<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-17471
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON
FORM S-4
UNDER
THE SECURITIES ACT OF 1933
------------------------
SPECIALTY PAPERBOARD, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2631 82-0429330
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
incorporation or Classification Code Number)
organization)
</TABLE>
--------------------------
BRUDIES ROAD
BRATTLEBORO, VERMONT 05302
(802) 257-0365
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
MR. BRUCE MOORE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SPECIALTY PAPERBOARD, INC.
BRUDIES ROAD
BRATTLEBORO, VERMONT 05302
(802) 257-0365
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
Frank L. Schiff, Esq.
White & Case
1155 Avenue of the Americas
New York, New York 10036-2787
(212) 819-8752
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
OTHER REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY STANDARD IRS
INDUSTRIAL EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME OF CORPORATION INCORPORATION CODE NUMBER NUMBER
- -------------------------------------------------- --------------- ------------------- --------------
<S> <C> <C> <C>
Specialty Paperboard/Endura, Inc.................. Delaware 2631 82-0429330
CPG Investors Inc................................. Delaware 2625 54-1684641
CPG Holdings Inc.................................. Delaware 2625 54-1684644
Custom Papers Group Inc........................... Virginia 2625 54-1684595
CPG-Warren Glen Inc............................... Virginia 2625 54-1684596
Arcon Holdings Corp............................... Delaware 2625 11-3203853
Arcon Coating Mills, Inc.......................... Delaware 2625 13-3459527
<CAPTION>
ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF
NAME OF CORPORATION PRINCIPAL EXECUTIVE OFFICE
- -------------------------------------------------- -----------------------------
<S> <C>
Brudies Road
Brattleboro, VT 05302
Specialty Paperboard/Endura, Inc.................. (802) 257-0365
110 Tredegar St.
Richmond, VA 23219
CPG Investors Inc................................. (804) 649-4368
110 Tredegar St.
Richmond, VA 23219
CPG Holdings Inc.................................. (804) 649-4368
110 Tredegar St.
Richmond, VA 23219
Custom Papers Group Inc........................... (804) 649-4368
110 Tredegar St.
Richmond, VA 23219
CPG-Warren Glen Inc............................... (804) 649-4368
3067 New Street
Oceanside, NY 11572
Arcon Holdings Corp............................... (516) 766-8800
3067 New Street
Oceanside, NY 11572
Arcon Coating Mills, Inc.......................... (516) 766-8800
</TABLE>
<PAGE>
PROSPECTUS
SPECIALTY PAPERBOARD, INC.
OFFER TO EXCHANGE
9 3/8% SENIOR NOTES DUE 2006, SERIES B
FOR ALL OUTSTANDING 9 3/8% SENIOR NOTES DUE 2006, SERIES A
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 12, 1997, UNLESS EXTENDED
---------------------
Specialty Paperboard, Inc., a Delaware corporation ("SPI"), hereby offers,
upon the terms and subject to conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"; together with the Prospectus, the "Exchange Offer"), to exchange
up to an aggregate principal amount of $100,000,000 of its 9 3/8% Senior Notes
Due 2006, Series B (the "New Notes") for up to an aggregate principal amount of
$100,000,000 of its outstanding 9 3/8% Senior Notes Due 2006, Series A (the "Old
Notes"). The terms of the New Notes are identical in all material respects to
those of the Old Notes, except for certain transfer restrictions, registration
rights and penalty provisions relating to the Old Notes. The New Notes will be
issued pursuant to, and entitled to the benefits of, the Indenture (as defined)
governing the Old Notes. The New Notes and the Old Notes are sometimes referred
to collectively as the "Notes."
The Old Notes were issued in connection with the acquisition by SPI, on
October 31, 1996, of CPG Investors Inc. and Arcon Holdings Corp. See "The
Acquisitions."
