause the consolidation of many currently fragmented
product segments, as well as consolidation between separate sectors where the
key differentiation among suppliers will be their relative ability to fulfill
customer needs, rather than their ability to supply an individual product or
service. The Company believes that it is well positioned to capitalize on these
industry trends.
The Company currently operates in two main sectors: product distribution
(which includes office products, computer supplies, forms production and
management, desktop software, promotional products and cleaning and service
supplies) and services (primarily same-day delivery), with the majority of its
revenue and cash flow attributable to the product distribution business.
PRODUCT DISTRIBUTION
The office products distribution industry in the U.S. is consolidating
rapidly and undergoing other significant changes. As a result of consolidation,
the number of independent, midsize office products contract distribution
companies (those with annual sales of more than $15 million) has declined
significantly. Large companies (including the Company) serving a broad range of
customers have acquired many of these smaller businesses. As the office products
industry continues to consolidate, the Company believes that many of the
remaining smaller office products distribution companies will be unable to
compete due, in part, to their inability to purchase products at favorable
prices or provide all of the services customers require. The Company expects
that these independent businesses will be acquired by larger companies or will
close.
The office products industry consists primarily of companies that operate
in one or more of three broad sales channels: contract distribution, direct
mail-order marketing and retail. Contract distributors typically serve large and
medium-sized business customers through the use of a product catalog and a
direct sales organization and typically stock these products in distribution
centers and deliver such products to customers on the next business day. The
major contract distributors carry a significant proportion of their merchandise
in-stock, relying only upon wholesaler intermediaries for inventory backup and
increased product breadth, while smaller contract distributors carry a much
smaller portion of their merchandise in stock. Direct mail-order marketers of
office products typically target small business customers and home offices.
While their
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procurement and order fulfillment functions are similar to contract
distributors, direct mail-order marketers rely almost exclusively on catalogs
and other direct marketing programs, rather than direct sales forces, to sell
their products, and generally use third parties to deliver such products. Office
product retailers typically serve smaller businesses, home office and
individuals. Over the last decade, the retail channel has undergone significant
change, primarily as the result of the emergence of office products superstores.
The Company believes that every major metropolitan area in the U.S. is now
served by at least one office product superstore.
Also included in the Company's product distribution sector are desktop
software, forms production and management, advertising specialties, promotional
products and cleaning and service supplies. Companies in the desktop software
industry provide corporate clients with a wide array of personal computer and
network software titles on a shrink-wrapped and volume license basis. Net
revenue includes the sale of shrink-wrapped product and the sale of licenses for
the use of software produced by major software publishers. The Company's other
product distribution business lines are also large markets served by many large
and small competitors.
SERVICES
The services segment consists primarily of delivery and logistics services
along with certain call center services. The delivery industry offers a variety
of customized distribution services for corporate customers with time-sensitive
pickup and delivery requirements. Customized distribution services include
regularly scheduled deliveries to replenish on-site inventories of
non-production goods, individual special orders and door-to-door courier
deliveries. Through both ground and air divisions, the Company provides same-day
delivery fulfillment and next flight out services to its corporate clients.
PRODUCTS, SERVICES AND REGIONS OF OPERATION
The Company provides a broad range of non-production goods and services to
large corporations throughout North America as well as Europe and the Southern
Pacific. The Company's product and service offerings include office products,
computer supplies, forms production and management, desktop software,
promotional products, cleaning and service supplies and services (primarily
same-day delivery). Name brands offered by the Company include such brands as
3M, Microsoft and Hewlett-Packard, as well as the Company's own "EXP" private
label. The approximate percentages of the Company's net sales by product and
service category and by geographical segments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INDUSTRY SEGMENTS:
Product Distribution(1)................................... 81% 82% 76% 79%
Delivery Services......................................... 19% 18% 24% 21%
GEOGRAPHICAL SEGMENTS:
Domestic (U.S. only)...................................... 100% 87% 82% 81%
International............................................. 0% 13% 18% 19%
</TABLE>
- ------------------------------
(1) Included in the product distribution segment is office products, computer
supplies, forms production and management, desktop software, promotional
products and cleaning and service supplies.
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Net sales, merger and other nonrecurring charges, operating profit and
identifiable assets pertaining to the geographic segments are as follows:
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL
CONSOLIDATED OPERATIONS OPERATIONS
------------ ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Eleven months ended January 31, 1998
Net sales.............................................. $3,573,311 $2,901,744 $671,567
Merger and other nonrecurring charges.................. 14,890 13,285 1,605
Operating profit....................................... 114,815 103,199 11,616
Identifiable assets.................................... 2,349,659 1,987,177 362,482
Fiscal year ended March 1, 1997
Net sales.............................................. $3,196,056 $2,630,930 $565,126
Merger and other nonrecurring charges.................. 19,840 18,511 1,329
Operating profit....................................... 100,490 95,788 4,702
Identifiable assets.................................... 1,843,977 1,519,152 324,825
Fiscal year ended March 2, 1996
Net sales.............................................. $1,890,639 $1,652,438 $238,201
Merger and other nonrecurring charges.................. 42,790 42,790 --
Operating profit....................................... 38,160 28,943 9,217
Identifiable assets.................................... 1,023,365 868,227 155,138
Fiscal year ended February 25, 1995
Net sales.............................................. $1,145,151 $1,143,457 $ 1,694
Operating profit....................................... 40,953 40,939 14
Identifiable assets.................................... 645,309 641,898 3,411
</TABLE>
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SUMMARY DESCRIPTION OF PRODUCT AND SERVICE OFFERINGS
The Company currently operates in two main sectors: product distribution
and services. The following describes the products and services offered in each
of these sectors:
PRODUCT DISTRIBUTION SECTOR
<TABLE>
<CAPTION>
<S> <C>
Office Products, Computer Supplies and Forms
Production and Management..................... The Company offers its customers a full range of
office products, including traditional office
supplies, computer and imaging supplies and
furniture, offering next-day delivery. The
Company also offers forms production and forms
management capabilities, including custom
business forms, electronic forms,
pressure-sensitive label products and forms
management systems.
Specialty Products............................... The Company offers its customers desktop
software, promotional products, advertising
specialties, and cleaning and service supplies.
The Company's desktop software product offerings
include major business programs for word
processing, spreadsheets, electronic mail,
suites/offices, databases, graphics, operating
systems, utilities and languages.
SERVICES SECTOR
Services......................................... In addition to delivering its own products, the
Company provides, through a separate business
unit, same-day local delivery service including
both prescheduled and on-demand delivery
services, core replenishment services and
distribution logistics management.
</TABLE>
EXPANSION OF PRODUCT AND SERVICE OFFERINGS
The Company believes that its domestic and international network of
centrally-managed distribution centers, delivery fleet, computer systems and
direct sales force provides the infrastructure to efficiently supply corporate
customers with a broad range of non-production goods and services. To capitalize
on this competitive advantage, the Company has added through acquisitions the
following major product and service categories since 1994: forms printing and
management, same-day local delivery services, distribution logistics management,
computer and imaging supplies, desktop software, advertising specialties,
janitorial and cleaning supplies, business forms and pressure sensitive labels.
The Company may add additional product and service categories through
acquisitions or product line expansion. Following the acquisition of a company
whose product and service offerings are complementary to the Company's existing
offerings, the Company's initial integration efforts are focused on cross
selling its products and services and those of the acquired operations to each
respective customer base.
MERCHANDISING STRATEGY
The Company's domestic office products merchandising strategy is based
primarily on offering its customer's products featured the Company's
proprietary, full-color catalog. This catalog provides a comprehensive selection
and variety of the best-selling items in the core office products categories
which the Company typically maintains in inventory in its regional warehouses
for next-day delivery. The Company is currently expanding the assortment of
products featured in its office products catalog to include a broader assortment
of products. This merchandising strategy differs from that of traditional
contract stationers which typically provide their customers with
wholesaler-produced catalogs and typically maintain less then half of that
product assortment on hand. The Company has introduced its office products
catalog in all of its United States regions and has introduced a similar
country-specific catalog in Canada, Australia and the United Kingdom. Most of
the products featured in the Company's office products catalog are purchased by
the
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Company directly from the manufacturer, eliminating the wholesaler's mark-up.
The number of items found in the Company's office products catalog is generally
comparable to that found in a typical office products superstore, although the
merchandise mix differs substantially. The Company also offers various
electronic versions of the office products catalog, complete with pictures and
custom pricing.
In addition to its office products catalog, the Company produces specialty
catalogs for complementary products and services, including additional computer
and imaging products, office furniture, promotional products and advertising
specialties. Products are selected for each of the Company's catalogs utilizing
computerized sales trend analyses which determine the best-selling items and
needs of the large corporate customer. The office products catalog is updated
annually to account for new sales trends, new product introductions and changes
in manufacturer's list prices, while the other catalogs are updated as
appropriate. The Company's catalogs generally include a full-color photograph of
each item, a narrative product description that emphasizes the particular
benefits and features of each item and a bar code to permit scanning order
entry.
The Company's catalog contains Company registered trademarks, service marks
and logos. In addition, the layout and design of the catalog are unique and
protected by copyright laws. The Company registers trademarks, service marks and
logos contained in the catalog with the U.S. Patent and Trademark Office to
obtain protection of these marks. The catalog also contains copyright notices.
DISTRIBUTION FACILITIES
The Company's distribution network consists of over 90 distribution centers
that maintain significant inventory for resale and approximately 600
distribution breakpoints and satellite sales offices which extend the Company's
geographic coverage. In its office product business, the Company generally
operates from a single regional distribution center which supports multiple
distribution breakpoints and satellite sales offices. Items stocked in these
regional office products' distribution centers generally consist of the most
commonly ordered items for which customers generally demand next-day delivery
through Company vehicles.
PROPRIETARY COMPUTER SOFTWARE APPLICATIONS
The Company continues to make substantial investments in the development
and enhancement of its proprietary computer software applications. During fiscal
1997, the Company completed the development and implementation of its ISIS
computer software for its national account customers and successfully launched
the internet version of E-Way, its electronic commerce, ordering and fulfillment
system. The integrated multi-divisional version of the ISIS software continues
to be developed and enhanced and is currently in beta test mode at two operating
divisions.
Key features of the ISIS system are the use of three-tier client/server
architecture that allows customers and suppliers to better communicate with the
Company, object oriented design techniques and a relational database designed to
handle customer inquiry, data warehouse and management information applications.
Through the implementation of these enhanced systems, the Company plans to make
its products and services available to a broader range of customers through its
Corporate Supplier business model and to further customize customer services and
account information while lowering the customer's overall procurement cost. In
addition, the new systems are expected to allow the Company to more effectively
integrate acquisitions and streamline operations by providing greater electronic
access to information between the Company, its customers and its suppliers.
MARKETING
The Company markets its various products and services directly to
individual customers by designing and offering customized merchandise and
service packages tailored to each customer's specific needs. The Company
generally offers discounts from the manufacturer's suggested list prices on many
products. Prices for some high volume items are often established by competitive
bidding. A substantial portion of the Company's revenues from its service
segment are derived from customers who have entered into contracts with the
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Company. The Company has a broad customer base and believes that no single
customer accounted for more than one percent of total sales during fiscal 1997.
The Company markets its products and services through a combination of
national account sales teams, a local sales force and account managers. The
national account sales teams take primary responsibility for maintaining and
increasing sales of the Company's wide array of products and services to
multi-location customers. These efforts are supported through proprietary
information technology resources dedicated to the national account teams. The
Company's local sales force is generally commission-based and is organized
within each of the Company's major product and service categories. The Company
believes that this structure maximizes the productivity as well as the product
and service knowledge of its sales force. Each customer is assigned an account
manager who maintains regular contact with the customer. Account managers share
in the responsibility of maintaining customer satisfaction, resolving any
potential customer issues and increasing the Company's sales to each account.
Account managers are also assigned a list of prospective customers for whom the
account manager takes responsibility in directing all marketing efforts.
Additional responsibilities of the account managers include designing and
implementing customized merchandise and service packages for each of their
accounts as well as responding to all special service requests.
STRUCTURE AND INTEGRATION OF ACQUISITIONS
The Company has historically grown through numerous acquisitions of small
office products and service companies which generally have annual sales of less
than $30 million. The Company intends to continue to grow in the future, through
internal growth coupled with selective strategic acquisitions. The Company plans
to increase sales to existing customers by cross-selling its expanded product
and service offerings and developing existing customers into multi-regional,
national or international accounts. The Company seeks to attract new customers,
including national and international accounts, through the marketing efforts of
its direct sales force.
Additionally, the Company generally seeks to increase the sales,
profitability and asset productivity of its acquisitions by combining them with
the Company's existing operations, implementing the Company's business model and
eliminating redundant facilities. Integration of acquisitions is often a complex
process which may entail material nonrecurring expenditures, including facility
closing costs, warehouse consolidation expenses, asset write downs and severance
payments. Integration of acquisitions generally involves the following elements:
- Elimination of Redundant Facilities and Services. In cases where acquired
companies have facilities, systems and administrative functions in the
Company's existing markets, these operations are generally eliminated or
consolidated with the Company's existing operations.
- Upgrading of Facilities. In addition to eliminating redundant facilities,
the Company has undertaken a program to upgrade certain of its existing
facilities to enable these facilities to handle higher sales volumes
resulting from its internal growth and acquisition activity. These
upgrades include modernization of equipment and computer systems, phone
system and wide area network standardization and improved material
handling including a reconfiguration of inventory within the warehouse.
The Company will also, where appropriate, construct or lease new
distribution facilities into which existing, outdated facilities will be
combined.
- Consolidation of Purchasing Power. As part of its integration of
acquisitions, the Company takes advantage of its volume purchasing power
and seeks to negotiate better prices and terms from suppliers.
- Implementation of Proprietary Computer Software. Acquired product
distribution companies are generally incorporated into the Company's
proprietary computer software environment, including EDI, common master
information files, national accounts software and customer ordering and
inventory management software. Certain elements of these implementations
will be timed to coincide with introduction of the Company's next
generation of computer software.
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INTERNATIONAL ACQUISITIONS
The Company has made acquisitions and established operations in Canada,
Australia, New Zealand, the United Kingdom, Germany, France, Italy, Ireland and
Switzerland, and the Company may enter additional international markets in the
future. The Company has typically retained existing management and information
systems in its international acquisitions. The Company's proprietary computer
software will be able to accommodate future international installations;
however, the Company has no immediate plans to implement the ISIS software in
these locations. The Company does not expect that any inefficiencies associated
with different operating systems will have a material adverse effect on future
operations. The Company has and will continue to implement appropriate aspects
of the Corporate Supplier business model in its international operations,
including creating in-stock catalogs, consolidating warehouses, upgrading
information systems, acquiring companies offering complementary products and
services, while focusing on larger customers and developing national and
international accounts. Portions of the Corporate Supplier business model have
been implemented in Canada, Australia and the United Kingdom.
COMPETITION
The Company operates in a highly competitive environment. The Company's
principal competitors in North America for office supplies and computer products
include both regional and national contract stationers (including the contract
stationer operations of office products superstores), large direct resellers,
privately-held companies that generally operate in only one location, and
distributors of business software and supplies for personal computers. In
certain of its business segments the Company may have various other large and
small competitors. In Europe and Australia, the Company's competitors include
primarily local and regional contract stationers and, to a limited extent,
national and multi-country contract stationers. In the delivery services sector
the Company has numerous competitors in each market, certain of which have
service capabilities which are similar to the Company's and others which provide
different types or levels of service.
Each of the Company's major product and service categories are a part of
fragmented industries which are currently experiencing a trend toward
consolidation. Although the Company believes its pricing is competitive with its
competitors, the Company also seeks to differentiate itself from its competitors
in each of its major product and service categories through its systems, product
assortment, service offerings and breadth of capabilities. Certain of the
Company's competitors have greater financial resources than the Company.
However, the Company believes that its Corporate Supplier business model
differentiates the Company from its competitors by offering, through a single
source, a unique selection of products and services for large corporate
customers.
EMPLOYEES
As of August 1, 1998, the Company had approximately 26,100 full-time
employees, 5,800 of whom were primarily employed in management and
administration, 15,200 in regional warehouse, delivery and distribution
operations and 5,100 in sales and marketing, order processing and customer
service. Approximately 85% of these employees are in the U.S., 7% in Europe, 4%
in Canada and 4% in the Southern Pacific. As of August 1, 1998, approximately
280 of the Company's employees were members of labor unions.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes, or (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances. Certain of the
Company's subsidiaries operate printing facilities which may generate, or may
have generated in the past, hazardous wastes, and the Company operates a fleet
of vehicles, the maintenance or fueling of which may generate hazardous waste.
The Company is currently not aware of any environmental conditions relating
to present or past waste generation at or from these facilities, or any other of
the Company's facilities or operations, that would be
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likely to have a material adverse effect on the financial condition or results
of operations of the Company. However, there can be no assurance that
environmental liabilities in the future will not have a material adverse effect
on the financial condition or results of operations of the Company.
PROPERTIES
As of August 1, 1998, the Company owned 46 facilities and leased 637
facilities. Of these 683 facilities, one was the corporate headquarters in
Broomfield, Colorado, 92 were product distribution warehouses and contiguous
administrative offices and 590 were separate sales or administrative offices,
delivery facilities or breakpoints. The Company's principal properties are
summarized as follows:
<TABLE>
<CAPTION>
SALES, SERVICE
DISTRIBUTION & CORPORATE TOTAL
CENTERS FACILITIES FACILITIES
------------ -------------- ----------
<S> <C> <C> <C>
United States..................................... 51 541 592
Australia......................................... 8 3 11
New Zealand....................................... 6 -- 6
Canada............................................ 6 10 16
United Kingdom.................................... 5 17 22
France............................................ 1 1 2
Italy............................................. 3 4 7
Switzerland....................................... 2 -- 2
Ireland........................................... 1 -- 1
Germany........................................... 9 15 24
-- --- ---
Total................................... 92 591 683
== === ===
</TABLE>
The Company periodically evaluates the location and efficiency of its
facilities to maximize customer satisfaction and increase economies of scale.
The Company plans to eliminate redundant facilities such that it typically will
operate office and computer supply product distribution from a single regional
warehouse with satellite sales offices and distribution breakpoints in each of
its regions. The Company also may close, consolidate or relocate regional
warehouses, satellite sales offices and distribution breakpoints from time to
time.
LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company. The Company maintains general liability
and business interruption insurance coverage in amounts which it believes to be
adequate.
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MANAGEMENT
The executive officers and directors of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Jirka Rysavy............. 44 Chairman of the Board and Chief Executive Officer
Robert L. King........... 47 President, Chief Operating Officer and Director
Gary M. Jacobs........... 51 Executive Vice President and Secretary
Sam R. Leno.............. 52 Executive Vice President and Chief Financial Officer
Mark Hoffman............. 45 President--North American Operations
Thomas E. Frank.......... 59 President--International Operations
Janet A. Hickey.......... 53 Director
Mo Siegel................ 48 Director
James P. Argyropoulos.... 54 Director
</TABLE>
Mr. Rysavy has been Chairman of the Board and Chief Executive Officer since
1986. In addition to founding the Company's business in 1986, Mr. Rysavy has
been responsible for the Company's strategic vision, planning and direction.
Mr. King joined the Company in August 1993 as President, Chief Operating
Officer and a director. During the previous ten years, Mr. King held various
executive positions with Foxmeyer Corporation, a distributor of pharmaceuticals
and healthcare products, serving as its President and Chief Executive Officer
from 1989 to 1993. Prior to 1983, Mr. King served as Executive Vice President of
Narco Drug Co. and Vice President of computer services for Fox-Vliet Drug Co.
Mr. King serves as a director of Investment Technology Group, Inc.
Mr. Jacobs joined the Company in November 1992 as Executive Vice President
and Chief Financial Officer, and currently serves as Executive Vice President
and Secretary of the Company. Mr. Jacobs previously served the Company as a
director from August 1988 through September 1990. From 1990 to 1992, Mr. Jacobs
served as the Chief Executive Officer of Boulder Retail Finance Corporation, an
investment firm controlled by Mr. Jacobs. From 1978 through mid-1990, he served
as Executive Vice President of Capital Associates, Inc., a public equipment
leasing company. Mr. Jacobs also served as a director of Capital Associates,
Inc. from 1978 to 1991 and from 1994 to present. Prior to joining Capital
Associates, Inc., Mr. Jacobs served as a director of finance for Storage
Technology Corporation, a public company which manufactures computer peripheral
devices.
Mr. Leno joined the Company as Executive Vice President and Chief Financial
Officer in July 1995. From July 1994 until July 1995, Mr. Leno was the Chief
Financial Officer of Coram Healthcare. Prior thereto, for 23 years, Mr. Leno
served in various management positions with Baxter International, a
manufacturing and multinational distribution company, including Vice President
of Finance and Information Technology.
Mr. Hoffman joined the Company as President -- North American Office
Product Operations during April 1997. Mr. Hoffman previously served as
President, Chief Executive Officer and a director of APS Holdings, Inc. from
August 1992 to March 1997. Mr. Hoffman was Vice President, Planning and
Development at W. W. Grainger, Inc., from April 1991 to July 1992. From 1987 to
April 1991, he was with TRW, Inc., a manufacturer of automotive parts and other
products and a provider of information system services, in various executive
capacities, including Vice President and General Manager of TRW, Inc.'s Asia
Pacific steering and suspension operations and Managing Director, TRW Products,
Ltd.
Mr. Frank joined the Company as President -- International Operations
during May 1997. Mr. Frank previously served as President and Chief Executive
Officer of Hickory Farms Incorporated from 1988 to 1996. From 1972 to 1986, he
served in various management positions with Kentucky Fried Chicken, including
Senior Vice President and Managing Director of KFC International leading the
operations in Great Britain,
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<PAGE> 67
Continental Europe, South Africa and the Middle East. From 1996 to 1997, Mr.
Frank was a marketing professor at the University of Michigan Graduate School of
Business.
Ms. Hickey has served as a director of the Company since December 1991. Ms.
Hickey is a General Partner of the Sprout Group and a Senior Vice President of
DLJ Capital Corporation. The Sprout Group is a division of DLJ Capital
Corporation, which is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette,
Inc. Prior to joining the Sprout Group in 1985, Ms. Hickey was with the General
Electric Company for fifteen years in a variety of positions, most recently as
Senior Vice President-Venture Investments of the General Electric Investment
Corporation and as a Trustee of the General Electric Pension Trust. Ms. Hickey
also serves as a director of Loehmann's Holdings, Inc., as well as several
private companies, and is a Trustee of Mt. Holyoke College.
Mr. Siegel has been a director of the Company since June 1996. In 1970, Mr.
Siegel founded Celestial Seasonings, Inc., the largest manufacturer and marketer
of herb teas in the United States, and was President and Chairman of the Board
of Celestial Seasonings until 1986. From 1986 until 1991, Mr. Siegel was
involved in private investments and not-for-profit activities. He served as
Chief Executive Officer of Celestial Seasonings from 1991 to 1997 and has served
as a director since 1988 and as Chairman of the Board since 1991. Mr. Siegel
also serves on numerous other boards.
Mr. Argyropoulos has been a director of the Company since June 1997. Mr.
Argyropoulos was previously a director of the Company until October 1993. A
private investor, Mr. Argyropoulos is the founder, Chairman and Chief Executive
Officer of The Walking Company, a lifestyle specialty retailer, and serves on
the Board of Earthshell, a concrete packaging business. Mr. Argyropoulos
previously served as Chairman of the Board and Chief Executive Officer of The
Cherokee Group Inc. between 1972 and 1989, a shoe manufacturing and apparel
business he founded in 1972.
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<PAGE> 68
DESCRIPTION OF THE NEW CREDIT FACILITY
On April 22, 1998, the Issuer and the Parent entered into the New Credit
Facility, dated as of April 17, 1998, with various banks, The First National
Bank of Chicago, as Syndication Agent, The Bank of New York, as Co-Documentation
Agent, DLJ Capital Funding, Inc., as Co-Documentation Agent and Bankers Trust
Company, as Administrative Agent (collectively, the "Banks"). The following is a
summary description of the principal terms of the New Credit Facility. The
description set forth below does not purport to be complete and is qualified in
its entirety by reference to the agreements setting forth the principal terms
and conditions of the New Credit Facility, which are available upon request from
the Company.
STRUCTURE
The New Credit Facility provides for a $250,000,000 term loan facility (the
"Term Loan Facility") and up to $750,000,000 of revolving loans under a
revolving credit facility (the "Revolving Loan Facility"). The Term Loan
Facility was fully drawn on the closing of the New Credit Facility.
As of August 31, 1998, the Company had $249,375,000 outstanding under the
Term Loan Facility, $231,222,000 outstanding (which includes outstanding Letters
of Credit) under the Revolving Loan Facility of the New Credit Facility and an
unused borrowing capacity of $519,403,000. The Revolving Loan Facility may be
utilized to fund the Company's working capital requirements, including issuance
of stand-by and trade letters of credit, and for other general corporate
purposes.
The Term Loan Facility is comprised of a single tranche, seven-year term
facility of $250,000,000. Loans and letters of credit under the Revolving Loan
Facility will be available at any time during its five-year term subject to the
fulfillment of customary conditions precedent, including the absence of a
default under the New Credit Facility.
The Issuer will be required to repay loans outstanding under the Term Loan
Facility in accordance with the following amortization schedule:
<TABLE>
<CAPTION>
TERM LOANS
FISCAL YEAR AMOUNT AMORTIZED
----------- ----------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 1,250
1999........................................................ 2,500
2000........................................................ 2,500
2001........................................................ 2,500
2002........................................................ 2,500
2003........................................................ 60,625
2004........................................................ 118,750
2005........................................................ 59,375
--------
Total............................................. $250,000
========
</TABLE>
SECURITY; GUARANTY
The obligations under the New Credit Facility are guaranteed by each of the
Parent's and the Issuer's direct and indirect material domestic subsidiaries
with certain limited exceptions. The New Credit Facility and the guarantees
thereof are, subject to certain exceptions, secured by (i) a first priority
perfected lien on all the property and assets (tangible and intangible) of the
Parent, the Issuer and each of the subsidiary guarantors, (ii) all of the
capital stock of the Issuer and (iii) all of the capital stock (or similar
equity interests) of the Issuer's and the Parent's existing and future direct
and indirect material domestic subsidiaries. As of the date of consummation of
the Exchange Offer, the New Notes will be guaranteed by the same subsidiaries of
the Parent and Issuer that have guaranteed the New Credit Facility.
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<PAGE> 69
INTEREST RATE; MATURITY
At the Issuer's option, borrowings under the New Credit Facility will bear
interest at (i) the base rate ("BR") or (ii) a Eurodollar rate specified in the
New Credit Facility, plus applicable margins, which vary based on leverage. On
the Issue Date, the applicable margins shall be (i) for the Revolving Loan
Facility, 150 basis points (in the case of Eurodollar loans) or 25 basis points
(in the case of BR loans) and (ii) for the Term Loan Facility 175 basis points
(in the case of Eurodollar loans) and 50 basis points (in the case of BR loans).
The Term Loan Facility matures on April 25, 2005 and the Revolving Loan Facility
will terminate on April 25, 2003.
FEES
The Issuer is required to pay the Banks a commitment fee based on the daily
average unused portion of the Revolving Loan Facility which accrues from the
closing date under the New Credit Facility. The Issuer is also obligated to pay
letter of credit fees on the aggregate stated amount of outstanding letters of
credit.
COVENANTS
The New Credit Facility contains a number of covenants (in addition to the
financial covenants) that, among other things, restrict the ability of the
Company to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes) or amend certain debt instruments (including
the Indenture), pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
make investments, engage in mergers or consolidations, change the business
conducted by the Company or its subsidiaries, make capital expenditures or
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities. In addition, the New Credit Facility contains financial
covenants that require the Issuer to maintain, on a consolidated basis,
specified financial ratios and tests, including minimum interest coverage and
fixed charge coverage ratios, and maximum leverage ratios.
EVENTS OF DEFAULT
The New Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-defaults to
certain other indebtedness, certain events of bankruptcy and insolvency, certain
ERISA matters, material judgments, invalidity of any guarantee or security
interest and a "change of control" of the Issuer or the Parent. A "change of
control" occurs under the New Credit Facility when, generally, (i) the Parent
ceases to own 100% of the capital stock of the Issuer and shares representing
the right to elect a majority of the board of directors of the Issuer, (ii)
there occurs a "change of control" under the provisions of the Parent
Convertible Notes or any indebtedness subordinated to the New Credit Facility,
(iii) a person or group becomes the beneficial owners of more than 25% of the
voting stock of the Parent, or (iv) a majority of the directors on the board of
directors of the Parent as of the initial borrowing date under the New Credit
Facility (plus directors recommended by them) cease to constitute a majority of
such board of directors. The "change of control" provisions in the Indenture are
substantially similar to those contained in the New Credit Facility, although
certain thresholds (i.e., the percentage of shares triggering an event and the
date from which the composition of the board of directors is examined for
changes) in determining whether a "change of control" has occurred are less
restrictive than those described above. See "Description of Notes -- Certain
Covenants -- Repurchase of Notes at the Option of the Holder Upon a Change of
Control." The Indenture contains many of the same customary events of default as
the New Credit Facility, such as nonpayment of principal or interest (including
any amounts due as the result of a "change of control"), violation of covenants,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency and material judgments, except that certain thresholds under such
Indenture provisions (i.e., grace periods and the materiality of cross-defaulted
indebtedness and judgements) are less restrictive than those contained in the
New Credit Facility. See "Description of Notes -- Events of Default and
Remedies."
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<PAGE> 70
DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the Notes. The Old
Notes were and the New Notes will be issued pursuant to an indenture (the
"Indenture") dated as of May 29, 1998, by and among CEX Holdings, Inc. (the
"Issuer"), Corporate Express, Inc. (the "Parent"), the Subsidiary Guarantors and
The Bank of New York, as trustee (the "Trustee"). The terms of the New Notes are
identical in all material respects to the respective terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act, and
therefore will not be subject to certain restrictions on transfer applicable to
the Old Notes and (ii) holders of the new Notes will generally not be entitled
to certain rights, including the payment of Liquidated Damages, pursuant to the
Registration Rights Agreement. The terms of the New Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The New Notes are subject to
all such terms, and Holders of New Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. In the event that the Exchange
Offer is consummated, any Old Notes which remain outstanding after consummation
of the Exchange Offer and the New Notes issued in the Exchange Offer will vote
together as a single class for purposes of determining whether holders of the
requisite percentage in outstanding principal amount thereof have taken certain
actions or exercised certain rights under the Indenture. The following summary
of the material provisions of the Indenture and the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Indenture and the Registration Rights Agreement, including the
definitions therein of certain terms used below. Copies of the Indenture and
Registration Rights Agreement are available as set forth below under
"-- Additional Information." The definitions of certain terms used in the
following summary are set forth below under "-- Certain Definitions."
GENERAL
The Old Notes are and the New Notes will be senior subordinated, unsecured,
general obligations of the Issuer. The Indenture provides, in addition to the
$350,000,000 aggregate principal amount of Old Notes issued on the Issue Date,
for the issuance of additional Notes having identical terms and conditions to
the Old Notes (the "Additional Notes"). The aggregate principal amount of Old
Notes, New Notes and Additional Notes will be limited to the sum of
$550,000,000. Interest will accrue on the Additional Notes issued pursuant to
the Indenture from and including the date of issuance of such Additional Notes.
The Additional Notes may only be issued in compliance with the other provisions
of the Indenture, including the covenant entitled "Limitation on Incurrence of
Indebtedness and Disqualified Capital Stock." Any such Additional Notes will be
issued on the same terms as the Old Notes and New Notes and will constitute part
of the same series of securities as the Old Notes and New Notes and will vote
together as one series on all matters with respect to the Old Notes and New
Notes. As a result, if Additional Notes are issued, holders of Old Notes and New
News will have a smaller percentage vote in connection with any amendment or
waiver of, or other action taken with respect to, the Indenture. All references
to Notes herein includes the Old Notes, the New Notes and the Additional Notes.
The Notes will be subordinate in right of payment to certain other debt
obligations of the Issuer. The Notes will be jointly and severally guaranteed on
a senior subordinated basis by Parent and each of the Subsidiary Guarantors,
which consist of all the Issuer's Subsidiaries other than the Receivables
Subsidiaries, Finance Subsidiaries, Excluded Subsidiaries and Foreign
Subsidiaries, provided that DDI and its subsidiaries shall not be required to
become Guarantors until 120 days after the Issue Date. The obligations of each
Guarantor under its guarantee, however, will be limited in a manner intended to
avoid it being deemed a fraudulent conveyance under applicable law. See
"Guarantees" below. The Notes will be issued only in fully registered form,
without coupons, in denominations of $1,000 and integral multiples thereof.
The Notes will mature on June 1, 2008. The Notes will bear interest at the
rate per annum stated on the cover page hereof from the date of issuance or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on June 1 and December 1 of each year,
commencing December 1, 1998 to the persons in whose names such Notes are
registered at the close of business on the May 15 or November 15 immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
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<PAGE> 71
Principal of, premium, if any, and interest and liquidated damages under
the Registration Rights Agreement (the "Liquidated Damages"), if any, on the
Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of the Issuer maintained for such
purpose, which office or agency shall be maintained in the Borough of Manhattan,
The City of New York. Except as set forth below, at the option of the Issuer,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth upon the registry books of the Issuer. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by the Issuer, the Issuer's office or agency will be the corporate trust office
of the Trustee presently located at the office of the Trustee in the Borough of
Manhattan, The City of New York.
The term "Subsidiaries" as used in this Description of Notes does not
include Unrestricted Subsidiaries. As of the Expiration Date of the Exchange
Offer, none of the Issuer's Subsidiaries will be Unrestricted Subsidiaries.
However, under certain circumstances, the Issuer will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to the restrictive covenants set forth in the
Indenture.
SUBORDINATION
The Notes and the Guarantees will be general, unsecured obligations of the
Issuer, the Parent and the Subsidiary Guarantors, respectively, subordinated in
right of payment to all Senior Debt of the Issuer, the Parent and the Subsidiary
Guarantors, as applicable. As of August 1, 1998, the Issuer and the Subsidiary
Guarantors would have had outstanding an aggregate principal amount of
approximately $446.1 million of Senior Debt which would rank senior in right of
payment to the Notes and the guarantees, respectively, and the nonguarantor
subsidiaries would have had approximately $93.9 million of indebtedness which
would be effectively senior to the Notes and the guarantees, respectively. Thus,
in total, as of August 1, 1998 the New Notes would have been Subordinated in
right of payment to approximately $540.0 of indebtedness. As of August 1, 1998,
the Parent had no Senior Debt but had outstanding $325.0 million of Convertible
Notes which would rank pari passu with the Parent's guarantee of the Notes but
which would be structurally subordinated to the Notes.
The Indenture will provide that no payment (by set-off or otherwise) may be
made by or on behalf of the Issuer or a Guarantor, as applicable, on account of
the principal of, premium, if any, or interest on, the Notes (including any
repurchases of any of the Notes), or any Obligation (and Claim, but only in the
case of Senior Debt under the New Credit Facility) in respect of the Notes,
including for cash or property (other than Junior Securities), or on account of
the redemption provisions of the Notes (or Liquidated Damages), (i) upon the
maturity of any Senior Debt of the Issuer or such Guarantor by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of,
premium, if any, and the interest on such Senior Debt (and in the case of Senior
Debt under the New Credit Facility, all other monetary obligations in respect
thereof) are first paid in full in cash or Cash Equivalents (or such payment is
duly provided for) or otherwise to the extent holders accept satisfaction of
amounts due by settlement in other than cash or Cash Equivalents, or (ii) in the
event of default in the payment of any principal of, premium, if any, or
interest on Senior Debt of the Issuer or such Guarantor (and, in the case of
Senior Debt under the New Credit Facility, any other monetary obligation in
respect thereof) when it becomes due and payable, whether at maturity, a
scheduled payment date, or at a date fixed for prepayment or by declaration or
otherwise (a "Payment Default"), unless and until such Payment Default has been
cured or waived or otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Debt (or a trustee or agent on
behalf of such holders) to declare such Senior Debt to be due and payable (or,
in the case of letters of credit, require cash collateralization thereof) and
(ii) written notice of such event of default being given to the Trustee by the
holders (or a trustee, agent or other representative of such holders) of
Designated Senior Debt (a "Payment Notice"), then, unless and until such event
of default has been cured or waived or otherwise has ceased to exist, no payment
(by set-off or otherwise) may be made by or on behalf of the Issuer or any
Guarantor which is an obligor under such Senior Debt on account of any
Obligation (and Claims, but only in the case of Senior Debt under the New Credit
Facility) in respect of the Notes, including the principal of, premium, if any,
or interest on the Notes, or to repurchase any of the Notes,
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<PAGE> 72
or on account of the redemption provisions of the Notes, in any such case, other
than payments made with Junior Securities. Notwithstanding the foregoing, unless
the Senior Debt in respect of which such event of default exists has been
declared due and payable in its entirety within 179 days after the Payment
Notice is delivered as set forth above (the "Payment Blockage Period") (and such
declaration has not been rescinded or waived), at the end of the Payment
Blockage Period (but subject to the preceding and following paragraphs), the
Issuer and the Guarantors shall be required to pay all sums not paid to the
Holders of the Notes during the Payment Blockage Period due to the foregoing
prohibitions and to resume all other payments as and when due on the Notes. Any
number of Payment Notices may be given; provided, however, that (i) not more
than one Payment Notice shall be given within a period of any 360 consecutive
days, and (ii) no default that existed upon the date of such Payment Notice or
the commencement of such Payment Blockage Period (whether or not such event of
default relates to the same issue of Senior Debt) shall be made the basis for
the commencement of any other Payment Blockage Period unless such other Payment
Blockage Period is commenced by a Payment Notice from the representative under
the New Credit Facility and such event of default shall have been cured or
waived for a period of at least 90 consecutive days.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Issuer or any Guarantor (other than Junior
Securities) shall be received by the Trustee or the Holders at a time when such
payment or distribution is prohibited by the foregoing provisions, such payment
or distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of such Senior Debt remaining unpaid (or
unprovided for) or to their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Debt may have been issued, ratably according to the aggregate
principal amounts remaining unpaid on account of such Senior Debt held or
represented by each, for application to the payment of all such Senior Debt
remaining unpaid, to the extent necessary to pay all such Senior Debt in full in
cash or U.S. Legal Tender Equivalents or otherwise to the extent holders accept
satisfaction of amounts due by settlement in other than cash or U.S. Legal
Tender Equivalents after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt.
Upon any distribution of assets of the Issuer or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Issuer or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Debt of the Issuer or such Guarantor, as applicable, will
first be entitled to receive payment in full in cash or U.S. Legal Tender
Equivalents or otherwise to the extent holders accept satisfaction of amounts
due by settlement in other than cash or U.S. Legal Tender Equivalents (or have
such payment duly provided for) before the Holders are entitled to receive any
payment on account of any Obligation (and Claims, but only in the case of Senior
Debt under the New Credit Facility) in respect of the Notes, including the
principal of, premium, if any, and interest on the Notes (and Liquidated Damages
pursuant to the Registration Rights Agreement) and (ii) any payment or
distribution of assets of the Issuer or such Guarantor of any kind or character
from any source, whether in cash, property or securities (other than Junior
Securities) to which the Holders or the Trustee on behalf of the Holders would
be entitled (by set-off or otherwise), except for the subordination provisions
contained in the Indenture, will be paid by the liquidating trustee or agent or
other Person making such a payment or distribution directly to the holders of
such Senior Debt or their representative to the extent necessary to make payment
in full in cash or Cash Equivalents (or have such payment duly provided for) on
all such Senior Debt remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Debt.
No provision contained in the Indenture or the Notes will affect the
obligation of the Issuer and the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest and
Liquidated Damages, if any, on the Notes. The subordination provisions of the
Indenture and the Notes will not prevent the occurrence of any Default or Event
of Default under the Indenture or limit the rights of the Trustee or any Holder
to pursue any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Issuer or
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any Guarantor or a marshalling of assets or liabilities of the Issuer or any
Guarantor, Holders of the Notes may receive ratably less than other creditors.
GUARANTEES
The Parent is a holding company, conducting substantially all of its
business through Subsidiaries including the Issuer. The Issuer's payment
obligations under the Notes will be jointly and severally guaranteed by the
Parent and each of the Subsidiary Guarantors. The Subsidiary Guarantors consist
of all of the Issuer's Subsidiaries other than any Receivables Subsidiaries,
Excluded Subsidiaries, Finance Subsidiaries and Foreign Subsidiaries, provided
that DDI and its subsidiaries shall not be required to become Guarantors until
120 days after the Issue Date. The Guarantees will be general unsecured
obligations of the Parent and the Subsidiary Guarantors, as the case may be, and
each of the Guarantees will be subordinated in right of payment to all Senior
Debt of the Parent or the Subsidiary Guarantor, as applicable, including the
indebtedness under the New Credit Facility. The Subsidiary Guarantees will rank
pari passu in right of payment with all current and future senior subordinated
Indebtedness of the Guarantors, including the guarantees by the Subsidiary
Guarantors of obligations under the 9 1/8% Notes and the Parent's obligations
under the Parent's Convertible Notes. Holders of the Notes will be direct
creditors of each Guarantor by virtue of their Guarantees. In the event of the
bankruptcy or financial difficulty of a Guarantor, such Guarantor's obligations
under its Guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Guarantor
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its guarantee exceeds the economic benefits
it receives in the Offering. The obligations of each Guarantor under its
guarantee will be limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance can be given
that a court would give the holder the benefit of such provision. See "Risk
Factors -- The Guarantors and the Enforceability of the Guarantees."
If the obligations of a Guarantor under its Guarantee were avoided, Holders
of Notes would have to look to the remaining Guarantors for payment. There can
be no assurance in that such remaining Guarantors would have the ability and
resources to pay the outstanding principal and interest on the Notes. See, "Risk
Factors -- The Guarantors and the Enforceability of the Guarantees."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into another Person unless such Subsidiary Guarantor complies with
the provisions of the covenant entitled "Limitation on Merger of Subsidiary
Guarantors and Release of Subsidiary Guarantors."
The Issuer conducts certain of its foreign operations through Foreign
Subsidiaries. Accordingly, the Issuer's ability to meet its cash obligations may
in part depend upon the ability of such Foreign Subsidiaries and any future
Foreign Subsidiaries to make cash distributions to the Issuer and the Subsidiary
Guarantors. Furthermore, any right of the Issuer and the Subsidiary Guarantors
to receive the assets of any such Foreign Subsidiary upon such Foreign
Subsidiary's liquidation or reorganization (and the consequent right of the
Holders of the Notes to participate in the distribution of the proceeds of those
assets) effectively will be subordinated by operation of law to the claims of
such Foreign Subsidiary's creditors (including trade creditors) and holders of
its preferred stock, except to the extent that the Issuer or the Subsidiary
Guarantors are recognized as creditors or preferred stockholders of such Foreign
Subsidiary, in which case the claims of the Issuer or the Subsidiary Guarantors
would still be subordinate to any indebtedness or preferred stock of such
Foreign Subsidiaries.
OPTIONAL REDEMPTION
The Issuer will not have the right to redeem any Notes prior to June 1,
2003, other than as provided in the next paragraph. The Notes will be redeemable
for cash at the option of the Issuer, in whole or in part, at any time on or
after June 1, 2003, upon not less than 30 days' nor more than 60 days' notice to
each Holder of
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Notes, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period commencing on June 1 of
the years indicated below, in each case (subject to the right of Holders of
record on a Record Date to receive the corresponding interest due (and the
corresponding Liquidated Damages due, if any) on an Interest Payment Date
corresponding to such Record Date that is on or prior to such Redemption Date)
together with accrued and unpaid interest and Liquidated Damages, if any,
thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 104.813%
2004...................................................... 103.208%
2005...................................................... 101.604%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to June 1, 2001, the
Issuer may redeem, on one or more occasions, up to an aggregate of 35% of the
aggregate principal amount of the Notes originally issued under the Indenture at
a redemption price equal to 109.625% of the principal amount thereof (subject to
the right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption, with cash from the Net Cash Proceeds to the Issuer of one or more
Public Equity Offerings; provided, that at least 65% of the aggregate principal
amount of the Notes issued under the Indenture remain outstanding immediately
after the occurrence of each such redemption; provided, further, that such
notice of redemption shall be sent within 30 days after the date of closing of
any such Public Equity Offering, and such redemption shall occur within 60 days
after the date such notice is sent.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Issuer defaults in the payment
thereof.
CERTAIN COVENANTS
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indenture provides that in the event that a Change of Control has
occurred (subject to the provisions of the immediately succeeding paragraph),
each Holder of Notes will have the right, at such Holder's option, pursuant to
an offer (subject only to conditions required by applicable law, if any) by the
Issuer (the "Change of Control Offer"), to require the Issuer to repurchase all
or any part of such Holder's Notes (provided, that the principal amount of such
Notes must be $1,000 or an integral multiple thereof) on a date (the "Change of
Control Purchase Date") that shall be no later than 40 Business Days after the
occurrence of such Change of Control, at a cash price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof, together with
accrued and unpaid interest and Liquidated Damages, if any, to the Change of
Control Purchase Date. The Change of Control Offer shall be made within 35 days
following a Change of Control and shall remain open for 20 Business Days
following its commencement or such longer period as may be required by
applicable law (the "Change of Control Offer Period").
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The Indenture requires that if a New Credit Facility is in effect, or any
amounts are owing thereunder, at the time of the occurrence of a Change of
Control, prior to the mailing of the notice to Holders described in the
preceding paragraph, but in any event within thirty days following any Change of
Control, the Issuer covenants to (i) repay in full all Obligations under the New
Credit Facility or offer to repay in full all Obligations under the New Credit
Facility and repay the Obligations under the New Credit Facility of each lender
who has accepted such offer or (ii) obtain the requisite consent under the New
Credit Facility to permit the repurchase of Notes as described above. The Issuer
must first comply with the covenant described in the preceding sentence before
it shall be required to purchase Notes in the event of a Change of Control;
provided that the Issuer's failure to comply with the covenant described in the
preceding sentence shall constitute an Event of Default described in clause
(iii) under "Events of Default" below if not cured within thirty days after the
notice required by such clause. As a result of the foregoing, a Holder of the
Notes may not be able to compel the Issuer to purchase the Notes unless the
Issuer is able at the time to refinance all of the New Credit Facility or obtain
requisite consents under the New Credit Facility.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Issuer or Parent with or into any Person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of the Issuer or Parent, on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in the election of
directors, managers, or trustees, as applicable, of the transferee(s) or
surviving entity or entities, (ii) any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power in the aggregate of all classes of
Capital Stock of the Issuer (other than the Parent so long as the Parent owns
100% of such voting power) or Parent then outstanding normally entitled to vote
in elections of directors, (iii) during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Board of Directors of either the Issuer or Parent
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Issuer or Parent, as
applicable, was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved, including new
directors designated in or provided for in an agreement regarding the merger,
consolidation or sale, transfer or other conveyance, of all or substantially all
of the assets of the Issuer or the Parent, if such agreement was approved by a
vote of such majority of directors) cease for any reason to constitute a
majority of the Board of Directors of the Issuer or Parent then in office, as
applicable, or (iv) Parent ceases to own 100% of the Equity Interests of the
Issuer.