Interest on the New Notes will accrue from the date of issuance thereof (the
"Issue Date") at the rate of 9 3/8% PER ANNUM and will be payable semi-annually
in arrears on each April 15 and October 15, commencing on April 15, 1997. The
New Notes will be redeemable, at SPI's option, in whole at any time or in part
from time to time, on or after October 15, 2001 at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, thereon to the date of
redemption. In addition, at any time or from time to time, on or prior to
October 15, 1999, SPI may, at its option, use the net cash proceeds of one or
more Public Equity Offerings (as defined herein) to redeem up to $35.0 million
aggregate principal amount of New Notes at the redemption price set forth
herein, plus accrued and unpaid interest, if any, thereon to the date of
redemption; PROVIDED that at least 65% of the principal amount of New Notes
originally issued remains outstanding immediately after giving effect to any
such redemption.
The New Notes will be general unsecured obligations of SPI and will rank
PARI PASSU in right of payment with all existing and future senior indebtedness
of SPI. The New Notes will be guaranteed on a senior basis by each of SPI's
domestic subsidiaries -- Specialty Paperboard/Endura, Inc., CPG Investors Inc.,
CPG Holdings Inc., Custom Papers Group Inc., CPG-Warren Glen Inc., Arcon
Holdings Corp. and Arcon Coating Mills, Inc. (the "Guarantors"). The Guarantees
(as defined) will be general unsecured obligations of the Guarantors and will
rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Guarantors. As of September 30, 1996, after giving pro forma
effect to the Transactions (as defined), SPI and the Guarantors would have no
indebtedness outstanding other than the New Notes.
Upon the occurrence of a Change of Control (as defined herein), each holder
of the New Notes will have the right to require SPI to purchase all or a portion
of such holder's New Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
purchase. In addition, SPI will be obligated to offer to purchase New Notes at
100% of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase in the event of certain asset sales. See
"Description of the Notes."
(CONTINUED ON NEXT PAGE)
------------------------------
See "Risk Factors," which begins at page 9, for a discussion of certain
factors that should be considered by participants 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
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 FEBRUARY 11, 1997.
<PAGE>
(CONTINUED FROM COVER)
The Old Notes were originally issued and sold on October 16, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemptions provided in Rule 144A and
Regulation D under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available.
SPI will accept for exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on March
12, 1997, unless extended by SPI in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. In the event SPI terminates the Exchange
Offer and does not accept for exchange any Old Notes with respect to the
Exchange Offer, SPI will promptly return the Old Notes to the holders thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange, but is otherwise subject to certain customary
conditions. The Old Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of SPI contained in the Registration Rights Agreement dated October
16, 1996 (the "Registration Rights Agreement") by and among SPI, the Guarantors
and BT Securities Corporation, as the initial purchaser (the "Initial
Purchaser"), with respect to the initial sale of the Old Notes. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") rendered to third parties in similar transactions, the New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by respective holders thereof
(other than any such holder which is an "affiliate" of SPI within the meaning of
Rule 405 under the Securities Act, without compliance with the registration and
prospectus delivery provisions of the Securities Act), provided that the New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement with any person to participate in the distribution of
such New Notes and is not engaged in and does not intend to engage in a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Notes received in exchange for Old Notes if such New
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. SPI has agreed that, for a period of 180
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
There has not previously been any public market for the New Notes. SPI does
not intend to list the New Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no assurance
that an active market for the New Notes will develop. To the extent that an
active market for the New Notes does develop, the market value of the New Notes
will depend on market conditions (such as yields on alternative investments),
general economic conditions, the Company's financial condition, and other
factors. Such conditions might cause the New Notes, to the extent that they are
actively traded, to trade at a significant discount from face value. See "Risk
Factors -- Absence of Public Market."
SPI will not receive any proceeds from the Exchange Offer. SPI has agreed to
pay the expenses incident to the Exchange Offer.
i
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY SPI. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON.
------------------------
Until May 12, 1997 (90 days after commencement of this offering), all
dealers effecting transactions in the New Notes, whether or not participating in
this offering, may be required to deliver a Prospectus.
AVAILABLE INFORMATION
SPI's common stock is currently traded on the NASDAQ National Market System
under the symbol "SPBI." Accordingly, SPI complies with the periodic reporting
and other information requirements of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"). Periodic reports and other information filed by
SPI with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Electronic
filings filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval system (EDGAR) are publicly available through the Commission's home
page on the Internet at http://www.sec.gov.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. SPI's actual results may differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to: failure to integrate the operations acquired in the
Acquisitions (as defined) into the operations of SPI; failure to sustain future
sales growth; failure to identify or carry out suitable strategic acquisitions;
increases in the price of raw materials under market conditions which preclude
passing such increases on to customers; increased competition (especially from
competitors with access to substantially greater resources); and overall
economic conditions in the United States. Each of the foregoing factors is
discussed in greater detail herein.