On or before the Change of Control Purchase Date, the Issuer will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest and Liquidated Damages, if any), of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officer's Certificate
listing the Notes or portions thereof being purchased by the Issuer. The Paying
Agent promptly will pay the Holders of Notes so accepted an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest and
Liquidated Damages, if any), and the Trustee promptly will authenticate and
deliver to such Holders a new Note equal in principal amount to any unpurchased
portion of the Note surrendered. Any Notes not so accepted will be delivered
promptly by the Issuer to the Holder thereof. The Issuer publicly will announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Issuer, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of the Issuer or Parent
will likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the
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Issuer or Parent has occurred. In addition, no assurances can be given that the
Issuer will be able to acquire Notes tendered upon the occurrence of a Change of
Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, compliance by the
Issuer or any of the Guarantors with such laws and regulations shall not in and
of itself cause a breach of its obligations under such covenant.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any, due on such
Interest Payment Date) will be paid to the Person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to Holders who tender the
Notes pursuant to the Change of Control Offer.
Limitation on Restricted Payments
The Indenture provides that the Issuer and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
make any Restricted Payment if, after giving effect to such Restricted Payment
on a pro forma basis, (1) a Default or an Event of Default shall have occurred
and be continuing, (2) the Issuer is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a)
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," or (3) the aggregate amount of all Restricted
Payments made by the Issuer and its Subsidiaries, including after giving effect
to such proposed Restricted Payment, from and after the Issue Date, would exceed
the sum of, without duplication, (a) $15.0 million, plus (b) 50% of the
aggregate Consolidated Net Income of the Issuer and its Consolidated
Subsidiaries for the period (taken as one accounting period), commencing on the
first day of the first full fiscal quarter commencing after the Issue Date, to
and including the last day of the fiscal quarter ended immediately prior to the
date of each such calculation (or, in the event Consolidated Net Income for such
period is a deficit, then minus 100% of such deficit), plus (c) to the extent
not included in the amount described in clause (b) above, (i) 100% of the
aggregate Net Cash Proceeds received after the Issue Date by the Issuer from the
issue or sale of, or from Capital Contributions in respect of, Equity Interests
of the Issuer or of debt securities of the Issuer or any Subsidiary Guarantor
that have been converted into, or cancelled in exchange for, Equity Interests of
the Issuer (other than Equity Interests (or convertible debt securities) sold to
a Subsidiary of the Issuer and other than Disqualified Capital Stock or debt
securities that have been converted into or exchanged for Disqualified Capital
Stock), plus (ii) 100% of any dividends or other distributions received by the
Issuer or a Subsidiary of the Issuer after the Issue Date from an Unrestricted
Subsidiary of the Issuer, plus (iii) 100% of the cash proceeds (or Cash
Equivalents) realized upon the sale of any Unrestricted Subsidiary (less the
amount of any reserve established for purchase price adjustments and less the
maximum amount of any indemnification or similar contingent obligation for the
benefit of the purchaser, any of its Affiliates or any other third party in such
sale, in each case as adjusted for any permanent reduction in any such amount on
or after the date of such sale, other than by virtue of a payment made to such
Person) following the Issue Date, plus (iv) to the extent that any Restricted
Investment that was made after the Issue Date is sold for cash (or Cash
Equivalents) or otherwise liquidated or repaid for cash (or Cash Equivalents),
at the Issuer's option the amount of cash proceeds (or Cash Equivalents)
received by the Issuer or any Subsidiary Guarantor with respect to such
Restricted Investment plus, (v) upon the redesignation of an Unrestricted
Subsidiary as a Subsidiary, the lesser of (x) the fair market value of such
Subsidiary or (y) the aggregate amount of all Investments made in such
Subsidiary subsequent to the Issue Date by the Issuer and its Subsidiaries.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (s) Restricted Investments, provided, that after
giving pro forma effect to such Restricted Investments, the aggregate amount of
all such Restricted Investments made on or after the Issue Date that are
outstanding (after reducing such aggregate amount by (A) the net cash proceeds
received by the Issuer or any Subsidiary Guarantor from any Restricted
Investments made after the Issue Date that are sold or otherwise liquidated or
repaid to the Issuer or its Subsidiary Guarantors, other than amounts credited,
at the option of the Issuer, under clause (iv) of the immediately preceding
paragraph, and (B) the amount of all Restricted Investments
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made after the Issue Date that have become Permitted Investments, valued at the
lesser of (x) the fair market value thereof on the date that such Investments
became Permitted Investments or (y) the aggregate amount of such prior
Investments) does not exceed the sum of (A) $50.0 million plus (B) the aggregate
amount of any Investments that, but for the fact that such Investments were made
prior to the Issue Date, would be Restricted Investments ("Existing Restricted
Investments"); provided, however, the aggregate of (B) shall not exceed $65.5
million, less the amount by which the net cash proceeds received by the Issuer
and its Subsidiary Guarantors upon the sale, liquidation or repayment of
Existing Restricted Investments is less than the original amount of such
Existing Restricted Investments; (t) pro rata dividends and other distributions
on the Equity Interests of any Subsidiary of the Issuer by such Subsidiary; (u)
payments in lieu of fractional shares in an amount not to exceed $50,000 in the
aggregate; (v) repurchases of Capital Stock from employees of the Parent, the
Issuer or Subsidiaries of the Issuer pursuant to any management agreement or
stock option agreement or upon their death or disability or the termination of
their employment in an aggregate amount to all employees not to exceed $5.0
million per year plus the net cash proceeds received by the Issuer of Capital
Stock (other than Disqualified Capital Stock) of the Parent sold to directors,
executive officers, members of the management or employees of the Parent, the
Issuer and its Subsidiaries in such year on and after the Issue Date, (w) the
acquisition by a Receivables Subsidiary in connection with a Qualified
Receivables Transaction of Equity Interests of a trust or other Person
established by such Receivables Subsidiary to effect such Qualified Receivables
Transaction, and the provisions of the immediately preceding paragraph will not
prohibit, (x) Permitted Payments to Parent, (y) a Qualified Exchange, or (z) the
payment of any dividend on Qualified Capital Stock within 60 days after the date
of its declaration if such dividend could have been made on the date of such
declaration in compliance with the foregoing provisions. The full amount of any
Restricted Payment made pursuant to the foregoing clauses (t), (u), (w) and (z)
(but not pursuant to clauses (s), (v), (x) and (y), of the immediately preceding
sentence, however, will be deducted in the calculation of the aggregate amount
of Restricted Payments available to be made referred to in clause (3) of the
immediately preceding paragraph.
Additionally, (a) the foregoing clauses (2) and (3) of the first paragraph
of this covenant will not prohibit any payment of cash dividends to Parent,
which dividends are used by Parent (x) to make the next scheduled interest
payment, or, at the final scheduled maturity of July 1, 2000, the then
outstanding principal due (but in no event to exceed $325.0 million), on the
Parent Convertible Notes as required by the terms of the Parent Convertible
Notes in effect on the Issue Date or (y) to pay the next scheduled interest
payment on Refinanced Parent Convertible Notes (but in no event to exceed an
aggregate of $325.0 million, less amounts, if any, used to repay the Parent
Convertible Notes) and (b) the forgoing clause (3) of the first paragraph of
this covenant will not prohibit repurchases of Capital Stock (other than
Disqualified Capital Stock) of the Parent in an aggregate amount not to exceed
$100.0 million and, provided the Parent Consolidated Leverage Ratio for the most
recent four consecutive fiscal quarters ending on or prior to the date of any
such repurchase would be no more than 4.5 to 1, an additional $50.0 million in
the aggregate; provided, that the aggregate amount of all payments made pursuant
to clauses (a) and (b) of this paragraph (excluding payments of interest on the
Parent Convertible Notes and Refinanced Parent Convertible Notes paid in
accordance with clause (a)(x) and (a)(y)) shall not exceed $400.0 million. Any
Restricted Payment made pursuant to this paragraph shall be counted in the
calculation of the aggregate amount of Restricted Payments available to be made
pursuant to clause (3) of the first paragraph of this covenant except that any
such amount that is substantially concurrently used by Parent to pay interest on
or retire Parent Convertible Notes in accordance with clause (a)(x) or to pay
interest on Refinanced Parent Convertible Notes in accordance with clause (a)(y)
will not be counted in such calculation. Notwithstanding anything herein to the
contrary, in no event shall any proceeds from any debt ranking senior to or pari
passu with any of the Notes or Guarantees, as applicable, of the Issuer or any
of its Subsidiaries (excluding Indebtedness of any Foreign Subsidiary that is
non-recourse to the Issuer and its other Subsidiaries) be used (directly or
indirectly) to make any principal payments in respect of the Parent Convertible
Notes unless on the date of such incurrence of any such debt ranking senior to
or pari passu with any of the Notes or Guarantees, the Consolidated Leverage
Ratio for the most recent four consecutive fiscal quarters ending on or prior to
the date of such incurrence, after giving effect, on a pro forma basis, to such
incurrence of any senior or pari passu Indebtedness would be less than 4.5 to 1.
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For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined by the
Issuer and set forth in an Officer's Certificate delivered to the Trustee
pursuant to the next sentence. Additionally, on the date of each Restricted
Payment in excess of $10.0 million, the Issuer shall deliver an Officer's
Certificate to the Trustee describing in reasonable detail the nature of such
Restricted Payment, stating the amount of such Restricted Payment, stating in
reasonable detail the provisions of the Indenture pursuant to which such
Restricted Payment was made and certifying that such Restricted Payment was made
in compliance with the terms of the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Issuer and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Subsidiary of the Issuer to pay dividends or make other distributions to or
on behalf of, or to pay any obligation to or on behalf of, or otherwise to
transfer assets or property to or on behalf of, or make or pay loans or advances
to or on behalf of, the Issuer or any Subsidiary of the Issuer, except (a)
restrictions imposed by the Notes or the Indenture or by other indebtedness of
the Issuer or any of the Subsidiary Guarantors ranking pari passu with the Notes
or the Guarantees, as applicable, provided such restrictions are no more
restrictive taken as a whole than those imposed by the Indenture and the Notes,
(b) restrictions imposed by applicable law, (c) existing restrictions under
Indebtedness outstanding on the Issue Date and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of such Indebtedness, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive taken as a whole with respect to dividend
and other payment restrictions than those contained in the applicable existing
Indebtedness, (d) restrictions under any Acquired Indebtedness not incurred in
violation of the Indenture or any agreement relating to any property, asset, or
business acquired by the Issuer or any of its Subsidiaries, which restrictions
existed at the time of acquisition, were not put in place in connection with or
in anticipation of such acquisition and are not applicable to any Person, other
than the Person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, (e) any such restriction or
requirement imposed by any Senior Debt incurred under the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
provided such restriction or requirement is no more restrictive than that
imposed by the New Credit Facility as of the Issue Date, (f) restrictions with
respect solely to a Subsidiary of the Issuer imposed pursuant to a binding
agreement which has been entered into for the sale or disposition of all or
substantially all of the Equity Interests or assets of such Subsidiary, provided
such restrictions apply solely to the Equity Interests or assets of such
Subsidiary, (g) restrictions on transfer contained in Purchase Money
Indebtedness incurred pursuant to paragraph (c) of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," provided
such restrictions relate only to the transfer of the property acquired with the
proceeds of such Purchase Money Indebtedness, (h) restrictions contained in
Indebtedness or other contractual requirements of a Receivables Subsidiary in
connection with a Qualified Receivables Transaction, provided that such
restrictions apply only to such Receivables Subsidiary, (i) restrictions
contained in Indebtedness incurred by a Foreign Subsidiary in accordance with
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," provided such restrictions relate only to one or
more Foreign Subsidiaries, (j) any asset subject to a Lien which is not
prohibited to exist with respect to such asset pursuant to the terms of the
Indenture may be subject to restrictions on the transfer or disposition thereof
or (k) in connection with and pursuant to permitted Refinancings, replacements
of restrictions imposed pursuant to clauses (a), (c) or (d) of this paragraph
that are not more restrictive than those being replaced and do not apply to any
other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced. Notwithstanding the foregoing,
neither (a) customary provisions restricting subletting or assignment of any
lease entered into in the ordinary course of business, consistent with industry
practice, nor (b) Liens permitted under the terms of the Indenture on assets
securing Senior Debt or Purchase Money Indebtedness incurred in accordance with
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock" shall in and of themselves be considered a
restriction on the ability of the applicable Subsidiary to transfer such
agreement or assets, as the case may be.
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Limitations on Layering Indebtedness
The Indenture provides that the Issuer and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
incur, or suffer to exist any Indebtedness (other than the Notes and any
Acquired Indebtedness not incurred in connection with or in contemplation of
such Acquisition by the Company or a Subsidiary of the Company) that is
subordinate in right of payment to any other Indebtedness of the Issuer or a
Subsidiary Guarantor unless, by its terms, such Indebtedness is subordinate in
right of payment to, or ranks pari passu with, the Notes or the Guarantee, as
applicable.
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that, except as set forth below in this covenant,
the Issuer and the Subsidiary Guarantors will not, and will not permit any of
their Subsidiaries to, directly or indirectly, issue, assume, guarantee, incur,
become directly or indirectly liable with respect to, extend the maturity of, or
otherwise become responsible for, contingently or otherwise (individually and
collectively, to "incur" or, as appropriate, an "incurrence"), any Indebtedness
(including Acquisition Indebtedness) or any Disqualified Capital Stock from and
after the Issue Date. Notwithstanding the foregoing:
(a) if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro
forma basis to, such incurrence of Indebtedness or Disqualified Capital
Stock and (ii) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Coverage Ratio of the Issuer for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a pro
forma basis to such incurrence of such Indebtedness or Disqualified Capital
Stock and, to the extent set forth in the definition of Consolidated
Coverage Ratio, the use of proceeds thereof, would be at least 2.0 to 1
(the "Debt Incurrence Ratio"), then the Issuer may incur such Indebtedness
or Disqualified Capital Stock and the Subsidiary Guarantors may incur such
Indebtedness provided that no Guarantee may be incurred pursuant to this
paragraph unless the guaranteed Indebtedness is incurred by the Company or
a Subsidiary Guarantor pursuant to this paragraph;
(b) the Issuer and the Subsidiary Guarantors may incur Indebtedness
evidenced by the Notes (and any related Guarantees) issued as of the
original Issue Date and the Exchange Notes (and any related Guarantees)
issued in exchange therefor;
(c) the Issuer and the Subsidiary Guarantors may incur Purchase Money
Indebtedness on or after the Issue Date, provided, that (i) the aggregate
amount of such Indebtedness incurred on or after the Issue Date and
outstanding at any time pursuant to this paragraph (c) (including any
Indebtedness issued to refinance, replace, defease or refund such
Indebtedness) shall not exceed (A) $35.0 million plus (B) Purchase Money
Indebtedness existing on the Issue Date; provided, however, (B) shall not
exceed $29.2 million and (ii) in each case, such Indebtedness shall not
constitute more than 100% of the cost (determined in accordance with GAAP)
to the Issuer or such Subsidiary Guarantor, as applicable, of the property
so purchased or leased;
(d) the Issuer, the Subsidiary Guarantors and the Foreign
Subsidiaries, as applicable, may incur permitted Refinancing Indebtedness
with respect to any Existing Indebtedness and Indebtedness or Disqualified
Capital Stock, as applicable, incurred in accordance with this covenant so
long as, in the case of Indebtedness used to refinance, replace, defease or
refund secured Indebtedness, such Refinancing Indebtedness is secured only
by the assets that secured the Indebtedness so refinanced;
(e) the Issuer and the Subsidiary Guarantors and the Foreign
Subsidiaries, as applicable, may incur Permitted Indebtedness;
(f) the Issuer, the Subsidiary Guarantors and the Foreign Subsidiaries
may incur Indebtedness in an aggregate amount outstanding at any time
pursuant to this clause (f) (including any Indebtedness issued to
refinance, replace, defease or refund such Indebtedness) of up to $50.0
million, minus the amount of any such Indebtedness retired (including, in
the case of a revolver or a similar arrangement, to the extent permanently
retired) with Net Cash Proceeds from any Asset Sale (other than a sale of
Assets to Be Disposed of) or assumed by a transferee in an Asset Sale;
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(g) the Issuer and the Subsidiary Guarantors may incur Indebtedness
pursuant to the New Credit Facility up to an aggregate amount outstanding
at any time pursuant to this clause (g) (including any Indebtedness issued
to refinance, replace, defease or refund such Indebtedness) at any time of
$1.0 billion, minus the amount of any such Indebtedness retired (including,
in the case of a revolver or a similar arrangement, to the extent
permanently retired) with Net Cash Proceeds from any Asset Sale (other than
a sale of Assets to Be Disposed of) or assumed by a transferee in an Asset
Sale;
(h) the Foreign Subsidiaries may incur Indebtedness (and the Issuer
and the Subsidiary Guarantors may guarantee such Indebtedness of the
Foreign Subsidiaries) in an aggregate amount outstanding at any time
pursuant to this clause (h) (including any Indebtedness used to refinance,
replace or refund such Indebtedness) of up to (A) $50.0 million plus (B)
the amount of Foreign Subsidiary Indebtedness outstanding on the Issue
Date; provided, however, the aggregate of (B) shall not exceed $71.1
million, minus the amount of any such Indebtedness retired (including, in
the case of a revolver or a similar arrangement, to the extent permanently
retired) with the Net Cash Proceeds from any Asset Sale (other than a sale
of Assets to Be Disposed of) or assumed by a transferee in an Asset Sale;
and
(i) the Finance Subsidiary may incur Finance Subsidiary Indebtedness.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Issuer
(including, without limitation, upon designation of any subsidiary or other
Person as a Subsidiary and upon the contribution of the Equity Interests thereof
to the Issuer) or is merged with or into or consolidated with the Issuer or a
Subsidiary of the Issuer shall be deemed to have been incurred at the time such
Person becomes such a Subsidiary of the Issuer or is merged with or into or
consolidated with the Issuer or a Subsidiary of the Issuer, as applicable.
Limitation on Liens Securing Indebtedness
The Issuer and the Subsidiary Guarantors will not, and will not permit any
of their Subsidiaries to, create, incur, assume or suffer to exist any Lien of
any kind, other than Permitted Liens, upon any of their respective assets now
owned or acquired on or after the date of the Indenture.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that the Issuer and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, in one or a series of
related transactions, convey, sell, transfer, assign or otherwise dispose of,
directly or indirectly, any of its property, business or assets, including by
merger or consolidation (in the case of a Subsidiary of the Issuer), and
including any sale or other transfer or issuance of any Equity Interests of any
Subsidiary of the Issuer, whether by the Issuer or a Subsidiary of either or
through the issuance, sale or transfer of any Equity Interest by a Subsidiary of
the Issuer (any of the foregoing, an "Asset Sale"), unless (1)(a) the Net Cash
Proceeds therefrom (the "Asset Sale Offer Amount") are applied (i) within 330
days after the date of each such Asset Sale, to the optional redemption of the
Notes in accordance with the terms of the Indenture and, at the Issuer's option,
other Indebtedness of the Issuer ranking on a parity with the Notes from time to
time outstanding with similar provisions requiring the Issuer to make an offer
to purchase or to redeem such Indebtedness with the proceeds from asset sales,
pro rata in proportion to the respective principal amounts (or accreted values
in the case of Indebtedness issued with an original issue discount) of the Notes
and such other Indebtedness then outstanding or (ii) within 360 days after the
date of each such Asset Sale, to the repurchase of the Notes pursuant to a cash
offer to repurchase Notes and, at the Issuer's option, other Indebtedness of the
Issuer ranking on a parity with the Notes from time to time outstanding with
similar provisions requiring the Issuer to make an offer to purchase or to
redeem such Indebtedness with the proceeds from asset sales, pro rata in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness then outstanding (the "Asset Sale Offer") at a purchase price
of 100% of principal amount (or accreted value in the case of Indebtedness
issued with an original issue discount) (the "Asset Sale Offer Price") together
with accrued and unpaid interest and Liquidated Damages, if any, to the date of
payment, made within 330 days of such Asset Sale, or (b) within 330 days
following such Asset Sale, the Asset Sale Offer Amount is (i) used to
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make a Permitted Investment (other than pursuant to clause (i) thereof) or
otherwise invested (or committed, pursuant to a binding commitment subject only
to reasonable, customary closing conditions, to be invested, and in fact is so
invested, within an additional 90 days) in assets and property which in the good
faith reasonable judgment of the Issuer will immediately constitute or be a part
of a Related Business of the Issuer or such Subsidiary (if it continues to be a
Subsidiary) immediately following such transaction, except that no proceeds from
an Asset Sale of Existing Assets or assets acquired (directly or indirectly)
from the proceeds of an Asset Sale of Existing Assets may be invested in or used
to acquire assets or property for a Foreign Subsidiary or (ii) used to retire
Purchase Money Indebtedness or other Senior Debt in accordance with any
provisions therein requiring the Issuer to repurchase, redeem, or otherwise
retire such Indebtedness with the proceeds from such Asset Sale, Indebtedness
outstanding under the New Credit Facility and, except with respect to the use of
proceeds from the sale of Assets to Be Disposed of, to permanently reduce (in
the case of Senior Debt that is not Purchase Money Indebtedness) the amount of
such Indebtedness outstanding on the Issue Date, any amount outstanding under
the New Credit Facility or Indebtedness permitted pursuant to paragraph (c), (f)
or (g) of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock" (including that in the case of a revolver or similar
arrangement that makes credit available, such commitment is permanently so
reduced by such amount), except that no proceeds from an Asset Sale of Existing
Assets or assets acquired from the proceeds or Asset Sale of Existing Assets may
be used to retire Indebtedness of a Foreign Subsidiary (unless such Existing
Assets were assets of such Foreign Subsidiary on the Issue Date), (2) with
respect to any transaction or related series of transactions of securities,
property or assets with an aggregate fair market value in excess of $3.0
million, at least 75% of the consideration for such Asset Sale (excluding (a)
Senior Debt assumed by a transferee which assumption permanently reduces the
amount of Indebtedness outstanding on the Issue Date or permitted pursuant to
paragraph (c), (f) or (g) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock" (including that in the
case of a revolver or similar arrangement that makes credit available, such
commitment is permanently so reduced by such amount), (b) Purchase Money
Indebtedness assumed by a transferee and (c) property that within 30 days of
such Asset Sale is converted into cash or Cash Equivalents) consists of Cash or
Cash Equivalents which is applied as set forth above or consists of Restricted
Investments, (3) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect, on a pro forma
basis, to, such Asset Sale, and (4) the Issuer determines in good faith that the
Issuer or such Subsidiary, as applicable, receives fair market value for such
Asset Sale.
The Indenture provides that an Asset Sale Offer may be deferred until the
accumulated Net Cash Proceeds from Asset Sales not applied to the uses set forth
in clauses (1)(a)(i) or 1(b) above (the "Excess Proceeds") exceeds $20.0 million
and that each Asset Sale Offer shall remain open for 20 Business Days following
its commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset
Sale Offer Period, the Issuer shall apply the Asset Sale Offer Amount plus an
amount equal to accrued and unpaid interest and Liquidated Damages, if any, to
the purchase of all Indebtedness properly tendered pursuant to the Asset Sale
Offer (on a pro rata basis (in $1,000 increments) if the Asset Sale Offer Amount
is insufficient to purchase all Indebtedness so tendered) at the Asset Sale
Offer Price (together with accrued interest and Liquidated Damages, if any). To
the extent that the aggregate amount of Indebtedness tendered pursuant to an
Asset Sale Offer is less than the Asset Sale Offer Amount, the Issuer may use
any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following each Asset Sale Offer the Excess
Proceeds amount shall be reset to zero.
Notwithstanding, and without complying with, the foregoing provisions of
the two immediately prior paragraphs: (i) the Issuer and its Subsidiaries may,
in the ordinary course of business, convey, sell, transfer, assign or otherwise
dispose of (x) assets or series of related assets with an aggregate fair market
value not in excess of $1.0 million, but in any case limited in the aggregate to
not more than $5.0 million for any fiscal year and (y) inventory and other
assets acquired and held for resale in the ordinary course of business; (ii) the
Issuer and its Subsidiaries may convey, sell, transfer, assign or otherwise
dispose of assets pursuant to and in accordance with the limitation on mergers,
sales or consolidations provisions in the Indenture; (iii) the Issuer and its
Subsidiaries may sell or dispose of damaged, worn out or other obsolete property
in the ordinary course of business so long as such property is no longer
necessary for the proper conduct of the business of the Issuer or such
Subsidiary, as applicable; (iv) the Issuer and the Subsidiary Guarantors may
convey, sell, transfer,
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assign or otherwise dispose of assets to the Issuer or any of the Subsidiary
Guarantors; (v) the Issuer and its Subsidiaries may surrender or waive contract
rights or the settlement, release or surrender of contract, tort or other claims
of any kind; (vi) the Issuer and its Subsidiaries may grant Liens not prohibited
by the Indenture; (vii) the Issuer and each of the Subsidiaries may liquidate
Cash Equivalents in the ordinary course of business; (viii) the Issuer and each
of the Subsidiaries may sell sales of accounts receivable and related assets of
the type specified in the definition of Qualified Receivables Transaction to a
Receivables Subsidiary for the fair market value thereof, including cash in an
amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP, and transfers of accounts receivable and related assets of
the type specified in the definition of Qualified Receivables Transaction (or a
fractional undivided interest therein) by a Receivables Subsidiary in a
Qualified Receivables Transaction; (ix) Foreign Subsidiaries may convey, sell,
transfer, assign or otherwise dispose of assets to the Issuer, any of the
Subsidiary Guarantors, or any other Foreign Subsidiary; and (x) the Issuer and
its Subsidiaries may make Permitted Investments (excluding clauses (b) and (1)
in the definition thereof) and Restricted Investments made under clause (s) of
the third paragraph under "Limitation on Restricted Payments."
Notwithstanding anything herein to the contrary, other than as provided in
the following sentence, the Issuer and its Subsidiaries may sell (including by
merger, consolidation or issuance), transfer, assign, license, sublicense or
otherwise dispose of (collectively "Transfer") any software, trademark or other
intellectual property, or any interest (including any Equity Interest) in any
entity which has as its principal assets such property or rights, and such
Transfer shall not be treated as an Asset Sale hereunder, if (a) the Issuer and
its Subsidiary Guarantors thereafter have unfettered access to and use of such
property or rights at a cost to the Issuer and its Subsidiaries which is not in
excess of the aggregate normal operating costs and third party license fees
which have been incurred by the Issuer and its Subsidiaries prior to any such
Transfer, and (b) any proceeds from any Transfer of any such property, rights or
interests (including Equity Interests) are used (i) solely for the purpose of
the development or installation or implementation of such property or rights (or
similar property or rights) or (ii) otherwise in accordance with the provisions
of the first paragraph of this covenant. Notwithstanding the preceding sentence
or any other provision of this covenant to the contrary, the Issuer and its
Subsidiaries may not Transfer the internally developed product distribution
software used by the Issuer and its Subsidiaries ("Core Operating Software") or
intellectual property rights therein or any interests (including any Equity
Interests) in any entity which has as its principal assets such Core Operating
Software or rights therein, unless the Issuer and its Subsidiary Guarantors
comply with clauses (a) and (b) of the preceding sentence in connection with
such Transfer.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this covenant, compliance by
the Issuer or any of its Subsidiaries with such laws and regulations shall not
in and of itself cause a breach of its obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages
due on such Interest Payment Date, if any) will be paid to the Person in whose
name a Note is registered at the close of business on such Record Date, and such
interest (and Liquidated Damages, if applicable) will not be payable to Holders
who tender Notes pursuant to such Asset Sale Offer.
Limitation on Transactions with Affiliates
The Indenture provides that neither the Issuer nor any Subsidiary of the
Issuer will be permitted on or after the Issue Date to enter into any contract,
agreement, arrangement or transaction with any Affiliate (an "Affiliate
Transaction"), or any series of related Affiliate Transactions, other than
Exempted Affiliate Transactions, (1) involving consideration to either party in
excess of $5.0 million unless such transaction is evidenced by an Officer's
Certificate addressed and delivered to the Trustee stating that the terms of
such Affiliate Transaction are fair and reasonable to the Issuer or such
Subsidiary, as the case may be, and no less favorable to the Issuer or such
Subsidiary, as the case may be, than could have been obtained in an arm's length
transaction with a non-Affiliate, and (2) involving consideration to either
party in excess of
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$10.0 million, unless the Issuer, prior to the consummation thereof, obtains a
written favorable opinion as to the fairness of such transaction to the Issuer
from a financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such investment
banking firms do not customarily render such opinions, an appraisal or valuation
firm of national reputation.
Limitation on Merger, Sale or Consolidation
The Indenture provides that neither the Issuer nor Parent will consolidate
with or merge with or into another Person or, directly or indirectly, sell,
lease, convey or transfer all or substantially all of its assets (computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons, unless (i)
either (a) the Issuer or Parent, as applicable, is the continuing entity or (b)
the resulting, surviving or transferee entity is a corporation organized under
the laws of the United States, any state thereof or the District of Columbia and
expressly assumes by supplemental indenture all of the obligations of the Issuer
or Parent, as applicable, in connection with the Notes and the Indenture; (ii)
no Default or Event of Default shall exist or shall occur immediately after
giving effect on a pro forma basis to such transaction; (iii) except in the case
of a transaction involving only the Parent, immediately after giving effect to
such transaction on a pro forma basis, the consolidated resulting, surviving or
transferee entity would immediately thereafter be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio set forth
in paragraph (a) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock;" and (iv) the Company will have
delivered to the Trustee an Officer's Certificate addressed to the Trustee,
stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or disposition and such supplemental indenture, if any, comply with
the Indenture and that the supplemental indenture is enforceable.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer or Parent, as applicable, in accordance with the
foregoing, the successor corporation formed by such consolidation or into which
the Issuer or Parent, as applicable, is merged or to which such transfer is made
shall succeed to, and (except in case of a lease) be substituted for, and may
exercise every right and power of, the Issuer or Parent, as applicable, under
the Indenture with the same effect as if such successor corporation had been
named therein as the Issuer or Parent, as applicable, and (except in case of a
lease) the Issuer or Parent, as applicable, shall be released from the
obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
Future Subsidiary Guarantors
The Indenture provides that all present and future Subsidiaries of the
Issuer (other than Receivables Subsidiaries, Finance Subsidiaries, Excluded
Subsidiaries and Foreign Subsidiaries) jointly and severally will guarantee
irrevocably and unconditionally all principal, premium, if any, and interest
(and Liquidated Damages, if any) on the Notes on a senior subordinated basis,
provided that DDI shall not be required to become a Guarantor until 120 days
after the Issue Date. Notwithstanding anything herein or in the Indenture to the
contrary and if permitted by the New Credit Facility, if any Subsidiary of the
Issuer that is not a Subsidiary Guarantor guarantees any other Indebtedness of
the Issuer or Parent or of any Subsidiary of the Issuer or Parent, or the Issuer
or Parent or any Subsidiary of the Issuer or of Parent, individually or
collectively pledges more than 65% of the Equity Interests of such Subsidiary to
a United States lender, then such Subsidiary must become a Guarantor.
Limitation on Merger of Subsidiary Guarantors and Release of Subsidiary
Guarantors
The Indenture provides that no Subsidiary Guarantor shall consolidate or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another Person unless (i) subject to the provisions of the following
paragraph, the Person formed by or surviving any such consolidation or merger
(if other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee, pursuant to which such Person shall unconditionally
guarantee, on a senior subordinated basis, all of such Subsidiary Guarantor's
obligations under such Subsidiary Guarantor's guarantee and the Indenture on the
terms set forth in the Indenture; and
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(ii) immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred or be
continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor or all or substantially all of its
assets to an entity which is not a Subsidiary Guarantor or the designation of a
Subsidiary to become an Unrestricted Subsidiary, which transaction is otherwise
in compliance with the Indenture (including, without limitation, the provisions
of the covenant "Limitations on Sale of Assets and Subsidiary Stock"), such
Subsidiary Guarantor will be deemed released from its obligations under its
Guarantee of the Notes; provided, however, that any such termination shall occur
only to the extent that all obligations of such Subsidiary Guarantor under all
of its guarantees of, and under all of its pledges of assets or other security
interests which secure, any Indebtedness of the Issuer or any other Subsidiary
of the Issuer shall also terminate upon such release, sale or transfer.
Limitation on Status as Investment Company
The Indenture prohibits the Issuer, its Subsidiaries and Parent from taking
any action which would require any of them to register as an "Investment
Company" (as that term is defined in the Investment Company Act of 1940, as
amended), or from otherwise becoming subject to regulation under the Investment
Company Act.
REPORTS
The Indenture provides that the Parent shall deliver to the Trustee and, to
each Holder and to prospective purchasers of Notes identified to the Issuer by
an Initial Purchaser, (i) its respective annual and quarterly reports filed
pursuant to Section 13 or 15(d) of the Exchange Act, within 15 days after such
reports have been filed with the Commission or (ii) in the event the Parent is
not subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act within 15 days after it would have been (if it were subject to such
reporting obligations) required to file such reports with the Commission, annual
and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission if
the Parent were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the Issuer's certified independent public accountants as such would
be required in such reports to the Commission, and, in each case, together with
a management's discussion and analysis of financial condition and results of
operations which would be so required and, unless the Commission will not accept
such reports, file with the Commission the annual, quarterly and other reports
which it is or would have been required to file with the Commission. If at any
time Parent does not file such reports which include the Issuer and its
Subsidiaries on a consolidated basis with Parent, the Issuer shall succeed to
the obligations of Parent hereunder.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Issuer
to pay any installment of interest (or Liquidated Damages, if any) on the Notes
as and when the same becomes due and payable and the continuance of any such
failure for 30 days, (ii) the failure by the Issuer to pay all or any part of
the principal, or premium, if any, on the Notes when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Purchase Price or the Asset
Sale Offer Price, or otherwise, (iii) the failure by the Issuer or any Guarantor
to observe or perform any other covenant or agreement contained in the Notes or
the Indenture and, subject to certain exceptions, the continuance of such
failure for a period of 45 days after written notice is given to the Issuer by
the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes outstanding, (iv) certain events of
bankruptcy, insolvency or reorganization in respect of the Issuer or any of its
Significant Subsidiaries, (v) a default in any Indebtedness of the Issuer or any
of its Subsidiaries with an aggregate principal amount in excess of $10.0
million (a) resulting from the failure to pay principal at final maturity or (b)
as a result of which the maturity of such Indebtedness has been accelerated
prior to its stated maturity, and (vi) final unsatisfied judgments not covered
by insurance aggregating in excess of $10.0 million, at any one time rendered
against the Issuer or any of its Significant Subsidiaries and not
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stayed, bonded or discharged within 60 days. The Indenture provides that if a
Default occurs and is continuing, the Trustee must, within 90 days after the
occurrence of such Default, give to the Holders notice of such Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Issuer), then in every
such case, unless the principal of all of the Notes shall have already become
due and payable, either the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding, by notice in writing to the
Issuer (and to the Trustee if given by Holders) (an "Acceleration Notice"), may
declare all principal, determined as set forth below, and accrued interest
thereon to be due and payable immediately; provided, however, that if any Senior
Debt is outstanding pursuant to the New Credit Facility, upon a declaration of
such acceleration, such principal and interest shall be due and payable upon the
earlier of (x) the day that is five Business Days after the provision to the
Issuer and the representative under the New Credit Facility of such written
notice, unless such Event of Default is cured or waived prior to such date and
(y) the date of acceleration of any Senior Debt under the New Credit Facility.
In the event a declaration of acceleration resulting from an Event of Default
described in clause (v) above has occurred and is continuing, such declaration
of acceleration shall be automatically annulled if such Default is cured or
waived or the holders of the Indebtedness which is the subject of such Default
have rescinded their declaration of acceleration in respect of such Indebtedness
within 45 days thereof and the Trustee has received written notice of such cure,
waiver or rescission and no other Event of Default described in clause (v) above
has occurred that has not been cured or waived within 45 days of the declaration
of such acceleration in respect of such Indebtedness. If an Event of Default
specified in clause (iv) above relating to the Issuer occurs, all principal and
accrued interest thereon will be immediately due and payable on all outstanding
Notes without any declaration or other act on the part of Trustee or the
Holders. The Holders of a majority in aggregate principal amount of Notes
generally are authorized to rescind such acceleration if all existing Events of
Default, other than the non-payment of the principal of, premium, if any, and
interest on the Notes which have become due solely by such acceleration and
except any Default with respect to any provision requiring a supermajority
approval to amend, which Default may only be waived by such a supermajority,
have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any Default, except a Default
with respect to any provision requiring a supermajority approval to amend, which
Default may be waived only by such a supermajority, and except a Default in the
payment of principal of or interest on any Note not yet cured or a Default with
respect to any covenant or provision which cannot be modified or amended without
the consent of the Holder of each outstanding Note affected. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable security or indemnity. Subject to
all provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the Notes at the time outstanding will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Issuer may, at its option, elect to have
its obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Issuer shall be deemed to have paid and discharged the entire indebtedness
represented, and the Indenture shall cease to be of further effect as to all
outstanding Notes and Guarantees, except as to (i) rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest (and
Liquidated Damages, if any) on such Notes when such payments are due from the
trust funds; (ii) the Issuer's obligations with respect to such Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust; (iii) the rights, powers, trust, duties,
and immunities of the Trustee, and the Issuer's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the
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Indenture. In addition, the Issuer may, at its option and at any time, elect to
have the obligations of the Issuer and the Guarantors released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, guarantees,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, U.S. legal tender, U.S. Government Obligations or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the Holders of
Notes must have a valid, perfected, exclusive security interest in such trust;
(ii) in the case of Legal Defeasance, the Issuer shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Issuer has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable Federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of such Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such Legal Defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that the Holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a Default under the Indenture or any other material
agreement or instrument to which the Issuer or any of its Subsidiaries is a
party or by which the Issuer or any of its Subsidiaries is bound; (vi) the
Issuer shall have delivered to the Trustee an Officers' Certificate stating that
the deposit was not made by the Issuer with the intent of preferring the Holders
of such Notes over any other creditors of the Issuer or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the Issuer
or others; and (vii) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate, clauses (i)
through (vi) and, in the case of the opinion of counsel, clauses (i), (with
respect to the validity and perfection of the security interest) (ii), (iii) and
(v) of this paragraph have been complied with.
If the funds deposited with the Trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, and interest on the Notes
when due, then the obligations of the Issuer and the Guarantors under the
Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Issuer, the Guarantors and
the Trustee to enter into a supplemental indenture for certain limited purposes
without the consent of the Holders. With the consent of the Holders of not less
than a majority in aggregate principal amount of the Notes at the time
outstanding, the Issuer, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify the rights
of the Holders; provided that no such modification may, without the consent of
Holders of at least 66 2/3% in aggregate principal amount of Notes at the time
outstanding, modify the provisions (including the defined terms used therein) of
the covenant "Repurchase of Notes at the Option of the Holder upon a Change of
Control" in a manner adverse to the Holders; and provided, that no such
modification may, without the consent of each Holder affected thereby: (i)
change the Stated Maturity on any Note, or reduce the principal amount thereof
or the rate (or extend the time for payment) of interest
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thereon or any premium payable upon the redemption at the option of the Issuer
thereof, or change the place of payment where, or the coin or currency in which,
any Note or any premium or the interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption at the option of the Issuer, on
or after the Redemption Date), or reduce the Change of Control Purchase Price or
the Asset Sale Offer Price or alter the provisions (including the defined terms
used therein) regarding the right of the Issuer to redeem the Notes in a manner
adverse to the Holders, or (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture will provide that no direct or indirect stockholder,
employee, officer or director, as such, past, present or future of the Issuer,
the Guarantors or any successor entity shall have any personal liability in
respect of the obligations of the Issuer or the Guarantors under the Indenture
or the Notes solely by reason of his or its status as such stockholder,
employee, officer or director.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such Person becomes a Subsidiary of the Issuer,
including by designation, or is merged or consolidated into or with the Issuer
or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person of all
or substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Issuer. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided that a Beneficial Owner of 20% or more of the total
voting power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"Assets to Be Disposed of" means assets identified in an Officer's
Certificate at the time of an Acquisition as assets the Issuer or the acquiring
Subsidiary intends to dispose of within 180 days of such Acquisition.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (a) the sum of the
products (i) of the number of years (calculated to the nearest one-twelfth) from
the date of determination to the date or dates of each successive scheduled
principal (or redemption) payment of such security or instrument and (ii) the
amount of each such respective principal (or redemption) payment by (b) the sum
of all such principal (or redemption) payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definitions of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable, except that a "Person" shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any committee of the Board of Directors of such
Person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such Person.
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"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Contribution" means any contribution to the equity of the Issuer
from a direct or indirect parent of the Issuer for which no consideration other
than the issuance of common stock with no redemption rights and no special
preferences, privileges or voting rights is given.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (b) U.S. dollar denominated
(or foreign currency fully hedged) time deposits, certificates of deposit,
Eurodollar time deposits or Eurodollar certificates of deposit of (i) any
domestic commercial bank of recognized standing having capital and surplus in
excess of $100.0 million or (ii) any bank whose short-term commercial paper
rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at
least P-1 or the equivalent thereof (any such bank being an "Approved Lender"),
in each case with maturities of not more than twelve months from the date of
acquisition; (c) commercial paper and variable or fixed rate notes issued by any
Approved Lender (or by the parent company thereof) or any variable rate notes
issued by, or guaranteed by, any domestic corporation rated A-2 (or the
equivalent thereof) or better by S&P or P-2 (or the equivalent thereof) or
better by Moody's and maturing within twelve months of the date of acquisition,
(d) repurchase agreements with a bank or trust company or recognized securities
dealer having capital and surplus in excess of $100.0 million for direct
obligations issued by or fully guaranteed by the United States of America in
which the Company will have a perfected first priority security interest
(subject to no other Liens) and having, on the date of purchase thereof, a fair
market value of at least 100% of the amount of repurchase obligations, (e)
interests in money market mutual funds which invest solely in assets or
securities of the type described in subparagraphs (a), (b), (c) or (d) hereof
and (f) in the case of any Foreign Subsidiary: (i) direct obligations of the
sovereign nation (or any agency thereof) in which such Foreign Subsidiary is
organized and is conducting business or in obligations fully and unconditionally
guaranteed by such sovereign nation (or any agency thereof), (ii) investments of
the type and maturity described in clauses (a) through (e) above of foreign
obligors, which investments or obligors (or the direct or indirect parents of
such obligors) have ratings described in such clauses or equivalent ratings from
comparable foreign rating agencies or (iii) investments of the type and maturity
described in clauses (a) through (e) above of foreign obligors (or the direct or
indirect parents of such obligors), which investments or obligors (or the direct
or indirect parents of such obligors) are not rated as provided in such clauses
or in clause (ii) above but which are, in the reasonable judgment of the
Company, comparable in investment quality to such investments and obligors (or
the direct or indirect parent of such obligors).
"Claim" means any claim for damages arising from the purchase of the Notes
or for reimbursement or contribution on the account of such claim, in each case
to the extent relating to the purchase price of the Notes.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses
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permanently discontinued or disposed of, but only to the extent that the
obligations giving rise to such Consolidated Fixed Charges would no longer be
obligations contributing to such Person's Consolidated Fixed Charges subsequent
to the Transaction Date) during the Reference Period; provided, that for
purposes of such calculation, (i) Acquisitions which occurred during the
Reference Period or subsequent to the Reference Period and on or prior to the
Transaction Date shall be assumed to have occurred on the first day of the
Reference Period, (ii) transactions giving rise to the need to calculate the
Consolidated Coverage Ratio shall be assumed to have occurred on the first day
of the Reference Period without regard to the effect of subsection (c) of the
definition of "Consolidated Net Income", (iii) the incurrence of any
Indebtedness or issuance of any Disqualified Capital Stock during the Reference
Period or subsequent to the Reference Period and on or prior to the Transaction
Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) shall be assumed to have occurred on the
first day of the Reference Period, and (iv) the Consolidated Fixed Charges of
such Person attributable to interest on any Indebtedness or dividends on any
Disqualified Capital Stock bearing a floating interest (or dividend) rate shall
be computed on a pro forma basis as if the average rate in effect from the
beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted (a) to
eliminate (i) non-recurring charges related to the assimilation of Persons
acquired, and the expenses of, any Acquisitions, including expenses incurred in
connection with the retirement of Acquired Indebtedness, (ii) the write-off of
debt financing fees associated with termination of credit facilities, (iii) any
non-cash pre-Acquisition write-offs or similar charges incurred by a Person
acquired in an Acquisition that as a result of pooling of interest are included
in the Parent's consolidated financial statements for such period to the extent
such write-offs or charges would either (x) not be included as an expense on the
Parent's consolidated financial statements had the Acquisition not been
accounted for as a pooling of interests or (y) be eliminated by the provisions
hereof if recorded by the Parent for such period and (iv) any non-cash
write-offs or similar charges which are recorded following an Acquisition in the
Parent's consolidated financial statements with respect to an acquired Person's
assets to the extent such amounts were accounted for in the first twelve months
following the date such Acquisition was consummated and (b) to add thereto (to
the extent deducted from net revenues in determining Consolidated Net Income),
without duplication, the sum of (i) Consolidated income tax expense, (ii)
Consolidated depreciation and amortization expense (including any accelerations
thereof), (iii) Consolidated Fixed Charges, and (iv) non-cash charges
attributable to the grant, exercise or repurchase of options or shares of
Qualified Capital Stock to or from employees. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash charges of a Subsidiary of a Person will be
added to Consolidated Net Income to compute Consolidated EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating the Consolidated Net Income of such Person.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letters of credit financings and currency and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period, (b)
one-third of rental expense for such period attributable to operating leases of
such person and its Consolidated Subsidiaries, (c) the amount of dividends
accrued or payable by such Person or any of its Consolidated Subsidiaries in
respect of Preferred Stock (other than by Subsidiaries of such Person to such
Person or such Person's Subsidiaries) and (d) interest expense of Parent for
such period with respect to the Parent Convertible Notes and any refinancing
indebtedness incurred with respect thereto. For purposes of this
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definition, (x) interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined in good faith by the Issuer to
be the rate of interest implicit in such Capitalized Lease Obligation in
accordance with GAAP and (y) interest expense attributable to any Indebtedness
represented by the guaranty by such Person or a Subsidiary of such Person of an
obligation of another Person shall be deemed to be the interest expense
attributable to the Indebtedness guaranteed.