In addition, SPI has agreed that, whether or not it is required to do so by
the rules and regulations of the Commission, for so long as any Notes remain
outstanding, it will furnish to the holders of the Notes and, following
consummation of the exchange offer referred to above and to the extent permitted
by applicable law or regulation, file with the Commission (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if SPI were required to file such
Forms, including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereof by SPI's independent certified public accountants and
(ii) all reports that would be required to be filed on Form 8-K if it were
required to file such reports. In addition, for so long as any of the Notes
remain outstanding, SPI has agreed to make available to any prospective
purchaser of the Notes or beneficial owner of the Notes, in connection with any
sale thereof, the information required by Rule 144(d)(4) under the Securities
Act.
------------------------
Tyvek-Registered Trademark- is a registered trademark of E.I. du Pont de
Nemours and Company. Genuine Pressboard-TM-, is a trademark of SPI.
Arco-Flex-TM- and Super ArcoFlex-TM- are trademarks of Arcon Coating Mills, Inc.
------------------------
SPI, a corporation organized under the laws of the State of Delaware, has
its principal executive office located at Brudies Road, Brattleboro, Vermont
05302; its telephone number is (802) 257-0365.
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE STATED IN THIS PROSPECTUS, REFERENCES TO (A) "SPI"
SHALL MEAN SPECIALTY PAPERBOARD, INC., A DELAWARE CORPORATION, AND ITS
SUBSIDIARIES, (B) "CPG" SHALL MEAN CPG INVESTORS INC., A DELAWARE CORPORATION,
AND ITS SUBSIDIARIES, (C) "ARCON" SHALL MEAN ARCON HOLDINGS CORP., A DELAWARE
CORPORATION, AND ITS SUBSIDIARY, AND (D) THE "COMPANY" SHALL MEAN SPI, CPG,
ARCON AND THEIR RESPECTIVE SUBSIDIARIES AFTER GIVING EFFECT TO THE ACQUISITIONS.
THE COMPANY
The Company is a leading manufacturer and converter of specialty paper and
related products with a wide range of consumer and industrial end-uses. Through
its eleven United States paper mills and converting facilities, the Company has
focused on niche markets where it can provide high value-added specialty paper
products which meet rigorous technical specifications and customer service
requirements. The Company's products serve four distinct markets which
represented the following percentages of total pro forma net sales for 1995:
office products (35.0%); technical specialty products (25.4%); saturated
specialty products (22.1%); and filtration products (17.5%). For the latest
twelve month period ended September 30, 1996 ("LTM"), the Company had pro forma
net sales of $225.1 million and pro forma EBITDA (as defined) of $31.2 million.
OFFICE PRODUCTS. The Company manufactures a wide range of materials used in
the manufacture of office products. Management believes that the Company is the
largest domestic supplier of pressboard, which is converted into data binders,
notebook covers, report covers, ring binders, and file and index guides. The
Company believes that it also is the leading provider of tape and edge covering
materials converted from Tyvek-Registered Trademark- and other materials, used
to strengthen and reinforce various office supply products, including note pads,
legal pads, composition books, file folders and red wallet expansion folders.
Other products manufactured for the office supplies market include lightweight
filing and cover materials and other products where the Company believes that
its capabilities and customer relationships give it a competitive advantage in
meeting customer specifications.
TECHNICAL SPECIALTY PRODUCTS. The Company manufactures specialty paper
products with customized physical performance characteristics which meet the
unique requirements of specific end-use markets. Technical specialty products
include paper used as insulation material in electrical transformer coils, acid-
free picture mounting art board used for archival-quality picture mounting and
records storage applications, photographic packaging papers, printed circuit
board substrates, wet-strength tag used in the laundry and dry-cleaning
industries, and paper backings for sandpaper and other abrasives. The Company
has been able to successfully enter niche markets in which it believes its
manufacturing flexibility and technical expertise give it a competitive
advantage in meeting rigorous customer requirements. The Company believes that
it is a market leader in many of its markets, including the markets for
electrical transformer papers, acid-free picture mounting art board and
photographic packaging papers.