"Consolidated Leverage Ratio" shall mean the ratio on a pro forma basis of
(i) the aggregate outstanding amount of Indebtedness of the Issuer and its
Consolidated Subsidiaries (excluding Indebtedness ranking subordinate to the
Notes and the Guarantees and Indebtedness of any Foreign Subsidiary that is
non-recourse to the Issuer and its other Subsidiaries) as of the date of
calculation on a consolidated basis, after giving effect to the incurrence of
Indebtedness on such date, net of cash stated on the Parent's consolidated
balance sheet (excluding cash held at Parent) to (ii) the Consolidated EBTIDA of
the Issuer for the four last full fiscal quarters ending on or prior to the date
of determination; provided, that for purposes of such calculation, Acquisitions
which occurred during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date shall be assumed to have occurred on the
first day of the Reference Period.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains and losses which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain or loss from the sale or other disposition of
assets outside the ordinary course of business or from the issuance or sale of
any capital stock), (b) the net income, if positive, of any Person, other than a
Consolidated Subsidiary, in which such Person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a
Consolidated Subsidiary of such Person during such period, but in any case not
in excess of such Person's pro rata share of such Person's net income for such
period, (c) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (d)
the net income, if positive, of any of such Person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Consolidated
Subsidiary, and (e) the net income of, or any dividends or other distributions
from, any Unrestricted Subsidiary, to the extent otherwise included, except to
the extent cash or Cash Equivalents are distributed to the Issuer or one of its
Subsidiaries in a transaction that does not relate to the liquidation of such
Unrestricted Subsidiary.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"Designated Senior Debt" means, (a) so long as it is in effect, the New
Credit Facility and (b) at any time when the New Credit Facility is no longer in
effect any other Senior Debt designated by the Issuer to be "Designated Senior
Debt" that has an outstanding principal amount of at least $20 million at the
time of such designation.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any Person, Equity Interests of such Person that, by its terms or by
the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such Person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with respect to
any Subsidiary of such Person (including with respect to any Subsidiary of the
Issuer), any Equity Interests other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"Disqualified Preferred Stock" means, with respect to any Person, Equity
Interests of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time or both would be, required to be redeemed or
repurchased
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(including at the option of the holder thereof) by such Person or any of its
Subsidiaries, in whole or in part, on or prior to the Stated Maturity of the
Notes.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Excluded Subsidiary" means any Subsidiary which has assets with a fair
market value of $5.0 million or less and is designated as an "Excluded
Subsidiary" by the Issuer; provided that at no time may the aggregate fair
market value of the assets of all Subsidiaries designated as "Excluded
Subsidiaries" exceed $25.0 million.
"Exempted Affiliate Transaction" means (a) reasonable and customary
financial advisory, securities underwriting or similar arrangements with
investment banking firms of national reputation, (b) issuances of Qualified
Capital Stock of the Issuer, (c) customary employee compensation or incentive
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Issuer, (d) dividends permitted under
the terms of the covenant "Limitation on Restricted Payments" and payable, in
form and amount, on a pro rata basis to all holders of Capital Stock of the
Issuer, and (e) transactions solely between the Issuer or any of the Issuer's
Subsidiaries or Unrestricted Subsidiaries or solely among Subsidiaries or
Unrestricted Subsidiaries of the Issuer.
"Existing Assets" means property, plant and equipment and other tangible
business assets existing as of the Issue Date used in a Related Business of the
Issuer or the Guarantors, but does not include inventory, cash or Cash
Equivalents or intangible assets, and the proceeds from the sale, disposition or
other transfer of any Existing Assets outside the ordinary course of business.
"Existing Indebtedness" means the Indebtedness of the Issuer and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the Issue Date, until such amounts are repaid.
"Finance Subsidiary" means any Subsidiary of the Issuer (other than a
Subsidiary Guarantor or a Foreign Subsidiary) organized for the sole purpose of
issuing Capital Stock or other securities and loaning the proceeds thereof to
the Issuer or a Subsidiary Guarantor and which engaged in no other transactions
except those incidental thereto.
"Finance Subsidiary Indebtedness" means Indebtedness of or Disqualified
Capital Stock issued by a Finance Subsidiary, which Indebtedness or Disqualified
Capital Stock does not mature and is not mandatorily redeemable or redeemable at
the option of the holder thereof, in whole or in part (other than pursuant to
customary change of control or asset sale provisions), prior to the final Stated
Maturity of the Notes.
"Foreign Subsidiary" means any Subsidiary of the Issuer which (a) is not
organized under the laws of the United States, any state thereof or the District
of Columbia, (b) conducts substantially all of its business operations outside
the United States of America, and (c) does not own, or have the benefit of any
Lien on, any Equity Interests of the Issuer or any Subsidiary Guarantor.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Indebtedness" of any Person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of such Person, to the
extent such liabilities and obligations would appear as a liability upon the
consolidated balance sheet of such Person in accordance with GAAP, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof), (ii) evidenced
by bonds, notes, debentures or similar instruments, or (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except (other than accounts payable or other obligations to trade creditors
which have remained unpaid for greater than 60 days past their original due
date) those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable to trade creditors; (b) all liabilities
and obligations, contingent or otherwise, of such Person (i) evidenced by
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bankers' acceptances or similar instruments issued or accepted by banks, (ii)
for the payment of money relating to any Capitalized Lease Obligation, or (iii)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit; (c) all net obligations of such Person
under Interest Swap and Hedging Obligations; (d) all liabilities and obligations
of others of the kind described in the preceding clauses (a), (b) or (c) that
such Person has guaranteed or that is otherwise its legal liability; and (e) any
and all deferrals, renewals, extensions, refinancings and refundings (whether
direct or indirect) of, or amendments, modifications or supplements to, any
liability of the kind described in any of the preceding clauses (a), (b), (c) or
(d), or this clause (e), whether or not between or among the same parties;
provided that any indebtedness which has been defeased in accordance with GAAP
or defeased pursuant to the deposit of cash or Government Securities (in an
amount sufficient to satisfy all such indebtedness obligations at maturity or
redemption, as applicable, and all payments of interest and premium, if any) in
a trust or account created or pledged for the sole benefit of the holders of
such indebtedness, and subject to no other Liens, and the other applicable terms
of the instrument governing such indebtedness, shall not constitute
"Indebtedness."
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any Person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person or any agreement to make any such acquisition; (b) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable, endorsements for
collection or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Issuer or any Guarantor to the extent
permitted by the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," the entering into by such Person of any
guarantee of, or other credit support or contingent obligation with respect to,
Indebtedness or other liability of such other person; (d) the making of any
capital contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Issuer of any Person to be an
Unrestricted Subsidiary. The Issuer shall be deemed to make an Investment in an
amount equal to the fair market value of the net assets of any subsidiary (or,
if neither the Issuer nor any of its Subsidiaries has theretofore made an
Investment in such subsidiary, in an amount equal to the Investments being
made), at the time that such subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from the
Issuer or a Subsidiary of the Issuer shall be deemed an Investment valued at its
fair market value at the time of such transfer.
"Issue Date" means the date of first issuance of Notes under the Indenture.
"Junior Securities" means any Qualified Capital Stock and any Indebtedness
of the Issuer or a Guarantor, as applicable, that is subordinated in right of
payment to the Notes or the Guarantee, as applicable, and has no scheduled
installment of principal due, by redemption, sinking fund payment or otherwise,
on or prior to the Stated Maturity of the Notes; provided that in the case of
subordination in respect of Senior Debt under the New Credit Facility, "Junior
Security" shall mean any Qualified Capital Stock and any Indebtedness of the
Issuer or the Guarantor, as applicable, that is issued to a Holder on account of
the Notes pursuant to an order or decree of a court of competent jurisdiction in
a reorganization proceeding under any applicable bankruptcy or reorganization
law, which Qualified Capital Stock or Indebtedness (i) has a maturity, mandatory
redemption obligation or put right, if any, longer than, or occurring after the
final maturity date of, all Senior Debt outstanding under the New Credit
Facility on the date of issuance of such
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Qualified Capital Stock or Indebtedness (and to any securities issued in
exchange for any such Senior Debt), (ii) is unsecured, (iii) has an Average Life
longer than the security for which such Qualified Capital Stock or Indebtedness
is being exchanged, (iv) does not provide for terms, conditions or covenants
more onerous than those provided in the Notes and (v) by their terms or by law
are subordinated to Senior Debt outstanding under the New Credit Facility on the
date of issuance of such Qualified Capital Stock or Indebtedness (and to any
securities in exchange for any such Senior Debt) at least to the same extent as
the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Issuer in the case of a sale of its Qualified Capital Stock and
by the Issuer and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock of the Issuer upon any exercise,
exchange or conversion of securities (including options, warrants, rights and
convertible or exchangeable debt) of the Issuer that were issued for cash on or
after the Issue Date, the amount of cash originally received by the Issuer upon
the issuance of such securities (including options, warrants, rights and
convertible or exchangeable debt) less, in each case, the sum of all payments,
fees, commissions and expenses (including, without limitation, the fees and
expenses of legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale of Qualified Capital Stock, and, in the
case of an Asset Sale only, less the amount (estimated reasonably and in good
faith by the Issuer) of income, franchise, sales and other applicable taxes
required to be paid resulting from such sale by the Issuer or any of its
respective Subsidiaries in the taxable year that such sale is consummated or in
the immediately succeeding taxable year, the computation of which shall take
into account the reduction in tax liability resulting from any available
operating losses and net operating loss carryovers, tax credits and tax credit
carryforwards, and similar tax attributes. "Net Cash Proceeds" also includes the
amount of cash received by the Issuer as a Capital Contribution from Parent.
"New Credit Facility" means the credit agreement dated April 17, 1998 by
and among the Issuer, the Parent, and certain financial institutions providing
for an aggregate $250.0 million term credit facility and an aggregate $750.0
million revolving credit facility, and including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and/or related documents may be amended,
restated, supplemented, renewed, replaced, refinanced (in whole or in part) or
otherwise modified from time to time whether or not with the same agent,
trustee, representative lenders or holders, and whether or not pursuant to a
single or multiple agreements or instruments, and, subject to the proviso to the
next succeeding sentence, irrespective of any changes in their terms and
conditions thereof. Without limiting the generality of the foregoing, the term
"New Credit Facility" shall include agreements in respect of Interest Swap and
Hedging Obligations with lenders at any time party to the New Credit Facility
(which Interest Swap and Hedging Obligations shall not be deemed to increase the
amount outstanding pursuant to the New Credit Facility for purposes of
determining compliance with the "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" covenant contained herein) and
shall also include any amendment, amendment and restatement, renewal, extension,
restructuring, supplement or modification to any New Credit Facility and all
refundings, refinancings and replacements (whether in whole or in part) of all
or any part of the New Credit Facility, including any agreement or agreements
(i) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding or deleting borrowers or guarantors
thereunder, so long as borrowers and issuers include one or more of the Issuer
and its Subsidiaries and their respective successors and assigns, (iii)
increasing the amount of Indebtedness incurred thereunder or available to be
borrowed thereunder; provided, that on the date such increased Indebtedness is
incurred it would be permitted to be incurred under the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," or (iv)
otherwise altering the terms and conditions thereof.
"Non-Recourse Indebtedness" means Indebtedness (a) as to which neither the
Issuer nor any of its Subsidiaries (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (ii) is directly or indirectly liable (as a guarantor or
otherwise), or (iii) constitutes the lender; and (b) no default with respect to
which (including any rights that the holders
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thereof may have to take enforcement action against an Unrestricted Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Issuer or any of its Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
"Obligation" means any principal, premium, interest, penalties, fees,
reimbursements, damages, indemnification and other liabilities relating to
obligations of the Issuer or any Guarantor under the Notes or the Indenture,
including any liquidated damages pursuant to the Registration Rights Agreement.
"Officer's Certificate" means a certificate signed on behalf of the Issuer
or Subsidiary Guarantor, as applicable, by an officer of the Issuer or
Subsidiary Guarantor, as applicable, who must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Issuer or Subsidiary Guarantor, as applicable, that
meets the requirements set forth in the Indenture.
"Parent" means Corporate Express, Inc.
"Parent Consolidated Leverage Ratio" shall mean the ratio on a pro forma
basis of (i) the aggregate outstanding amount of Indebtedness of the Parent and
its Consolidated Subsidiaries as of the date of calculation on a consolidated
basis, after giving effect to the incurrence of Indebtedness and Disqualified
Preferred Stock on such date, net of cash stated on the Parent's consolidated
balance sheet, plus the aggregate liquidation preference of all Disqualified
Preferred Stock of the Parent and its Consolidated Subsidiaries to (ii) the
Consolidated EBITDA of the Parent for the four last full fiscal quarters ending
on or prior to the date of determination; provided, that for purposes of such
calculation, Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period.
"Parent Convertible Notes" means the $325.0 million aggregate principal
amount of 4 1/2% Convertible Notes due July 1, 2000 of the Parent issued
pursuant to the Indenture, dated as of June 24, 1996, between Parent and Bankers
Trust Company, as Trustee, as in existence on the Issue Date.
"Permitted Indebtedness" means that:
(a) the Issuer, the Subsidiary Guarantors and the Foreign Subsidiaries
may incur Indebtedness solely in respect of bankers acceptances, bank
overdrafts, letters of credit and performance bonds (to the extent that
such incurrence does not result in the incurrence of any obligation to
repay any obligation relating to borrowed money of others), all in the
ordinary course of business in accordance with customary industry practices
and for the purposes customary in the Issuer's industry;
(b) the Issuer may incur Indebtedness to any Subsidiary Guarantor or a
Foreign Subsidiary, and any Subsidiary Guarantor or a Foreign Subsidiary
may incur Indebtedness to any other Subsidiary Guarantor or a Foreign
Subsidiary or to the Issuer; provided that the time any such Indebtedness
becomes held by any Person other than the Issuer or a Subsidiary, Guarantor
or a Foreign Subsidiary shall be deemed an Incurrence Date; provided,
further, that in the case of Indebtedness of the Issuer, such obligations
shall be unsecured and subordinated in all respects to the Issuer's
obligations pursuant to the Notes;
(c) any Subsidiary Guarantor may guaranty any Indebtedness of the
Issuer or another Subsidiary Guarantor that was permitted to be incurred
pursuant to the Indenture, substantially concurrently with such incurrence
or at the time such Person becomes a Subsidiary Guarantor;
(d) a Receivables Subsidiary may incur Indebtedness in a Qualified
Receivables Transaction that is without recourse to the Issuer or Parent or
to any Subsidiary of the Issuer or of Parent or any of their assets (other
than Standard Securitization Undertakings and other than such Receivables
Subsidiary and its assets), and is not guaranteed by any such Person and is
not otherwise any such other Person's legal liability; and
(e) the Issuer and the Subsidiary Guarantors and the Foreign
Subsidiaries may incur Interest Swap and Hedging Obligations, so long as
not for purposes of speculation, for the purpose of fixing or hedging
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(i) interest rate risk with respect to any floating Indebtedness that is
permitted by the terms of the Indenture to be outstanding or (ii) the value
of foreign currencies purchased or received by the Issuer or its
Subsidiaries in the ordinary course.
"Permitted Investment" means any Investment in (a) any of the Notes; (b)
Cash Equivalents; (c) intercompany notes to the extent permitted under clause
(b) of the definition of "Permitted Indebtedness; (d) Investments by the Issuer
or any Subsidiary Guarantor in any Person that is or immediately after such
Investment becomes a Subsidiary Guarantor, or immediately after such Investment
merges or consolidates into the Issuer or any Subsidiary Guarantor in compliance
with the terms of the Indenture, provided that such Person is engaged in all
material respects in Related Business; (e) Investments by the Issuer or any
Subsidiary Guarantor in any Person that is or immediately after such Investment
becomes a Wholly Owned Foreign Subsidiary, provided that such Person is engaged
in all material respects in a Related Business (other than Investments
consisting of or from the contribution, sale, disposition or other transfer of
Existing Assets of the Issuer or a Subsidiary Guarantor or the direct or
indirect proceeds of any such Existing Assets, in each case outside the ordinary
course of business); (f) Investments in the Issuer by any Subsidiary Guarantor,
provided that in the case of Indebtedness constituting any such Investment, such
Indebtedness shall be unsecured and subordinated in all respects to the Issuer's
obligations under the Notes; (g) Investments in securities of trade creditors or
customers received in settlement of obligations that arose in the ordinary
course of business or pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (h) Investments by the Issuer outstanding on the Issue Date; (i)
transactions or arrangements with officers or directors of the Issuer or any
Subsidiary Guarantor entered into in the ordinary course of business (including
compensation or employee benefit arrangements with any officer or director of
the Issuer or any Subsidiary Guarantor permitted under the covenant "Limitation
on Transactions with Affiliates"); (j) the acquisition by a Receivables
Subsidiary in connection with a Qualified Receivables Transaction of Equity
Interests of a trust or other Person established by such Receivables Subsidiary
to effect such Qualified Receivables Transaction; (k) any Investment by the
Issuer or any Guarantor in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other person, in each case in connection with a
Qualified Receivables Transaction; provided, that the foregoing Investment is in
the form of a note that the Receivables Subsidiary or other Person is required
to repay as soon as practicable from available cash collections less amounts
required to be established as reserves pursuant to contractual arrangements with
entities that are not Affiliates entered into as part of a Qualified Receivables
Transaction; (l) Investments made as a result of the receipt of non-cash
consideration from a sale of assets that does not constitute an Asset Sale by
reason of the de minimus thresholds set forth in the definition thereof and from
an Asset Sale that was made pursuant to and in compliance with the covenant
entitled "Limitations on Sales of Assets and Subsidiary Stock"; and (m) any
acquisition of assets in exchange for the Qualified Capital Stock of the Issuer.
"Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Issuer in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business,
provided that (i) the underlying obligations are not overdue for a period of
more than 30 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Issuer in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not in any
case materially detract from the value of the property subject thereto (as such
property is used by the Issuer or any of its Subsidiaries) or interfere with the
ordinary conduct of the business of the Issuer or any of its Subsidiaries; (f)
Liens arising by operation of law in connection with judgments, only to the
extent, for an amount and for a period not resulting in an Event of Default with
respect thereto; (g) pledges or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security legislation; (h) Liens
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securing the Notes; (i) Liens securing Indebtedness of a Person existing at the
time such Person becomes a Subsidiary of the Issuer or is merged with or into
the Issuer or a Subsidiary of the Issuer, or Liens securing Indebtedness
incurred in connection with an Acquisition, provided that such Liens were in
existence prior to the date of such acquisition, merger or consolidation, were
not incurred in anticipation thereof, and do not extend to any other assets; (j)
Liens arising from Purchase Money Indebtedness permitted to be incurred under
paragraph (c) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," provided such Liens relate solely
to the property which is subject to such Purchase Money Indebtedness; (k) leases
or subleases granted to other Persons in the ordinary course of business not
materially interfering with the conduct of the business of the Issuer or any of
its Subsidiaries or materially detracting from the value of the relative assets
of the Issuer or any Subsidiary; (l) Liens arising from precautionary Uniform
Commercial Code financing statement filings regarding operating leases entered
into by the Issuer or any of its Subsidiaries in the ordinary course of
business; (m) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to the
Holders of the Notes than the terms of the Liens securing such refinanced
Indebtedness, provided that the Indebtedness secured is not increased and the
Liens are not extended to any additional assets or property that would not have
been security for the Indebtedness refinanced; (n) Liens securing Senior Debt,
including Indebtedness incurred under the New Credit Facility in accordance with
the terms of the Indenture; (o) Liens on assets of a Receivables Subsidiary
incurred in connection with a Qualified Receivables Transaction; and (p) Liens
securing Indebtedness of any Foreign Subsidiary incurred in accordance with the
provisions of the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," provided such Liens relate solely to the
property of one or more Foreign Subsidiaries; (q) Liens of landlords or of
mortgages of landlords arising by operation of law, provided that the rental
payments secured thereby are not yet due and payable; (r) Liens incurred in the
ordinary course of business of the Issuer or any Subsidiary of the Issuer with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (i) 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 (ii) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof; (s) Liens
securing reimbursement obligations with respect to letters of credit which
encumber only documents and other property relating to such letters of credit
and the products and proceeds thereof; (t) Liens arising out of consignment or
similar arrangements for the sale of goods; and (u) Liens securing Interest Swap
and Hedging Obligations permitted to be incurred by the Indenture.
"Permitted Payments to Parent" means, without duplication, (a) payments to
Parent in an aggregate amount not to exceed $1.0 million in any fiscal year in
an amount necessary and sufficient to permit Parent to pay reasonable and
necessary operating expenses and other general corporate expenses to the extent
such expenses relate or are fairly allocable to the Issuer and its Subsidiaries
(including any reasonable professional fees and expenses, but excluding all
expenses payable to or to be paid to or on behalf of an Excluded Person except
in a transaction constituting an Exempted Affiliate Transaction, and (b)
payments to Parent to enable Parent to pay foreign, Federal, state or local tax
liabilities ("Tax Payments"), not to exceed the amount of any tax liabilities
that would be otherwise payable by the Issuer and its Subsidiaries to the
appropriate taxing authorities if the Issuer and its Subsidiaries were to file
separate tax returns to the extent that Parent has an obligation to pay such tax
liabilities relating to the operations, assets or capital of the Issuer or its
Subsidiaries; provided, however, that (i) notwithstanding the foregoing, in the
case of determining the amount of a Tax Payment that is permitted to be paid by
the Issuer and any of its United States Subsidiaries in respect of their Federal
income tax liability, such payment shall be determined on the basis of assuming
that the Issuer is the parent company of an affiliated group (the "Issuer
Affiliated Group") filing a Federal income tax return and that Parent and each
such United States Subsidiary is a member of the Issuer Affiliated Group and
(ii) any Tax Payments shall either be used by Parent to pay such tax liabilities
within 90 days of Parent's receipt of such payment or refunded to the payee.
"Public Equity Offering" means an underwritten offering of common stock of
the Issuer or Parent for cash pursuant to an effective registration statement
under the Securities Act, provided, at the time or upon consummation of such
offering, such common stock of the Issuer or Parent is listed on a national
securities exchange or quoted on the national market system of the Nasdaq Stock
Market.