SATURATED SPECIALTY PRODUCTS. The Company is one of the largest producers
of specialty tape substrates and a broad range of saturated, coated and
non-woven papers. The Company's tape substrates are used in the manufacture of
industrial and consumer masking tapes, barrier tapes, other pressure-sensitive
tapes and bandoliering tapes. The Company believes that it is also one of the
two leading domestic producers of latex-reinforced material used in book covers
and related products. These materials are used by customers in applications
where durability and distinctive appearance are important, such as flexible
covers for books, menus, photo albums, desktop calendars, appointment books and
reports. The Company
- ------------
Tyvek-Registered Trademark- is a registered trademark of E.I. du Pont de Nemours
and Company ("DuPont").
1
<PAGE>
also converts specialty paper into endsheets and spine reinforcement materials
for use in the bookbinding industry and provides specialty tapes for use in
binding materials for checkbooks and deposit books.
FILTRATION PRODUCTS. The Company is a major supplier of saturated and
non-saturated filter papers used in air and fluid filters for the automotive,
heavy-duty truck and equipment industries. The Company also manufactures filter
papers used in various industrial applications, including fruit juice
processing, the manufacture of paints and lacquers and hot oil filters for the
fast-food industry. The Company pursues niche markets in the filtration products
market where its manufacturing and technical capabilities give it a competitive
advantage in meeting customer specifications.
2
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to increase sales and earnings by consolidating
and strengthening core product lines, by rationalizing production capacity and
by pursuing selected strategic acquisitions. The following are the key elements
of this strategy:
- CONSOLIDATE AND STRENGTHEN CORE PRODUCT LINES. CPG and Arcon have an array
of products which complement SPI's core product lines. By consolidating
these products and streamlining and focusing its marketing efforts, the
Company believes that it will strengthen its core product lines in office
products, technical specialty products and saturated specialty products.
- RATIONALIZE OVERHEAD AND PRODUCTION CAPACITY. The Company believes that
the Acquisitions provide opportunities for the Company to eliminate
redundant overhead, rationalize inefficient facilities and optimize the
manufacturing of the Company's products over its existing capital
equipment base. The Company believes that it can achieve approximately
$4.2 million in annual overhead cost savings through the consolidation of
the administrative functions of CPG and Arcon at SPI's Brattleboro
headquarters and can achieve further operational savings by adjusting
current grade mixes on each of its machines and shifting production among
facilities to better match products, machine capabilities and cost
structures.
- STRATEGIC ACQUISITIONS. The Company intends to continue pursuing growth
through the acquisition of complementary businesses which provide
opportunities to enhance the Company's core product lines and create
operating efficiencies. In implementing this strategy, management intends
to build upon its successful experience in integrating the June 1994
acquisition of the Endura Products Division ("Endura") of W.R. Grace & Co.
(the "Endura Acquisition").
- INVEST IN CAPITAL IMPROVEMENTS. The Company seeks to reduce costs,
increase capacity, enhance manufacturing capabilities and improve product
quality through selected capital investments. The Company has invested
approximately $20 million in new equipment, technology and leasehold
improvements at its facilities over the past 12 months and plans to invest
significant additional capital in facilities and equipment over the next
12 to 24 months.
- INCREASE UTILIZATION OF RECYCLED FIBER. The Company intends to continue to
capitalize on its position as a leading manufacturer of specialty paper
products with recycled fiber content. The Company's office product line
contains between 25% and 100% recycled materials, depending on paper
grades. The Company continually seeks to increase the recycled content of
its products to reduce costs and better service customer demands for
recycled content while still meeting performance expectations. See
"Business -- Manufacturing -- Use of Recycled Fiber."
- EXPAND INTERNATIONAL SALES. While SPI historically has devoted increasing
resources to its international marketing efforts, CPG and Arcon have not
had a similar focus on these markets. SPI has an established network of
international sales offices and sales agents which sell SPI's existing
range of products. SPI believes that by using this sales and distribution
network it will be able to generate incremental sales of CPG's and Arcon's
products.
3
<PAGE>
THE ACQUISITIONS
Pursuant to a Merger Agreement, dated as of August 28, 1996 (the "CPG Merger
Agreement"), on October 31, 1996, a wholly-owned subsidiary of SPI was merged
with and into CPG and CPG became a wholly-owned subsidiary of SPI (the "CPG
Acquisition"). Shareholders of CPG received in the merger aggregate
consideration of $53.0 million less approximately $9.8 million in outstanding
indebtedness of CPG at closing, as adjusted for certain changes in the net worth
of CPG. See "The Acquisitions -- CPG Acquisition."
Pursuant to a Stock Purchase Agreement, dated as of August 28, 1996 (the
"Arcon Stock Purchase Agreement"), on October 31, 1996, SPI purchased all of the
outstanding capital stock of Arcon from its stockholders (the "Arcon
Acquisition", and, collectively with the CPG Acquisition, the "Acquisitions").
The purchase price paid for the capital stock of Arcon was approximately $32.0
million less approximately $8.5 million outstanding indebtedness of Arcon at
closing. See "The Acquisitions -- Arcon Acquisition."
The offering by SPI of the Old Notes (the "Offering") and the Acquisitions
are referred to herein as the "Transactions."
RECENT DEVELOPMENTS
On January 29, 1997, the Company announced its results of operations for the
quarter ended December 31, 1996 and the year ended December 31, 1996.
Net earnings for the fourth quarter of 1996 were $2.5 million or $0.63 per
share. Results for the fourth quarter of 1996 represented a 54% improvement over
the fourth quarter of 1995, during which the Company earned $1.6 million or
$0.41 per share. For the full year of 1996, the Company earned $7.5 million or
$1.86 per share, a 19% increase over 1995 earnings of $6.3 million or $1.56 per
share. Results for both years are adjusted to exclude non-recurring items.
Net sales for the fourth quarter of 1996 were $47.0 million as compared to
$26.0 million for the fourth quarter of 1995. $20.2 million of this increase was
attributable to the Acquisitions. Sales in the fourth quarter of 1996 for the
markets in which SPI was established prior to the Acquisitions were $26.8
million, up 3.1% from the fourth quarter of 1995. Sales in the office products
market increased 10% to $15.0 million, compared to $13.6 million in the fourth
quarter of 1995. Saturated specialty sales decreased 10% to $7.5 million versus
$8.3 million in the fourth quarter of 1995. Book cover sales increased 6% to
$3.8 million as compared to $3.6 million in the fourth quarter of 1995.
For the full year ended December 31, 1996, net sales were $124.8 million
compared to $117.5 in 1995. The Acquisitions added $20.2 million to 1996 sales.
Net sales in 1996 for the balance of the Company's markets were $104.6 million
as compared to $117.5 million in 1995. $6.7 million of this decline resulted
from the March 1995 sale of SPI's gasket business to Armstrong World Industries.
Additionally, office products sales in 1996 were $54.4 million compared to $57.3
million in 1995. Sales of saturated specialty products were $32.8 million versus
$36.2 million in 1995 and book cover sales in 1996 were $15.7 million as
compared to $15.8 million in 1995.
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The New Notes....................... The forms and terms of the New Notes are identical in
all material respects to the terms of the Old Notes
for which they may be exchanged pursuant to the
Exchange Offer, except for certain transfer
restrictions, registration rights and penalty
interest provisions relating to the Old Notes
described below under "-- Terms of the Notes."
The Exchange Offer.................. SPI is offering to exchange up to $100,000,000
aggregate principal amount of the New Notes for up to
$100,000,000 aggregate principal amount of the Old
Notes. Old Notes may be exchanged only in integral
multiples of $1,000.
Expiration Date; Withdrawal of The Exchange Offer will expire at 5:00 p.m., New York
Tender............................. City time, on March 12, 1997, or such later date and
time to which it is extended by SPI (the "Expiration
Date"). The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior to
the Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of
the Exchange Offer.
Certain Conditions to the
Exchange Offer..................... The Exchange Offer is subject to certain customary
conditions, which may be waived by SPI. See "The
Exchange Offer -- Certain Conditions to the Exchange
Offer."