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"Purchase Money Indebtedness" of any Person means any Indebtedness of such
Person to any seller or other Person incurred to finance solely the acquisition
(including in the case of a Capitalized Lease Obligation, the lease) of any real
or personal tangible property which is incurred within 180 days of such
acquisition and is secured only by the assets so financed.
"Qualified Capital Stock" means any Equity Interests of the Issuer or such
other specified person that is not Disqualified Capital Stock.
"Qualified Exchange" means any defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Issuer issued on or after the Issue Date with the Net Cash Proceeds received by
the Issuer from the substantially concurrent sale of Qualified Capital Stock of
the Issuer or any exchange of Qualified Capital Stock of the Issuer for any
Equity Interests or Indebtedness of the Issuer issued on or after the Issue
Date.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Issuer, any Guarantor or any
Receivables Subsidiary pursuant to which the Issuer, any Guarantor or any
Receivables Subsidiary may sell, convey or otherwise transfer to, or grant a
security interest in for the benefit of, (a) a Receivables Subsidiary (in the
case of a transfer or encumbrancing by the Issuer or any Guarantor) and (b) any
other Person (solely in the case of a transfer or encumbrancing by a Receivables
Subsidiary), solely accounts receivable (whether now existing or arising in the
future) of the Issuer or any Guarantor which arose in the ordinary course of
business of the Issuer or any Guarantor, and any assets related thereto,
including, without limitation, all collateral securing such accounts receivable,
all contracts and all guarantees or other obligations in respect of such
accounts receivable, proceeds of such accounts receivable and other assets which
are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Issuer
which engages in no activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of the
Issuer (as provided below) as a Receivables Subsidiary (a) no portion of any
Indebtedness or any other obligations (contingent or otherwise) of which,
directly or indirectly, contingently or otherwise, (i) is guaranteed by the
Issuer or Parent or any other Subsidiary of the Issuer or Parent (excluding
Standard Securities Undertakings), (ii) is recourse to or obligates the Issuer
or Parent or any other Subsidiary of the Issuer or Parent in any way other than
pursuant to Standard Securitization Undertakings, or (iii) subjects any property
or asset of the Issuer or Parent or any other Subsidiary of the Issuer or Parent
to the satisfaction thereof, other than Standard Securitization Undertakings,
(b) with which neither the Issuer or Parent nor any other Subsidiary of the
Issuer or Parent has any material contract, agreement, arrangement or
understanding other than those customarily entered into in connection with
Qualified Receivables Transactions, and (c) with which neither the Issuer or
Parent nor any other Subsidiaries of the Issuer or Parent has any obligation,
directly or indirectly, contingently or otherwise, to maintain or preserve such
Subsidiary's financial condition or cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Issuer shall be evidenced to the Trustee by the filing with the Trustee a
certified copy of the resolution of the Board of Directors of the Issuer giving
effect to such designation and an Officer's Certificate certifying that such
designation complied with the foregoing conditions.
"Reference Period" with regard to any Person means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"Refinanced Parent Convertible Note" means Refinancing Indebtedness
incurred to refinance the Parent Convertible Notes.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of
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Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so Refinanced and (ii) if such Indebtedness being
Refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
provided, that (A) such Refinancing Indebtedness shall only be issued to
Refinance outstanding Indebtedness or Disqualified Capital Stock of such person
issuing such Refinancing Indebtedness, (B) such Refinancing Indebtedness shall
(x) not have an Average Life shorter than the Indebtedness or Disqualified
Capital Stock to be so refinanced at the time of such Refinancing and (y) in all
respects, be no less subordinated, if applicable, to the rights of Holders of
the Notes than was the Indebtedness or Disqualified Capital Stock to be
refinanced, and (C) such Refinancing Indebtedness shall have a final stated
maturity or redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or Disqualified
Capital Stock to be so refinanced.
"Related Business" means the business conducted (or proposed to be
conducted) by the Issuer and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Issuer are materially related businesses. Without limiting the generality of the
foregoing, Related Business shall include sales (including by mail) of office
products, computer systems and equipment and office furniture, computer systems
consulting and forms management.
"Related Person" means any Person who controls, is controlled by or is
under common control with an Excluded Person; provided that for purposes of this
definition "control" means the beneficial ownership of more than 50% of the
total voting power of a Person normally entitled to vote in the election of
directors, managers or trustees, as applicable, of a Person.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in Cash Equivalents and other Permitted
Investments.
"Restricted Payment" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such Person or the Parent or Subsidiary of such person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Equity Interests of such Person or any Subsidiary or the Parent of such
Person, (c) other than with the proceeds from the substantially concurrent sale
of, or in exchange for, Refinancing Indebtedness, any purchase, redemption, or
other acquisition or retirement for value of, any payment in respect of any
amendment of the terms of or any defeasance of, any Subordinated Indebtedness,
directly or indirectly, by such Person or the Parent or Subsidiary of such
Person prior to the scheduled maturity, any scheduled repayment of principal, or
scheduled sinking fund payment, as the case may be, of such Indebtedness and (d)
any Restricted Investment by such person; provided, however, that the term
"Restricted Payment" does not include (i) any dividend, distribution or other
payment on or with respect to Equity Interests of an issuer to the extent
payable solely in shares of Qualified Capital Stock of such issuer; (ii) any
dividend, distribution or other payment to the Issuer or to any of its
Subsidiary Guarantors, by the Issuer or any of its Subsidiaries, or to a Foreign
Subsidiary which is a direct or indirect parent of another Foreign Subsidiary,
by such Foreign Subsidiary; (iii) loans or advances to any Subsidiary Guarantor
the proceeds of which are used by such Subsidiary Guarantor in a Related
Business activity of such Subsidiary Guarantor; or (iv) Permitted Investments.
"Senior Debt" of the Issuer or any Guarantor means Indebtedness (including,
without limitation, all monetary obligations in respect of the New Credit
Facility, and interest, whether or not allowable, accruing on Indebtedness
incurred pursuant to the New Credit Facility at the relevant contractual rate
provided in the New Credit Facility both before and after the filing of a
petition initiating any proceeding under any bankruptcy, insolvency or similar
law) of the Issuer or such Guarantor arising under the New Credit Facility or
that, by the terms of the instrument creating or evidencing such Indebtedness,
is expressly designated Senior Debt and made senior in right of payment to the
Notes or the applicable Guarantee; provided, that in no event shall Senior Debt
include (a) Indebtedness to any Subsidiary of the Issuer or any officer,
director or employee of the Issuer or any Subsidiary of the Issuer, (b)
Indebtedness to the extent the same is incurred in violation of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," (c) Indebtedness to trade creditors, (d) Disqualified Capital Stock, (e)
Capitalized Lease Obliga-
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tions, (f) any liability for taxes owed or owing by the Issuer or such Guarantor
or (g) the Parent Convertible Notes or the 9 1/8% Senior Subordinated Notes.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Standard Securitization Undertakings" mean representations, warranties,
covenants and indemnities entered into by the Issuer or any Subsidiary Guarantor
which are reasonably customary in an accounts receivables transaction.
"Stated Maturity" when used with respect to any Note, means June 1, 2008.
"Subordinated Indebtedness" means Indebtedness of the Issuer or a
Subsidiary Guarantor that is subordinated in right of payment by its terms or
the terms of any document or instrument relating thereto to the Notes or such
Subsidiary Guarantee, as applicable, in any respect or has a final stated
maturity after the Stated Maturity.
"Subsidiary" with respect to any Person, means (i) a corporation a majority
of whose Equity Interests with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such Person, by
such Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such person, or (ii) any other Person (other than a corporation)
in which such person, one or more Subsidiaries of such Person, or such Person
and one or more Subsidiaries of such Person, directly or indirectly, at the date
of determination thereof has a majority ownership interest. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Issuer or
of any Subsidiary of the Issuer. Unless the context requires otherwise,
Subsidiary means each direct and indirect Subsidiary of the Issuer.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Indebtedness; (b) is not party to any agreement, contract,
arrangement or understanding with the Issuer or any Subsidiary of the Issuer
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Issuer or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company; (c) is
a Person with respect to which neither the Issuer nor any of its Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (d)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Issuer or any of its Subsidiaries. Any such
designation by the Board of Directors will be evidenced to the Trustee by filing
with the Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
entitled "Restricted Payments" hereof. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary will be deemed
to be incurred by a Subsidiary of the Issuer as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
entitled "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" hereof, the Issuer will be in default of such covenant). The
Board of Directors of the Issuer may designate any Unrestricted Subsidiary to be
a Subsidiary, provided,that (i) no Default or Event of Default is existing or
will occur as a consequence thereof and (ii) immediately after giving effect to
such designation, on a pro forma basis, the Issuer could incur at least $1.00 of
Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock." Each such designation shall be evidenced by filing with the
Trustee a certified copy of the resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
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"U.S. Legal Tender Equivalents" means securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof with a maturity of 90 days or less (provided that the
full faith and credit of the United States of America is pledged in support
thereof).
"Wholly Owned Foreign Subsidiary" of any Person means a Foreign Subsidiary
of such Person all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Foreign Subsidiaries of such Person
or by such Person and one or more Subsidiary Guarantors of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiary Guarantors of such Person.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Old Notes sold to Qualified Institutional Buyers initially were in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
were deposited with the Trustee, as custodian for DTC in New York, New York, and
registered in the name of DTC or its nominee for credit to the accounts of DTC's
Direct and Indirect Participants. The Old Notes sold in offshore transactions in
reliance on Regulation S, initially were in the form of one or more temporary,
registered, global book-entry notes without interest coupons (the "Reg S
Temporary Global Notes"). The Reg S Temporary Global Notes were deposited with
the Trustee, as custodian for DTC, in New York, New York, and registered in the
name of a nominee of DTC (a "Nominee") for credit to the accounts of Indirect
Participants participating in DTC through the Euroclear System ("Euroclear") and
Cedel Bank, societe anonyme ("CEDEL"). During the 40-day period commencing on
the day after the later of the offering date and the original Issue Date of the
Old Notes (the "40-Day Restricted Period"), beneficial interests in the Reg S
Temporary Global Note may be held only through Euroclear or CEDEL, and, pursuant
to DTC's procedures, Indirect Participants that hold a beneficial interest in
the Reg S Temporary Global Note will not be able to transfer such interest to a
person that takes delivery thereof in the form of an interest in the U.S. Global
Notes. Within a reasonable time after the expiration of the 40-Day Restricted
Period, the Reg S Temporary Global Notes will be exchanged for one or more
permanent global notes (the "Reg S Permanent Global Notes", collectively with
the Reg S Temporary Global Notes, the "Reg S Global Notes") upon delivery to DTC
of certification of compliance with the transfer restrictions applicable to the
Notes and pursuant to Regulation S as provided in the Indenture. After the
40-Day Restricted Period, (i) beneficial interests in the Reg S Permanent Global
Notes may be transferred to a person that takes delivery in the form of an
interest in the U.S. Global Notes and (ii) beneficial interests in the U.S.
Global Notes may be transferred to a person that takes delivery in the form of
an interest in the Reg S Permanent Global Notes, provided, in each case, that
the certification requirements described below are complied with. See "Transfers
of Interests in One Global Note for Interests in Another Global Note." All
registered global notes are referred to herein collectively as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes, if
any, will be subject to certain restrictions on transfer and will bear a
restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See "Transfer
of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
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DEPOSITARY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and CEDEL. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants").
DTC has also advised the Issuer that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes that have been allocated to them by the Initial
Purchasers, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Temporary Global Notes may hold their interests therein directly through
Euroclear or CEDEL or indirectly through organizations that are participants in
Euroclear or CEDEL. After the expiration of the 40-Day Restricted Period (but
not earlier), investors may hold interests in the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office, is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of CEDEL (each a "Nominee" of Euroclear and CEDEL, respectively).
Therefore, they will each be recorded on DTC's records as the holders of all
ownership interests held by them on behalf of Euroclear and CEDEL, respectively.
Euroclear and CEDEL must maintain on their own records the ownership interests,
and transfers of ownership interests of, by and between their own customers'
securities accounts. DTC will not maintain such records. All ownership interests
in any Global Notes, including those of customers' securities accounts held
through Euroclear or CEDEL, may be subject to the procedures and requirements of
DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "Reg S Temporary and Reg S
Permanent Global Notes" and "-- Transfers of Interests in Global Notes for
Certificated Notes."
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Issuer, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any, and
interest on Global Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
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Indenture. Consequently, neither the Issuer, the Trustee nor any agent of the
Issuer or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Note or (ii) any other matter relating to the actions and practices of
DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Issuer that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Issuer or the Guarantors. Neither the Issuer, the Guarantors nor
the Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Notes, and the
Issuer and the Trustee may conclusively rely on and will be protected in relying
on instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
The Global Notes trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures of
Euroclear or CEDEL and within their established deadlines (Brussels time for
Euroclear and UK time for CEDEL). Indirect Participants who hold interest in the
Notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in Reg S
Permanent Global Note to a DTC Participant until the European business day for
Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its
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Direct Participants) for legended Notes in certificated form, and to distribute
such certificated forms of Notes to its Direct Participants. See "Transfers of
Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Global Notes and in the U.S.
Global Notes among Direct Participants, including Euroclear and CEDEL, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Issuer, the
Guarantors, the Initial Purchasers or the Trustee shall have any responsibility
for the performance by DTC, Euroclear or CEDEL or their respective Direct and
Indirect Participants of their respective obligations under the rules and
procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuer believes
to be reliable, but the Issuer takes no responsibility for the accuracy thereof.
REG S TEMPORARY AND REG S PERMANENT GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Temporary Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying that
such Indirect Participant is either not a U.S. Person or has purchased such
interests in a transaction that is exempt from the registration requirements
under the Securities Act, and Euroclear or CEDEL, as the case may be, must
provide to the Trustee (or the Paying Agent, if other than the Trustee) a
certificate in the form required by the Indenture prior to any exchange of such
beneficial interests for beneficial interests in Reg S Permanent Global Notes.
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settler, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned by "accredited investors" within the meaning of Rule
501(a) under the Securities Act who are not natural persons, estates or trusts);
provided, however, that a "U.S. Person" shall not include (A) a branch or agency
of a U.S. Person that is located and operating outside the United States for
valid business purposes as a locally regulated branch or agency engaged in the
banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(o)(7) of Regulation S under the Securities Act and any other similar
international organizations, and their agencies, affiliates and pension plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Temporary Global Note through
Euroclear or CEDEL will not be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes. After
the expiration of the 40-Day Restricted Period, an Indirect Participant who
holds an interest in Reg S Global Notes will be permitted to transfer its
interest to a U.S. Person who takes delivery in the form of an interest in U.S.
Global Notes only upon receipt by the Trustee of a written certification from
the transferor to the effect that such
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transfer is being made in accordance with the restrictions on transfer set forth
under "Notice to Investors" and set forth in the legend printed on the Reg S
Permanent Global Notes.
Prior to the expiration of the 40-Day Restricted Period, a Direct or
Indirect Participant who holds an interest in the U.S. Global Note will not be
permitted to transfer its interests to any person that takes delivery thereof in
the form of an interest in the Reg S Temporary Global Notes. After the
expiration of the 40-Day Restricted Period, a Direct or Indirect Participant who
holds an interest in U.S. Global Notes may transfer its interests to a person
who takes delivery in the form of an interest in Reg S Permanent Global Notes
only upon receipt by the Trustee of a written certification from the transferor
to the effect that such transfer is being made in accordance with Rule 904 of
Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies the Issuer that it is unwilling or unable to continue as depositary for
the Global Notes and the Issuer thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Issuer, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, the Issuer will notify the Trustee
in writing that, upon surrender by the Direct and Indirect Participants of their
interest in such Global Note, Certificated Notes will be issued to each person
that such Direct and Indirect Participants and the DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Notes will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Issuer
determines otherwise in compliance with applicable law.
Neither the Issuer, the Guarantors nor the Trustee will be liable for any
delay by the holder of the Global Notes or the DTC in identifying the beneficial
owners of Notes, and the Issuer and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the holder of the Global Note
or the DTC for all purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may be transferred only if the transferor first delivers
to the Trustee a written certificate (and, in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described under "Notice to Investors."
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SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Issuer will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. The Issuer expects that secondary trading
in the Certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, the Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC, First Chicago Capital
Markets, Inc. and BNY Capital Markets, Inc. (the "Initial Purchasers") entered
into the Registration Rights Agreement pursuant to which the Issuer and the
Guarantors agreed to file a registration statement with the Commission with
respect to the New Notes, of which this Prospectus forms a part (the "Exchange
Offer Registration Statement") within 60 days of the closing of the issuance of
the Old Notes (the "Closing Date"), and use their respective best efforts to
have it declared effective within 120 days of the Closing Date. The Issuer and
the Guarantors also agreed to use their respective best efforts to cause the
Exchange Offer Registration Statement to be effective continuously, to keep the
Exchange Offer open for a period of not less than 20 business days and cause the
Exchange Offer to be consummated no later than the 30th business day after it is
declared effective by the Commission. Pursuant to the Exchange Offer, certain
holders of the Notes which constitute Transfer Restricted Securities may
exchange their Transfer Restricted Securities for registered New Notes. To
participate in the Exchange Offer, each holder must represent that it is not an
affiliate of the Issuer, it is not engaged in, and does not intend to engage in,
and has no arrangement or understanding with any person to participate in, a
distribution of the New Notes and it is acquiring the New Notes in its ordinary
course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any holder of the Notes which are Transfer Restricted Securities
notifies the Issuer prior to the 20th business day following the consummation of
the Exchange Offer that (a) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (b) it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus, and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by it, or (c) it is a
broker-dealer and holds the Notes acquired directly from the Issuer or any of
the Issuer's affiliates, the Issuer and the Guarantors will file with the
Commission a Shelf Registration Statement to register for public resale the
Transfer Restricted Securities held by any such holder who provides the Issuer
with certain information for inclusion in the Shelf Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Note until the earliest on the date of which (i) such
Note is exchanged in the Exchange Offer and entitled to be resold to the public
by the holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (ii) such Note has been disposed of in
accordance with the Shelf Registration Statement, (iii) such Note is disposed of
by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (iv) such Note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) if the Issuer and the
Guarantors fail to file an Exchange Offer Registration Statement with the
Commission on or prior to the 60th day after the Closing Date, (ii) if the
Exchange Offer Registration Statement is not declared effective by the
Commission on or prior to the 120th day after the Closing Date, (iii) if the
Exchange Offer is not consummated on or before the 30th business day after the
Exchange Offer Registration Statement is declared effective, (iv) if obligated
to file the Shelf Registration Statement and the Issuer and the Guarantors fail
to file the Shelf Registration
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Statement with the Commission on or prior to the 30th business day after such
filing obligation arises, (v) if obligated to file a Shelf Registration
Statement and the Shelf Registration Statement is not declared effective on or
prior to the 90th day after the obligation to file a Shelf Registration
Statement arises, or (vi) if the Exchange Offer Registration Statement or the
Shelf Registration Statement, as the case may be, is declared effective but
thereafter ceases to be effective or useable in connection with resales of the
Transfer Restricted Securities, for such time of non-effectiveness or
non-usability (each, a "Registration Default"), the Issuer and the Guarantors
agree to pay to each holder of Transfer Restricted Securities affected thereby
liquidated damages ("Liquidated Damages") in an amount equal to $0.05 per week
per $1,000 in principal amount of Transfer Restricted Securities held by such
holder for each week or portion thereof that the Registration Default continues
for the first 90 day period immediately following the occurrence of such
Registration Default. The amount of the Liquidated Damages shall increase by an
additional $0.05 per week per $1,000 in principal amount of Transfer Restricted
Securities at the beginning of and for each subsequent 90 day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $0.50 per week, per $1,000 in principal amount of Transfer Restricted
Securities. The Issuer and the Guarantors shall not be required to pay
Liquidated Damages for more than one Registration Default at any given time.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
All accrued Liquidated Damages shall be paid by the Issuer or the
Guarantors to holders entitled thereto in the same manner as interest payments
on the Notes on semi-annual damages payment dates which correspond to interest
payment dates for the Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Issuer has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending one year after the Expiration Date (subject
to extension under certain limited circumstances described herein) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Issuer, or cause the
Issuer to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer -- Exchange Agent." See "The Exchange Offer -- Resales of New Notes."
The Issuer will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or 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 and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging
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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.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon on behalf of
the Company by Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia,
Pennsylvania.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of January 31,
1998, March 1, 1997 and March 2, 1996 and for the eleven month period ended
January 31, 1998, and the three years in the period ended March 1, 1997 have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their report appearing in the Company's Current Report on Form 8-K as filed
on July 29, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission and are
incorporated in this Prospectus by reference and made a part hereof:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998.
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended May 2, 1998 and August 1, 1998.
3. The Company's Current Reports on Form 8-K filed on May 7, 1998 and
July 29, 1998, respectively.
All documents filed by the Parent pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Statement shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained herein
or in any document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for the purposes of this Prospectus
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus, except
as so modified or superseded. The Company will provide without charge upon
written request, a copy of any or all of the information that has been
incorporated by reference in this Prospectus (excluding exhibits to such
information which are not specifically incorporated by reference into such
information). Any such request should be directed to the Secretary of the Parent
at 1 Environmental Way, Broomfield, Colorado 80021.
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AVAILABLE INFORMATION
The Issuer and the Subsidiary Guarantors are not subject to the periodic
reporting and other informational requirements of the Exchange Act. However, the
Parent is subject to such requirements and, in accordance therewith, files
reports, proxy statements and other information with the Commission. The
reports, proxy statements and other information filed by the Parent with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and should be available at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60621. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a Web site (www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Parent's Common Stock is traded on the Nasdaq National Market under the
symbol "CEXP." Reports, proxy statements and other information concerning the
Parent may be inspected at the offices of the Nasdaq National Market.
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GLOSSARY
"Acceleration Notice" means the written notice to the Issuer by either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding, declaring all principal and accrued interest thereon to
be due and payable immediately.
"Acquired Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"Acquisition" -- See "Description of the Notes -- Certain Definitions."
"Additional Notes" means the issuance of additional notes having identical
terms and conditions to the Old Notes, as provided in the Indenture.
"Affiliate" -- See "Description of the Notes -- Certain Definitions."
"Affiliate Transaction" means any Issuer or Subsidiary of Issuer contract,
agreement, arrangement or transaction with any Affiliate.
"Agent's Message" means a message transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Issuer may enforce such Letter
of Transmittal against such participant.
"ASAP" means ASAP Software Express, Inc.
"Asset Sale" means any conveyance, sale, transfer, assignment or other
disposition of, directly or indirectly, any of the Issuer's or a Subsidiary's
property, business or assets, including by merger or consolidation (in the case
of a Subsidiary of the Issuer), and including any sale or other transfer or
issuance of any Equity Interests of any Subsidiary of the Issuer, whether by the
Issuer or a Subsidiary of either or through the issuance, sale or transfer of
any Equity Interest by a Subsidiary of the Issuer.
"Asset Sale Offer" means the offer to (i) purchase or redeem Indebtedness
with the proceeds from an Asset Sale, within 330 days after the date of an Asset
Sale, or (ii) repurchase Notes, and, at the Issuer's option, other Indebtedness
of the Issuer ranking on a parity with the Notes, within 360 days after the date
of each Asset Sale.
"Asset Sale Offer Amount" means the Net Cash Proceeds from an Asset Sale.
"Asset Sale Offer Period" means the 20 business days for which the Asset
Sale Offer shall remain open.