Procedures for Tendering Old Each holder of Old Notes wishing to accept the
Notes.............................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Old Notes and any other required documentation to the
Exchange Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal, each
holder will represent to SPI that, among other
things, (i) any New Notes to be received by it will
be acquired in the ordinary course of its business,
(ii) it has no arrangement with any person to
participate in the distribution of the New Notes and
(iii) it is not an "affiliate," as defined in Rule
405 of the Securities Act, of SPI or, if it is an
affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities
Act to the extent applicable. Each holder whose Old
Notes are held through DTC (as defined) and who
wishes to participate in the Exchange Offer may do so
through the DTC's Automated Tender Offer Program
("ATOP") by which each tendering participant will
agree to be bound by the Letter of Transmittal.
Interest on the New Notes........... Interest on the New Notes will accrue from the date
of issuance (the "Issue Date") at the rate of 9 3/8%
per annum, and will be payable semi-annually in
arrears on each April 15 and October 15, commencing
April 15, 1997. Holders of the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
New Notes will also on April 15, 1997 receive an
amount equal to the accrued interest on the Old
Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
New Notes.
Special Procedures for Beneficial
Owners............................. Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender such Old Notes in the Exchange Offer should
contact such registered holder promptly instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the
Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date.
Guaranteed Delivery Procedure....... Holders of Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or
who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, prior to
the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Registration Requirements........... SPI has agreed to use its best efforts to consummate
by March 12, 1997, the registered Exchange Offer
pursuant to which holders of the Old Notes will be
offered an opportunity to exchange their Old Notes
for the New Notes which will be issued without
legends restricting the transfer thereof. In the
event that applicable interpretations of the staff of
the Commission do not permit SPI to effect the
Exchange Offer or in certain other circumstances, SPI
has agreed to file a Shelf Registration Statement
covering resales of the Old Notes and to use its best
efforts to cause such Shelf Registration Statement to
be declared effective under the Securities Act and,
subject to certain exceptions, keep such Shelf
Registration Statement effective until three years
after the original issuance of the Old Notes. If SPI
fails to consummate the Exchange Offer by March 12,
1997, or, if SPI is required to file a Shelf
Registration Statement and such Shelf Registration
Statement is not declared effective or does not
remain effective under the Securities Act as set
forth under "Old Notes Registration Rights," SPI will
be subject to certain interest rate penalties.
Certain U.S. Federal Income Tax
Consequences....................... For a discussion of certain federal income tax
considerations
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
relating to the exchange of the New Notes for the Old
Notes, see "Certain U.S. Federal Income Tax
Consequences."
Use of Proceeds..................... There will be no proceeds to SPI from the exchange of
Notes pursuant to the Exchange Offer.
Exchange Agent...................... Wilmington Trust Company is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
</TABLE>
TERMS OF THE NOTES
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 are registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof. See
"Description of the Notes."
OLD NOTES REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement") among SPI, the Guarantors and the Initial Purchaser, SPI and the
Guarantors agreed (a) to file a registration statement (the "Exchange Offer
Registration Statement") with respect to an offer to exchange the Old Notes (the
"Exchange Offer") for the New Notes (except that the New Notes will not contain
terms with respect to transfer restrictions) on or prior to the later of (i) 60
days after the Issue Date and (ii) 30 days after the closing of both of the
Acquisitions (the "Exchange Offer Filing Date") and (b) to use their best
efforts to cause such registration statement to become effective under the
Securities Act on or prior to the later of (i) 150 days after the Issue Date and
(ii) 90 days after the Exchange Offer Filing Date. In the event that applicable
law or interpretations of the staff of the Commission do not permit SPI to
effect the Exchange Offer, SPI and the Guarantors will use their best efforts to
cause to become effective a shelf registration statement with respect to the
resale of the Old Notes (and the related guarantees) (the "Shelf Registration
Statement") and to keep the Shelf Registration Statement continuously effective
until three years after the Issue Date or such shorter period ending when all
the New Notes have been sold thereunder. The interest rate on the Old Notes is
subject to increase under certain circumstances if SPI and the Guarantors are
not in compliance with their obligations under the Registration Rights
Agreement. See "Old Notes Registration Rights."
RISK FACTORS
See "Risk Factors," which begins at page 9, for a discussion of certain
factors that should be considered by participants in the Exchange Offer.
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
THE COMPANY
The following summary unaudited pro forma financial data gives pro forma
effect in the manner described under "Unaudited Pro Forma Financial Data" and
the notes thereto to the Transactions (including approximately $4.2 million of
annualized cost savings related to the integration of SPI, CPG and Arcon), as if
such transactions had occurred on January 1, 1995 in the case of Income
Statement Data and Other Data, and, in the case of Balance Sheet Data, as if the
Transactions had occurred on September 30, 1996. The Income Statement Data and
Other Data do not purport to represent what the Company's results of operations
actually would have been if the Transactions had occurred as of such date or
what such results will be for any future periods. The final allocation of
purchase price and the resulting amortization expenses in the Income Statement
Data will differ from the preliminary estimates for the reasons described in
more detail in "Unaudited Pro Forma Financial Data." The information contained
in this table should be read in conjunction with "Selected Historical
Consolidated Financial Data -- Specialty Paperboard, Inc.," "Selected Historical
Consolidated Financial Data -- CPG Investors Inc.," "Selected Historical
Consolidated Financial Data -- Arcon Holdings Corp.," "Unaudited Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements of SPI and
accompanying notes thereto, the consolidated financial statements of CPG and
accompanying notes thereto and the consolidated financial statements of Arcon
and the accompanying notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA LATEST
YEAR ENDED PRO FORMA NINE MONTHS TWELVE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------
<S> <C> <C> <C> <C>
1995 1995 1996 1996
------------ ---------- ---------- -------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................ $ 239,464 $ 183,396 $ 168,986 $ 225,054
Cost of sales........................................ 202,960 155,838 139,612 186,734
------------ ---------- ---------- -------------------
Gross profit....................................... 36,504 27,558 29,374 38,320
General and administrative expenses.................. 14,011 10,533 10,712 14,190
------------ ---------- ---------- -------------------
Income from operations............................. 22,493 17,025 18,662 24,130
Other (income) expenses, net......................... (1,198) (782) (991) (1,407)
Loss on sale of assets............................... 8,302 8,159 -- 143
Cogeneration (income)................................ (6,512) (6,512) -- --
Interest expense..................................... 9,825 7,370 7,370 9,825
------------ ---------- ---------- -------------------
Income before income taxes......................... 12,076 8,790 12,283 15,569
Provision for income taxes........................... 1,360 107 4,748 6,001
------------ ---------- ---------- -------------------
Net income........................................... $ 10,716 $ 8,683 $ 7,535 $ 9,568
------------ ---------- ---------- -------------------
------------ ---------- ---------- -------------------
OTHER DATA:
EBITDA (a)........................................... $ 29,454 $ 22,293 $ 24,074 $ 31,230
Net long-term debt to EBITDA......................... 2.98x
EBITDA to cash interest expense...................... 3.33x
Depreciation and amortization (b).................... 6,961 5,273 5,412 7,100
Capital expenditures................................. 9,445 5,303 6,825 10,967
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 34,917
Total assets....................................................................................... 205,574
Long-term debt, less current maturities............................................................ 100,000
Total stockholders' equity......................................................................... 44,021
</TABLE>
- ------------------------
(a) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.
(b) Depreciation and amortization includes only those items included in income
from operations and excludes $(995), $(646), $(677) and $(1,026) of
amortization included in other (income) expense and $450, $338, $338 and
$450 of amortization included in interest expense, for the year ended
December 31, 1995, the nine months ended September 30, 1995 and 1996 and the
twelve months ended September 30, 1996, respectively.
8
<PAGE>
RISK FACTORS
Prospective participants should carefully consider the following factors in
addition to the other information set forth in this Prospectus before
participating in the Exchange Offer.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE AND REFINANCE DEBT
In connection with the Transactions, the Company incurred a significant
amount of indebtedness. As of September 30, 1996, after giving pro forma effect
to the Transactions, the Company's indebtedness would have been approximately
$100.0 million and its stockholders' equity would have been approximately $44.0
million. In addition, the Company has significant obligations under an operating
lease (the "Sale/ Leaseback Transaction") in respect of its Brattleboro mill the
annual costs of which are reflected in the Company's income statements as cost
of sales. See "Description of Financing Arrangements" and Note 6 to the
consolidated financial statements of Specialty Paperboard, Inc. In addition,
subject to the restrictions in the Credit Facility and the Indenture, the
Company may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally.