"Asset Sale Offer Price" means the purchase price of 100% of principal
amount (or accreted value in the case of Indebtedness issued with an original
issue discount) of an Asset Sale Offer.
"Assets to Be Disposed of" -- See "Description of the Notes -- Certain
Definitions."
"ATOP" means DTC's Automated Tender Offer Program.
"Average Life" See "Description of the Notes -- Certain Definitions."
"Banks" means the First National Bank of Chicago, as syndication agent; The
Bank of New York, as co-documentation agent; DLJ Capital Funding, Inc., as
co-documentation agent; and Bankers Trust Company, as administrative agent under
the Parent's New Credit Facility.
"Beneficial Owner" or "beneficial owner" -- See "Description of the
Notes -- Certain Definitions."
"Board of Directors" -- See "Description of the Notes -- Certain
Definitions."
"BR" means base rate of interest.
"Business Day" -- See "Description of the Notes -- Certain Definitions."
"Capital Contribution" -- See "Description of the Notes -- Certain
Definitions."
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"Capitalized Lease Obligation" -- See "Description of the Notes -- Certain
Definitions."
"Capital Stock" -- See "Description of the Notes -- Certain Definitions."
"Cash Equivalent" -- See "Description of the Notes -- Certain Definitions."
"CEDEL" means Cedel Bank, societe anonyme.
"Certificate of Foreign Status" means an Internal Revenue Service Form W-8
or other documentary evidence, certifying that a holder is an exempt foreign
person.
"Certificated Notes" means a Note in registered, certificated form without
interest coupons.
"Change of Control" means (i) any merger or consolidation of the Issuer or
Parent with or into any Person or any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Issuer or Parent, on a consolidated basis, in one transaction or a series of
related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in the election of
directors, managers, or trustees, as applicable, of the transferee(s) or
surviving entity or entities, (ii) any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power in the aggregate of all classes of
Capital Stock of the Issuer (other than the Parent so long as the Parent owns
100% of such voting power) or Parent then outstanding normally entitled to vote
in elections of directors, (iii) during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Board of Directors of either the Issuer or the Parent
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Issuer or Parent, as
applicable, was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved, including new
directors designated in or provided for in an agreement regarding the merger,
consolidation or sale, transfer or other conveyance, of all or substantially all
of the assets of the Issuer or the Parent, if such agreement was approved by a
vote of such majority of directors) cease for any reason to constitute a
majority of the Board of Directors of the Issuer or Parent then in office, as
applicable, or (iv) Parent ceases to own 100% of the Equity Interests of the
Issuer.
"Change in Control Offer" means that, in the event that a Change of Control
has occurred, subject to certain optional redemption provisions, each Holder of
Notes will have the right, at such Holder's option, pursuant to an offer
(subject only to conditions required by applicable law, if any) by the Issuer,
to require the Issuer to repurchase all or any part of such Holder's Notes
(provided, that the principal amount of such Notes must be $1,000 or an integral
multiple thereof).
"Change in Control Offer Period" means the 20 business days for which the
Change in Control Offer shall remain open.
"Change in Control Purchase Date" means the date, that shall be no later
than 40 business days after the occurrence of a Change of Control.
"Change in Control Purchase Price" means the cash price equal to 101% of
the principal amount of a Holder's Notes, together with accrued and unpaid
interest and liquidated damage if any, to the Change in Control Purchase Date.
"Claim" -- See "Description of the Notes -- Certain Definitions."
"Closing Date" means the date within 60 days of the closing of the issuance
of the Old Notes.
"Commission" means the Securities and Exchange Commission
"Company" means the Issuer, the Parent and all their respective domestic
and foreign subsidiaries.
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"Consent Solicitation" means the Issuer's solicitation of consents to
certain indenture amendments, which expired on May 13, 1998.
"Consolidated Coverage Ratio" -- See "Description of the Notes -- Certain
Definitions."
"Consolidated EBITDA" -- See "Description of the Notes -- Certain
Definitions."
"Consolidated Fixed Charges" -- See "Description of the Notes -- Certain
Definitions."
"Consolidated Leverage Ratio" -- See "Description of the Notes -- Certain
Definitions."
"Consolidated Net Income" -- See "Description of the Notes -- Certain
Definitions."
"Consolidated Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
"Convertible Notes" means the Parent's 4 1/2% Convertible Notes due July
2000.
"Core Operating Software" means the internally developed product
distribution software used by the Issuer and its Subsidiaries.
"Covenant Defeasance" means the election by the Issuer, at its option and
at any time, to have the obligations of the Issuer and Guarantors released with
respect to certain covenants that are described in the Indenture.
"DDI" means Data Documents Incorporated.
"Debt Incurrence Ratio" means a Consolidated Coverage Ratio of the Issuer
for the Reference Period immediately preceding the Incurrence Date of 2.0 to
1.0.
"Delivery" means U.S. Delivery Systems, Inc.
"Designated Senior Debt" -- See "Description of the Notes -- Certain
Definitions."
"Direct Participants" means participating organizations in DTC's book-entry
transfer facility system.
"Disqualified Capital Stock" -- See "Description of the Notes -- Certain
Definitions."
"Disqualified Preferred Stock" -- See "Description of the Notes -- Certain
Definitions."
"DTC" means the Depository Trust Company.
"Eligible Institution" includes (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer,
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
"Equity Interest" -- See "Description of the Notes -- Certain Definitions."
"Euroclear" means the Euroclear System.
"Excess Proceeds" means the accumulated Net Cash Proceeds from Asset Sales
not applied as set forth in "Description of the Notes -- Certain
Covenants -- Limitation on Sale of Assets and Subsidiary Stock."
"Exchange Act" means the Securities Exchange Act of 1934, as amended .
"Exchange Agent" means the exchange agent with respect to the Exchange
Offer which is The Bank of New York.
"Exchange Offer" means the offer, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, to exchange the New Notes for a like principal amount of
outstanding Old Notes.
"Exchange Offer Registration Statement" means the registrations statement
filed with the Commission with respect to the New Notes, of which the Prospectus
forms a part.
"Excluded Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
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"Exempted Affiliate Transaction" -- See "Description of the
Notes -- Certain Definitions."
"Existing Assets" -- See "Description of the Notes -- Certain Definitions."
"Existing Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"Existing Restricted Investments" means investments that, but for the fact
that such Investments were made prior to the Issue Date, would be Restricted
Investments.
"Expiration Date" means 5:00 P.M., New York time, on , 1998,
unless the Exchange Offer is extended by the Issuer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is Extended.
"Finance Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
"Finance Subsidiary Indebtedness" -- See "Description of the
Notes -- Certain Definitions."
"Foreign Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
"40-Day Restricted Period" means the 40-day period commencing on the date
after the later of the offering date and the original Issue Date of the Old
Notes.
"GAAP" -- See "Description of the Notes -- Certain Definitions."
"Global Notes" means all registered global notes.
"Guarantees" means the guarantees by the Parent and the Subsidiary
Guarantors on a senior subordinated basis.
"Guarantors" means the Parent and the Issuer's Subsidiaries and any future
Subsidiaries, other than Receivables Subsidiaries, Finance Subsidiaries,
Excluded Subsidiaries, Foreign Subsidiaries and Unrestricted Subsidiaries
"HMI" means Hermann Marketing, Inc.
"Incurrence Date" means the date of incurrence of any Indebtedness by the
Issuer, any Subsidiary Guarantor or any Subsidiary.
"Indebtedness" -- See "Description of the Notes -- Certain Definitions."
"Indenture" means the indenture governing the Notes, dated May 29, 1998, by
and among the Issuer, the Parent, the subsidiary Guarantors and the Trustee.
"Indirect Participants" means the entities, other than Direct Participants,
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant.
"Initial Purchasers" means Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC, First Chicago Capital
Markets, Inc. and BNY Capital Markets, Inc.
"Interest Swap and Hedging Obligation" -- See "Description of the
Notes -- Certain Definitions."
"Investment" -- See "Description of the Notes -- Certain Definitions."
"Issue Date" -- See "Description of the Notes -- Certain Definitions."
"Issuer" means CEX Holdings, Inc., a wholly-owned subsidiary of Corporate
Express, Inc.
"Joyce" means Joyce International, Inc.'s office products division.
"Junior Securities" -- See "Description of the Notes -- Certain
Definitions."
"Legal Defeasance" means the election by the Issuer, at its option, to have
its obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes.
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"Letter of Transmittal" means the Letter of Transmittal and instructions
thereto accompanying the Prospectus.
"Lien" -- See "Description of the Notes -- Certain Definitions."
"Liquidated Damages" means the liquidated damages under the Registration
Rights Agreement.
"Lucas" means Lucas Bros., Inc.
"9 1/8% Notes" means the Issuer's 9 1/8% Senior Subordinated Notes due
2004.
"Net Cash Proceeds" -- See "Description of the Notes -- Certain
Definitions."
"New Credit Facility" -- See "Description of the Notes -- Certain
Definitions."
"New Notes" means $350,000,000 aggregate principal amount of the Issuer's
9 5/8% Series B Senior Subordinated Notes due 2008.
"Nimsa" means Nimsa S.A.
"Non-Recourse Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"NOLs" means net operating losses.
"Nominee" means a nominee of DTC.
"Notes" means the Old Notes and the New Notes.
"Obligation" -- See "Description of the Notes -- Certain Definitions."
"Old Credit Facility" means the Company's previous credit facility.
"Old Notes" means $350,000,000 aggregate principal amount of the Issuer's
9 5/8% Series A Senior Subordinated Notes due 2008.
"Old Note Offering" means the Company's sale of $350,000,000 principal
amount of the Old Notes consummated on May 29, 1998. "Officer's
Certificate" -- See "Description of the Notes -- Certain Definitions."
"Parent" means Corporate Express, Inc.
"Parent Consolidated Leverage Ratio" -- See "Description of the
Notes -- Certain Definitions."
"Parent Convertible Notes" -- See "Description of the Notes -- Certain
Definitions."
"Participating Broker-Dealer" means Broker-Dealers who acquired Old Notes
for their own accounts, as a result of market-making activities or other trading
activities.
"Payment Blockage Period" means the 179 day period after the Payment Notice
is delivered.
"Payment Default" means an event of default in the payment of any principal
of, premium, if any, or interest on Senior Debt of the Issuer or a Guarantor
(and, in the case of Senior Debt under the New Credit Facility, any other
monetary obligation in respect thereof) when it becomes due and payable, whether
at maturity, a scheduled payment date, or at a dated fixed for prepayment or by
declaration or otherwise.
"Payment Notice" means written notice of an event of default (other than a
Payment Default) given to the Trustee by the holders (or a trustee, agent or
other representative of such holders) of Designated Senior Debt.
"Permitted Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"Permitted Investment" -- See "Description of the Notes -- Certain
Definitions."
"Permitted Lien" -- See "Description of the Notes -- Certain Definitions."
"Permitted Payments to Parent" -- See "Description of the Notes -- Certain
Definitions."
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"Proceeding" means any threatened, pending, or completed action, suit or
proceeding whether civil, criminal, administrative or investigative and whether
formal or informal
"Prospectus" means this prospectus as the same may be amended or
supplemented from time to time.
"Public Equity Offering" -- See "Description of the Notes -- Certain
Definitions."
"Purchase Money Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"Qualified Capital Stock" -- See "Description of the Notes -- Certain
Definitions."
"Qualified Exchange" -- See "Description of the Notes -- Certain
Definitions."
"Qualified Receivables Transaction" -- See "Description of the
Notes -- Certain Definitions."
"Receivables Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
"Reference Period" -- See "Description of the Notes -- Certain
Definitions."
"Refinanced Parent Convertible Note" -- See "Description of the
Notes -- Certain Definitions."
"Refinancing Indebtedness" -- See "Description of the Notes -- Certain
Definitions."
"Reg S Global Notes" means the Reg S Permanent Global Notes and the Reg S
Temporary Global Notes.
"Reg S Permanent Global Notes" means the permanent global notes which will
be exchanged for the Reg S Temporary Global Notes within a reasonable time after
the expiration of the 40-Day Restricted Period.
"Reg S Temporary Global Notes" means the Old Notes sold in offshore
transactions in reliance on Regulation S, that were initially in the form of one
or more temporary, registered, global book-entry notes without interest coupons.
"Registration Default" means (i) if the Issuer and the Guarantors fail to
file an Exchange Offer Registration Statement with the Commission on or prior to
the 60th day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 120th
day after the Closing Date, (iii) if the Exchange Offer is not consummated on or
before the 30th business day after the Exchange Offer Registration Statement is
declared effective, (iv) if obligated to file the Shelf Registration Statement
and the Issuer and the Guarantors fail to file the Shelf Registration Statement
with the Commission on or prior to the 30th business day after such filing
obligation arises, (v) if obligated to file a Shelf Registration Statement and
the Shelf Registration Statement is not declared effective on or prior to the
90th day after the obligation to file a Shelf Registration Statement arises, or
(vi) if the Exchange Offer Registration Statement or the Shelf Registration
Statement, as the case may be, is declared effective but thereafter ceases to be
effective or useable in connection with resales of the Transfer Restricted
Securities, for such time of non-effectiveness or non-usability.
"Registration Rights Agreement" means if the Registration Rights Agreement,
dated as of May 29, 1998, among the Issuer, the Guarantors and the Initial
Purchasers.
"Related Business" -- See "Description of the Notes -- Certain
Definitions."
"Related Person" -- See "Description of the Notes -- Certain Definitions."
"Restricted Investment" -- See "Description of the Notes -- Certain
Definitions."
"Restricted Payment" -- See "Description of the Notes -- Certain
Definitions."
"Revolving Loan Facility" means $750,000,000 of revolving loans under a
revolving credit facility provided for under the New Credit Facility.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt" -- See "Description of the Notes -- Certain Definitions."
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"Share Repurchase" means the Parent's purchase of 35,000,000 shares of its
outstanding common stock at a price of $10.75 per share pursuant to a Dutch
Auction tender offer during April, 1998.
"Shelf Registration Statement" means a registration statement filed with
the Commission to register for public resale the Transfer Restricted Securities.
"Significant Subsidiary" -- See "Description of the Notes -- Certain
Definitions."
"Sofco" means Sofco-Mead, Inc.
"Standard Securitization Undertakings" -- See "Description of the
Notes -- Certain Definitions."
"Stated Maturity" -- See "Description of the Notes -- Certain Definitions."
"Subordinated Indebtedness" -- See "Description of the Notes - Certain
Definitions."
"Subsidiary" -- See "Description of the Notes - Certain Definitions."
"Subsidiary Guarantors" means all of the Issuer's present and future
Subsidiaries other than Receivables Subsidiaries, Finance Subsidiaries, Excluded
Subsidiaries, Foreign Subsidiaries and Unrestricted Subsidiaries.
"Term Loan Facility" means $250,000,000 term loan facility provided for
under the New Credit Facility.
"Tender Offer" means the Issuer's tender offer for all of its outstanding
$90 million principal amount of 9 1/8% Notes due 2004, which expired on May 28,
1998.
"Transfer" means the sale (including by merger, consolidation or issuance),
transfer, assignment, license, sublicense or other disposal of any software,
trademark or other intellectual property.
"Transfer Restricted Securities" means each Note until the earliest on the
date of which (i) such Note is exchanged in the Exchange Offer and entitled to
be resold to the public by the holder thereof without complying with prospectus
delivery requirements of the Securities Act, (ii) such Note has been disposed of
in accordance with the Shelf Registration Statement, (iii) such Note is disposed
of by a Broker-Dealer pursuant to the "Plan of Distribution' contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (iv) such Note is distributed to the public pursuant to
Rule 144 under the Securities Act.
"Trustee" means The Bank of New York.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"United States holder" means an individual who is a citizen or resident of
the United States, a corporation or partnership created or organized under the
laws of the United States or any state or political subdivision thereof, or a
person or other entity who is otherwise subject to United States Federal income
taxation on a net income basis in respect of income derived from the New Notes.
"Unrestricted Subsidiary" -- See "Description of the Notes - Certain
Definitions."
"U.S. Global Notes" means the Old Notes sold to qualified institutional
buyers that were initially in the form of one or more registered global notes
without interest coupons.
"U.S. Government Obligations" -- See "Description of the Notes - Certain
Definitions."
"U.S. Legal Tender Equivalents" -- See "Description of the Notes - Certain
Definitions."
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settler, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if
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any individual) resident in the United States (other than such an account held
for the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned by "accredited investors" within the meaning of Rule
501(a) under the Securities Act who are not natural persons, estates or trusts),
provided, however, that a "U.S. Person" shall not include (A) a branch or agency
of a U.S. Person that is located and operating outside the United States for
valid business purposes as a locally regulated branch or agency engaged in the
banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(o)(7) of Regulation S under the Securities Act and any other similar
international organizations, and their agencies, affiliates and pension plans.
"UT" means United TransNet, Inc.
"Wholly Owned Foreign Subsidiary" -- See "Description of the
Notes - Certain Definitions."
"Wholly Owned Subsidiary" -- See "Description of the Notes - Certain
Definitions."
"Young" means Richard Young Journal, Inc.
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NO DEALER, SALESPERSON, OR OTHER 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 REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR 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>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 11
The Exchange Offer.................... 18
Certain Federal Income Tax
Consequences........................ 27
Use of Proceeds....................... 28
Capitalization........................ 29
Unaudited Pro Forma Consolidated
Financial Statement................. 30
Selected Historical Consolidated
Financial Data...................... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 49
Management............................ 59
Description of New Credit Facility.... 61
Description of Notes.................. 63
Plan of Distribution.................. 99
Legal Matters......................... 100
Independent Accountants............... 100
Incorporation of Certain Documents by
Reference........................... 100
Available Information................. 101
Glossary.............................. 102
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$350,000,000
CEX HOLDINGS, INC.
9 5/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7-109-101, et seq., of the Colorado Business Corporation Act
generally provides that a corporation may indemnify its directors, officers,
employees, fiduciaries and agents against liabilities and reasonable expenses
incurred in connection with any threatened, pending, or completed action, suit
or proceeding whether civil, criminal, administrative or investigative and
whether formal or informal (a "Proceeding"), by reason of being or having been a
director, officer, employee, fiduciary or agent of the corporation, if such
person acted in good faith and reasonably believed that his conduct, in his
official capacity, was in the best interests of the corporation (or, with
respect to employee benefit plans, was in the best interests of the participants
of the plan), and in all other cases his conduct was at least not opposed to the
corporation's best interests. In the case of a criminal proceeding, the
director, officer, employee, fiduciary or agent must have had no reasonable
cause to believe his conduct was unlawful. Under Colorado law, the corporation
may not indemnify a director, officer, employee, fiduciary or agent in
connection with a Proceeding by or in the right of the corporation if the
director is adjudged liable to the corporation, or in a proceeding in which the
director, officer, employee or agent is adjudged liable for an improper personal
benefit.
Corporate Express' Articles of Amendment and Restatement and By-Laws
provide that Corporate Express shall indemnify its officers and directors to the
full extent permitted by the law. The indemnification provisions in Corporate
Express' By-Laws are substantially similar to the provisions of Section
7-109-101, et seq. Corporate Express has entered into agreements to provide
indemnification for its directors and certain officers consistent with its
Articles of Amendment and Restatement and By-Laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are incorporated in this Registration Statement by
reference or included and submitted with this Registration Statement, as
indicated. Except as otherwise noted, the exhibit has previously been filed or
incorporated by reference as an exhibit to the Company's Annual Report on Form
10-K for the transition period ended January 31, 1998, and is incorporated
herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Articles of Amendment and Restatement of the Articles of
Incorporation of Corporate Express, Inc., a Colorado
corporation (the "Company"), filed on September 30, 1994.
3.2 -- Articles of Amendment and Restatement of the Company,
filed on August 22, 1996.
3.3 -- Amended and Restated By-Laws of the Company.
*3.4 -- Articles of Incorporation of CEX Holdings, Inc.
*3.5 -- By-laws of CEX Holdings, Inc.
4.1 -- Specimen Common Stock Certificate of the Company.
4.2 -- Form of Warrant Agreement.
4.3 -- Indenture dated as of February 28, 1994 by and among the
Company, and the Guarantors named therein and First Trust
National Association for the $100,000,000 9 1/8% Senior
Subordinated Notes.
*4.4 -- Supplemental Indenture dated as of June 18, 1996 by and
among the Company, CEX Holdings, Inc. and First Trust
National Association.
</TABLE>
II-1
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.5 -- Indenture dated as of June 24, 1996 by and among the
Company and Bankers Trust Company, as trustee, for the
4 1/2% Convertible Notes due July 1, 2000 (including Form
of Notes).
4.6 -- First Supplemental Indenture dated as of October 15, 1996
relating to the Company's 4 1/2% Convertible Notes.
4.7 -- Rights Agreement dated as of January 29, 1998 between the
Company and Chasemellon Shareholder Services, L.L.C. as
Rights Agent.
4.8 -- Form of 4 1/2% Convertible Note.
*4.9 -- Indenture dated as of May 29, 1998 for the 9 5/8% Senior
Subordinated Notes due 2008 by and among CEX Holdings,
Inc., Corporate Express, Inc. and the other Guarantors
listed therein and The Bank of New York.
*4.10 -- Registration Rights Agreement dated as of May 29, 1998 by
and among CEX Holdings Inc., Corporate Express, Inc., the
Guarantors listed therein and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown
Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC,
First Chicago Capital Markets, Inc. and BNY Capital
Markets, Inc.
4.11 -- Second Supplemental Indenture dated as of May 18, 1998 by
and among CEX Holdings, Inc., the Guarantors named
therein and U.S. Bank Trust National Association
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 2,
1998).
**5.1 -- Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
10.1 -- Employment Agreement dated as of August 25, 1993, by and
between the Company and Robert King, as amended effective
July 15, 1994.
10.2 -- Amended and Restated 1992 Stock Option Plan, Form of
Non-qualified Stock Option Agreement and Form of
Incentive Stock Option Agreement.
10.3 -- 1994 Executive Stock Option Plan.
10.4 -- Form of Indemnification Agreement between the Company and
its officers and directors.
10.5 -- 1994 Stock Option and Incentive Plan.
10.6 -- 1994 Employee Stock Purchase Plan.
10.7 -- Employment Agreement dated as of July 31, 1995 by and
between the Company and Sam Leno.
10.8 -- Corporate Express, Inc. Supplemental Stock Option Plan.
10.9 -- Agreement and Plan of Merger dated as of September 10,
1996 among the Company, United TransNet, Inc. and Bevo
Acquisition Corp., Inc.
10.10 -- Agreement and Plan of Merger dated as of September 10,
1997 by and among the Company, IDD Acquisition Corp. and
Data Documents Incorporated.
10.11 -- Credit Agreement dated as of April 17, 1998 among the
Company, CEX Holdings, Inc., Various Banks, The First
National Bank of Chicago, as Syndication Agent, The Bank
of New York, as Co-Documentation Agent, DLJ Capital
Funding, Inc., as Co-Documentation Agent, DLJ Capital
Funding, Inc., as Co-Documentation Agent and Bankers
Trust Company as Administrative Agent.
10.12 -- Form of First Amendment to Credit Agreement dated as of
April 23, 1998.
**12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- List of Subsidiaries.
</TABLE>
II-2
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**23.1 -- Consent of PricewaterhouseCoopers LLP.
**23.2 -- Consent of Deloitte & Touche LLP
**23.3 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
(Included in Exhibit 5.1)
25.1 -- Statement of Eligibility of Trustee on Form T-1.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Tender Instructions.
**99.4 -- Supplemental letter to the Commission regarding reliance
on the Staff's position in certain no-action letters.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
ITEM 22. UNDERTAKINGS
The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrants hereby undertake 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 statement, 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
person who may be deemed underwriters, in addition to the information called for
by the other Items of the applicable form.
The Registrants hereby undertake that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities 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, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted against
the Registrants by such director, officer or controlling person in connection
with the securities being registered, the Registrants will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final resolution of such issue.
II-3
<PAGE> 121
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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 Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Broomfield, State of
Colorado, on September 17, 1998.
CEX HOLDINGS, INC.
By: /s/ ROBERT L. KING
----------------------------------
Robert L. King
President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on September 17, 1998 by the following
persons in the capacities indicated. Each person whose signature appears below
hereby authorizes and appoints Robert L. King and Sam R. Leno, and any one of
them, as his or her attorneys-in-fact, to sign and file on his or her behalf, in
the capacities stated below, any and all pre-effective amendments and
post-effective amendments to this Registration Statement.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT L. KING President, Chief Operating Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
Robert L. King
/s/ SAM R. LENO Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial and
Sam R. Leno Accounting Officer)
/s/ GARY M. JACOBS Executive Vice President, Secretary and
- ----------------------------------------------------- Director
Gary M. Jacobs
</TABLE>
II-5
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Broomfield, State of
Colorado, on September 17, 1998.
CORPORATE EXPRESS, INC.
By: /s/ JIRKA RYSAVY
----------------------------------
Jirka Rysavy
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on September 17, 1998 by the following
persons in the capacities indicated. Each person whose signature appears below
hereby authorizes and appoints Jirka Rysavy, Robert L. King and Sam R. Leno, and
any one of them, as his or her attorneys-in-fact, to sign and file on his or her
behalf, in the capacities stated below, any and all pre-effective amendments and
post-effective amendments to this Registration Statement.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JIRKA RYSAVY Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Jirka Rysavy
/s/ ROBERT L. KING President, Chief Operating Officer and
- ----------------------------------------------------- Director
Robert L. King
/s/ SAM R. LENO Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer)
Sam R. Leno
Director
- -----------------------------------------------------
Janet A. Hickey
Director
- -----------------------------------------------------
James P. Argyropoulos
/s/ MO SIEGEL Director
- -----------------------------------------------------
Mo Siegel
</TABLE>
II-6
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
following registrants have duly caused this Registration Statement to be signed
on their behalf by the undersigned, thereunto duly authorized, in the City of
Broomfield, State of Colorado on September 17, 1998.
ASAP SOFTWARE EXPRESS, INC.
CORPORATE EXPRESS CALLCENTER
SERVICES, INC.
SOFCO, INC.
SQP, INC.
SOFCO OF OHIO, INC.
S&O PROPERTY, INC.
EPCO PACKAGING SERVICES
HERMANN MARKETING, INC.
DISTRIBUTION RESOURCES CO.
CORPORATE EXPRESS REAL ESTATE, INC.
CORPORATE EXPRESS OF THE EAST, INC.
CORPORATE EXPRESS OF TEXAS, INC.
FEDERAL SALES SERVICES, INC.
VIRGINIA IMPRESSIONS PRODUCTS
CO., INC.
MICROMAGNETIC SYSTEMS, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS, INC.
AMERICAN DELIVERY SYSTEM, INC.
CORPORATE EXPRESS DISTRIBUTION
SERVICES, INC.
NEW DELAWARE DELIVERY, INC.
RED ARROW CORPORATION
RAC, INC.
RED ARROW SPOTTING SERVICES, INC.
RED ARROW TRUCKING CO.
RED ARROW WAREHOUSING, CO.
RUSH TRUCKING, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- INTERMOUNTAIN, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- INTERMOUNTAIN, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- MID-ATLANTIC, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- MID-ATLANTIC, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- MID-WEST, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- MID-WEST, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- NEW ENGLAND, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- NEW ENGLAND, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- NORTHEAST, INC.
II-7
<PAGE> 125
CORPORATE EXPRESS DELIVERY
LEASING -- NORTHEAST, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- SOUTHEAST, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- SOUTHEAST, INC.
AIR COURIER DISPATCH OF
NEW JERSEY, INC.
SUNBELT COURIER, INC.
TRICOR AMERICA, INC.
MIDNITE EXPRESS INTERNATIONAL
COURIER, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- SOUTHWEST, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- SOUTHWEST, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- WEST COAST, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- WEST COAST, INC.
CORPORATE EXPRESS DELIVERY
SYSTEMS -- EXPEDITED, INC.
CORPORATE EXPRESS DELIVERY
LEASING -- EXPEDITED, INC.
CORPORATE EXPRESS DELIVERY
ADMINISTRATION, INC.
CORPORATE EXPRESS DELIVERY
MANAGEMENT BUSINESS TRUST
CORPORATE EXPRESS DELIVERY
SYSTEMS -- AIR DIVISION, INC.
By: /s/ ROBERT L. KING
----------------------------------
Robert L. King
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on September 17, 1998 by the
following persons in the capacities indicated. Each person whose signature
appears below hereby authorizes and appoints Robert L. King and Sam R. Leno, and
any one of them, as his attorneys-in-fact, to sign and file on his behalf, in
the capacities stated below, any and all pre-effective amendments and
post-effective amendments to this Registration Statement.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ ROBERT L. KING Chief Executive Officer and Sole Director of
- ----------------------------------------------------- each Registrant* (Principal Executive
Robert L. King Officer)
/s/ SAM R. LENO Vice President of each Registrant**
- ----------------------------------------------------- (Principal Financial and Accounting
Sam R. Leno Officer)
</TABLE>
* Except for New Delaware Delivery, Inc.
** Also signing as a director of New Delaware Delivery, Inc.
II-8
<PAGE> 126
INDEX TO EXHIBITS
The following exhibits are incorporated in this Registration Statement by
reference or included and submitted with this Registration Statement, as
indicated. Except as otherwise noted, the exhibit has previously been filed or
incorporated by reference as an exhibit to the Company's Annual Report on Form
10-K for the transition period ended January 31, 1998, and is incorporated
herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Articles of Amendment and Restatement of the Articles of
Incorporation of Corporate Express, Inc., a Colorado
corporation (the "Company"), filed on September 30, 1994.
3.2 -- Articles of Amendment and Restatement of the Company,
filed on August 22, 1996.
3.3 -- Amended and Restated By-Laws of the Company.
*3.4 -- Articles of Incorporation of CEX Holdings, Inc.
*3.5 -- By-laws of CEX Holdings, Inc.
4.1 -- Specimen Common Stock Certificate of the Company.
4.2 -- Form of Warrant Agreement.
4.3 -- Indenture dated as of February 28, 1994 by and among the
Company, and the Guarantors named therein and First Trust
National Association for the $100,000,000 9 1/8% Senior
Subordinated Notes.
*4.4 -- Supplemental Indenture dated as of June 18, 1996 by and
among the Company, CEX Holdings, Inc. and First Trust
National Association.
4.5 -- Indenture dated as of June 24, 1996 by and among the
Company and Bankers Trust Company, as trustee, for the
4 1/2% Convertible Notes due July 1, 2000 (including Form
of Notes).
4.6 -- First Supplemental Indenture dated as of October 15, 1996
relating to the Company's 4 1/2% Convertible Notes.
4.7 -- Rights Agreement dated as of January 29, 1998 between the
Company and Chasemellon Shareholder Services, L.L.C. as
Rights Agent.
4.8 -- Form of 4 1/2% Convertible Note.
*4.9 -- Indenture dated as of May 29, 1998 for the 9 5/8% Senior
Subordinated Notes due 2008 by and among CEX Holdings,
Inc., Corporate Express, Inc. and the other Guarantors
listed therein and The Bank of New York.
*4.10 -- Registration Rights Agreement dated as of May 29, 1998 by
and among CEX Holdings Inc., Corporate Express, Inc., the
Guarantors listed therein and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown
Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC,
First Chicago Capital Markets, Inc. and BNY Capital
Markets, Inc.
4.11 -- Second Supplemental Indenture dated as of May 18, 1998 by
and among CEX Holdings, Inc., the Guarantors named
therein and U.S. Bank Trust National Association
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 2,
1998).
**5.1 -- Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
10.1 -- Employment Agreement dated as of August 25, 1993, by and
between the Company and Robert King, as amended effective
July 15, 1994.
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.2 -- Amended and Restated 1992 Stock Option Plan, Form of
Non-qualified Stock Option Agreement and Form of
Incentive Stock Option Agreement.
10.3 -- 1994 Executive Stock Option Plan.
10.4 -- Form of Indemnification Agreement between the Company and
its officers and directors.
10.5 -- 1994 Stock Option and Incentive Plan.
10.6 -- 1994 Employee Stock Purchase Plan.
10.7 -- Employment Agreement dated as of July 31, 1995 by and
between the Company and Sam Leno.
10.8 -- Corporate Express, Inc. Supplemental Stock Option Plan.
10.9 -- Agreement and Plan of Merger dated as of September 10,
1996 among the Company, United TransNet, Inc. and Bevo
Acquisition Corp., Inc.
10.10 -- Agreement and Plan of Merger dated as of September 10,
1997 by and among the Company, IDD Acquisition Corp. and
Data Documents Incorporated.
10.11 -- Credit Agreement dated as of April 17, 1998 among the
Company, CEX Holdings, Inc., Various Banks, The First
National Bank of Chicago, as Syndication Agent, The Bank
of New York, as Co-Documentation Agent, DLJ Capital
Funding, Inc., as Co-Documentation Agent, DLJ Capital
Funding, Inc., as Co-Documentation Agent and Bankers
Trust Company as Administrative Agent.
10.12 -- Form of First Amendment to Credit Agreement dated as of
April 23, 1998.
**12.1 -- Ratio of Earnings to Fixed Charges.
21.1 -- List of Subsidiaries.
**23.1 -- Consent of PricewaterhouseCoopers LLP.
**23.2 -- Consent of Deloitte & Touche LLP
**23.3 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
(Included in Exhibit 5.1)
25.1 -- Statement of Eligibility of Trustee on Form T-1.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Tender Instructions.
**99.4 -- Supplemental letter to the Commission regarding reliance
on the Staff's position in certain no-action letters.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[BALLARD SPAHR ANDREWS & INGERSOLL, LLP LETTERHEAD APPEARS HERE]
September 18, 1998
CEX Holdings, Inc.
1 Environmental Way
Broomfield, CO 80021-3416
Re: CEX Holdings, Inc. - Registration Statement on Form S-4
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to CEX Holdings, Inc., a
Colorado corporation (the "Issuer"), in connection with the Issuer's offer to
exchange (the "Exchange Offer") up to $350,000,000 of its outstanding 9 5/8%
Series A Senior Subordinated Notes due 2008 (the "Old Notes"), and related
guarantees (the "Old Guarantees), for its new 9 5/8% Series B Senior
Subordinated Notes due 2008 (the "Notes"), and related guarantees (the
"Guarantees"). The Notes and the Guarantees are to be issued pursuant to an
Indenture dated May 29, 1998 among the Issuer, Corporate Express, Inc. and the
guarantors listed on Schedule I attached hereto (collectively, the
"Guarantors"), and The Bank of New York, as trustee.
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Issuer's Registration Statement on Form S-4 (File No. 333-60155), as filed with
the Securities and Exchange Commission (the "Commission") under the Act on July
30, 1998, as amended on September 18, 1998 (such Registration Statement, as so
amended, the "Registration Statement"); (ii) an executed copy of the Indenture;
(iii) the forms of the Notes and the Guarantees and specimen certificates
thereof; (iv) the articles of incorporation and by-laws of the Issuer and the
Guarantors; and (v) certain resolutions of the Board of Directors of the Issuer
and the Guarantors. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Issuer and such
agreements,
<PAGE> 2
CEX Holdings, Inc.
September 18, 1998
Page 2
certificates of public officials, certificates of officers or other
representatives of the Issuer and the Guarantors and others, and such other
documents, certificates and records as we have deemed necessary or appropriate
as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Issuer and the
Guarantors, we have assumed that such parties had the power, corporate or other,
to enter into and perform all obligations thereunder and have also assumed the
due authorization by all requisite action, corporate or other, and execution and
delivery by such parties of such documents and (except as specifically set forth
below) the validity and binding effect thereof. As to any facts material to the
opinions expressed herein which we did not independently establish or verify, we
have relied upon oral or written statements and representations of officers and
other representatives of the Issuer, the Guarantors and others.
Based upon and subject to the limitations, qualifications,
exceptions and assumptions set forth herein, we are of the opinion that:
1. When (i) the Registration Statement becomes effective and
the Indenture has been qualified under the Trust Indenture Act of 1939, as
amended (the "TIA"), and (ii) the Notes have been duly executed and
authenticated in accordance with the terms of the Indenture and delivered in
exchange for the Old Notes in accordance with the Exchange Offer, the issuance
and exchange of the Notes will have been duly authorized by the Issuer and the
Notes will be valid and binding obligations of the Issuer entitled to the
benefits of the Indenture and enforceable against the Issuer in accordance with
their terms, except to the extent that (a) the enforcement thereof may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws now or hereafter in effect relating to creditors'
rights generally and (ii) general principles of equity (regardless of whether
enforcement is considered in a proceeding at law or in equity) and (b) the
waiver contained in Section 4.06 of the Indenture may be deemed to be
unenforceable.
<PAGE> 3
CEX Holdings, Inc.
September 18, 1998
Page 3
2. When (i) the Registration Statement becomes effective and
the Indenture has been qualified under the TIA and (ii) the Notes have been duly
executed and authenticated and the Guarantees have been executed by the
Guarantors in accordance with the terms of the Indenture and delivered in
exchange for the Old Guarantees in accordance with the Exchange Offer, the
execution and exchange of the Guarantees will have been duly authorized by
Guarantors and the Guarantees will be valid and binding obligations of the
Guarantors, entitled to the benefits of the Indenture and enforceable against
the Guarantors in accordance with their terms, except to the extent that (a) the
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii) general
principals of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity) and (b) the waiver contained in Section 4.06 of
the Indenture may be deemed to be unenforceable.
In rendering the opinions set forth above, we have assumed
that the execution and delivery by the Issuer or the Guarantors, as the case may
be, of the Indenture, the Notes and the Guarantees and the performance of their
respective obligations thereunder do not and will not violate, conflict with or
constitute a default under (i) any agreement or instrument to which the Issuer,
the Guarantors or any of their properties is subject, (ii) any law, rule or
regulation to which the Issuer, the Guarantors or any of their properties is
subject, (iii) any judicial or regulatory order or decrees of any governmental
authority, or (iv) any consent, approval, license, authorization or validation
of, or filing, recording or registration with, any governmental authority.
We express no opinion as to the law of any jurisdiction other
than the federal law of the United States and the State of Colorado.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
<PAGE> 4
SCHEDULE I
ASAP Software Express, Inc.
Corporate Express Callcenter Services, Inc.
Sofco, Inc.
SQP, Inc.
Sofco of Ohio, Inc.
S&O Property, Inc.
Epco Packaging Services
Hermann Marketing, Inc.
Distribution Resources Co.
Corporate Express Real Estate, Inc.
Corporate Express of the East, Inc.
Corporate Express of Texas, Inc.
Federal Sales Services, Inc.
Virginia Impressions Products Co., Inc.
Micromagnetic Systems, Inc.
Corporate Express Delivery Systems, Inc.
American Delivery System, Inc.
Corporate Express Distribution Services, Inc.
New Delaware Delivery, Inc.
Red Arrow Corporation
RAC, Inc.
Red Arrow Spotting Services, Inc.
Red Arrow Trucking Co.
Red Arrow Warehousing, Co.
Rush Trucking, Inc.
Corporate Express Delivery Systems-Intermountain, Inc.
Corporate Express Delivery Leasing-Intermountain, Inc.
Corporate Express Delivery Systems-Mid-Atlantic, Inc.
Corporate Express Delivery Leasing-Mid-Atlantic, Inc.
Corporate Express Delivery Systems-Mid-West, Inc.
Corporate Express Delivery Leasing-Mid-West, Inc.
Corporate Express Delivery Systems-New England, Inc.
Corporate Express Delivery Leasing-New England, Inc.
Corporate Express Delivery Systems-Northeast, Inc.
Corporate Express Delivery Leasing-Northeast, Inc.
Corporate Express Delivery Systems-Southeast, Inc.
Corporate Express Delivery Leasing-Southeast, Inc.
Air Courier Dispatch of New Jersey, Inc.
Sunbelt Courier, Inc.
Tricor America, Inc.
Midnite Express International Courier, Inc.
Corporate Express Delivery Systems-Southwest, Inc.
Corporate Express Delivery Leasing-Southwest, Inc.
Corporate Express Delivery Systems-West Coast, Inc.
Corporate Express Delivery Leasing-West Coast, Inc.
Corporate Express Delivery Systems-Expedited, Inc.
Corporate Express Delivery Leasing-Expedited, Inc.
Corporate Express Delivery Administration, Inc.
Corporate Express Delivery Management Business Trust
Corporate Express Delivery Systems-Air Division, Inc.
<PAGE> 1
EXHIBIT 12.1
CORPORATE EXPRESS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS AS
ADJUSTED ADJUSTED
SIX SIX TWELVE
MONTHS MONTHS MONTHS ELEVEN MONTHS
ENDED ENDED ENDED ENDED FISCAL YEARS
AUGUST 1, AUGUST 1, JANUARY 31, JANUARY 31, ----------------------------------------------
1998 1998 1998 1998 1996 1995 1994 1993 1992
--------- --------- ----------- ------------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing operations.... $ 41,593 $ 52,711 $ 60,099 $ 77,542 $ 73,785 $21,978 $24,600 $ 505 $ (913)
Add: Fixed charges......... 65,500 54,382 117,332 64,112 49,025 25,248 21,550 5,742 5,501
Deduct: Capitalized
interest................. 2,451 2,451 3,533 3,239 3,887 882 -- -- --
-------- -------- -------- -------- -------- ------- ------- ------ ------
Adjusted earnings.......... 104,642 104,642 173,898 138,415 118,923 46,344 46,150 6,247 4,588
Fixed charges:
Interest expense........... 46,554 35,436 88,972 38,115 26,949 17,968 16,915 5,014 4,972
Capitalized interest....... 2,451 2,451 3,533 3,239 3,887 882
Interest portion of rent
expense.................. 16,495 16,495 24,827 22,758 18,189 6,398 4,635 728 529
-------- -------- -------- -------- -------- ------- ------- ------ ------
Total fixed
charges.......... 65,500 $ 54,382 $117,332 $ 64,112 $ 49,025 $25,248 $21,550 $5,742 $5,501
Ratio of earnings to fixed
charges.................. 1.6 1.9 1.5 2.2 2.4 1.8 2.1 1.1 --(1)
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is calculated by dividing earnings,
defined as income from continuing operations before income taxes and
minority interest plus fixed charges less capitalized interest, by fixed
charges, defined as interest expense plus capitalized interest and the
interest portion of rent expense. Fiscal 1992 earnings were lower than total
fixed charges resulting in a less than one-to-one ratio of earnings to fixed
charges, consequently, additional earnings of $913,000 would have been
required to attain a ratio of one-to-one.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Corporate Express, Inc. on Form S-4 (the "Registration Statement") of our
report dated April 6, 1998, except for Note 18, for which the date is April 22,
1998 and Note 19 for which the date is July 17, 1998 on our audits of the
consolidated financial statements of Corporate Express, Inc. as of January 31,
1998, March 1, 1997 and March 2, 1996, and for the eleven month period ended
January 31, 1998 and the years ended March 1, 1997, March 2, 1996 and February
25, 1995.
PricewaterhouseCoopers LLP
Denver, Colorado
September 17, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
CEX Holdings, Inc. and Corporate Express, Inc. on Form S-4 of our report dated
February 6, 1997, (on the consolidated financial statements of Data Documents
Incorporated for the years ended December 31, 1996, 1995 and 1994) appearing in
the Current Report on Form 8-K, to be filed on July 28, 1998 by Corporate
Express, Inc.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
September 15, 1998
<PAGE> 1
EXHIBIT 99.4
CEX HOLDINGS, INC.
1 ENVIRONMENTAL WAY
BROOMFIELD, COLORADO 80021-3416
September 16, 1998
H. Christopher Owings
Assistant Director
Division of Corporation Finance
United States Securities and
Exchange Commission
Mail Stop 3-8
450 Fifth Street, N.W.
Washington, DC 20549
Re: CEX Holdings, Inc.
Corporate Express, Inc.
Registration Statement on Form S-4
File No. 333-60155
----------------------------------
Dear Mr. Owings:
This letter responds to the Staff's Comment No. 1 from its
letter to Jirka Rysavy, Chief Executive Officer of Corporate Express, Inc.
("CEI") dated August 31, 1998, in connection with the proposed exchange offer
(the "Exchange Offer") by CEX Holdings, Inc., a wholly owned subsidiary of CEI
(the "Company").
In response to the Staff's comment, the Company states that it
is registering the proposed Exchange Offer in reliance on the Staff's position
enunciated in the Morgan Stanley and Co. Incorporated (June 5, 1991), Exxon
Capital Holdings Corporation (May 13, 1988) and Shearman & Sterling (July 2,
1993) letters (collectively, the "Letters").
Pursuant to the Letters, the Company makes the following
representations:
(1) The Company has not entered into any arrangement or
understanding with any person to distribute the securities to be received in the
Exchange Offer (the "Securities") and, to the best of the Company's information
and belief, each person participating in the Exchange Offer is acquiring the
Securities in the ordinary course of business and has no arrangement or
understanding with any person to participate in the distribution of the
Securities.
(2) The Company will make each person participating in the
Exchange Offer aware (through the Exchange Offer prospectus or otherwise) that
any broker-dealer who holds the privately placed securities to be exchanged
pursuant to the Exchange Offer for its own account as a result of market-making
activities or other trading activities, and who receives Securities in exchange
for such privately placed securities, may be a statutory underwriter and
<PAGE> 2
H. Christopher Owings
September 16, 1998
Page 2
must deliver a prospectus meeting the requirements of the Securities Act of
1933, as amended (the "Securities Act"), in connection with any resale of the
Securities.
(3) The Company will include in the transmittal letter or
similar documentation to be executed by an offeree in order to participate in
the Exchange Offer the following provision:
"If the offeree is a broker-dealer holding the
privately placed securities acquired for its own
account as a result of market-making activities or
other trading activities, such offeree hereby
acknowledges that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of securities received in
respect of such initial securities pursuant to the
Exchange Offer. A broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act by providing the foregoing
acknowledgment and by delivering a prospectus."
(4) The Company acknowledges that a secondary resale
transaction by a person participating in the Exchange Offer for the purpose of
distributing the Securities should be covered by an effective registration
statement containing the selling securityholder information required by Item 507
of Regulation S-K under the Securities Act.
Any questions regarding the foregoing should be directed to
the undersigned at (303) 373-2800.
Sincerely,
CEX HOLDINGS, INC.
/s/ Sam R. Leno
--------------------------------------
By: Sam R. Leno
Title: Executive Vice President and
Chief Financial Officer