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control. The Company anticipates that
its operating cash flow, together with borrowings under the Credit Facility,
will be sufficient to meet its operating expenses and to service its debt
obligations as they become due. If the Company is unable to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness, or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." SPI's ratio of earnings to fixed charges was 6.79:1, 4.93:1,
4.93:1, 3.11:1 and 1.18:1 for the nine months ended September 30, 1996 and each
of the four years ended December 31, 1995, 1994, 1993 and 1992, respectively.
For the year ended December 31, 1991, SPI's fixed charges exceeded its earnings
by $4.2 million. On a pro forma basis, after giving effect to the Transactions,
the Company's ratio of earnings to fixed charges was 2.41:1, 2.46:1 and 2.11:1
for the twelve months ended September 30, 1996, the nine months ended September
30, 1996 and the fiscal year ended December 31, 1995, respectively.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, impose restrictions on the ability of a subsidiary
to pay dividends or make certain payments to the Company, merge or consolidate
with any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the Company. In addition,
the Credit Facility and the operating lease entered into pursuant to the
Sale/Leaseback Transaction (the "Sale/Leaseback Agreement") contains other and
more restrictive covenants. See "Description of Notes -- Certain Covenants" and
"Description of Financing Arrangements." A breach of any of these covenants
could result in a default under the Credit Facility, the Sale/Leaseback
Agreement and/or the Indenture. Upon the occurrence of an event of default under
the Credit Facility or the Sale/Leaseback
9
<PAGE>
Agreement, the lenders under the Credit Facility could elect to declare all
amounts outstanding under the Credit Facility and the Sale/Leaseback Agreement
together with accrued interest, to be immediately due and payable. If the
Company were unable to repay those amounts, such lenders could proceed against
the collateral granted to them to secure that indebtedness, which indebtedness
currently is secured by substantially all of the assets of SPI. The security
under the Credit Facility is limited to the accounts receivable and inventory of
the Company and certain of SPI's real estate and equipment. See "Description of
Financing Arrangements". If the lenders under the Credit Facility accelerate the
payment of such indebtedness, there can be no assurance that the assets of the
Company would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Notes.
EXPOSURE TO FLUCTUATIONS IN RAW MATERIALS COSTS AND SUPPLY
The Company's principal raw materials are hardwood and softwood pulp and
secondary fiber, which are cyclical in both price and supply. The cyclical
nature of pulp pricing presents a potential risk to the Company's gross profit
margins to the extent that the Company is unable to pass along price increases
to its customers on a timely basis. The Company is also subject to the risk that
it will be unable to purchase sufficient quantities of pulp to meet its
production requirements during times of tight supply. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Overview -- Raw Materials." The Company's sole source of
Tyvek-Registered Trademark- is DuPont. Although management believes it has a
good relationship with DuPont, there can be no assurances that the Company will
be able to continually purchase adequate supplies of
Tyvek-Registered Trademark-. Any material limitation or interruption in the
Company's supply of Tyvek-Registered Trademark- could have a material adverse
effect on the financial condition and results of operations of the Company.
Furthermore, significant increases in the price of Tyvek-Registered Trademark-,
if not offset by product price increases, could have a material adverse effect
on the financial condition and results of operations of the Company. There can
be no assurances that the Company will be able to pass any future increases in
the price of Tyvek-Registered Trademark- on to its customers in the form of
price increases.
SPECIALTY PAPER MARKET COMPETITION
The Company's competition within the specific markets in which it operates
comes primarily from a relatively small number of other specialty paper
producers, as well as from producers of vinyl, plastic, fiberglass and other
materials. Some of these producers have substantially greater resources than the
Company. Competition in the Company's markets is based principally on quality,
product performance and characteristics, service and price as they relate to the
specific needs of the customer. Competitors with like materials, and different
competitive materials, could displace the Company's materials and adversely
affect the Company's financial condition and results of operations.
IMPACT OF ENVIRONMENTAL REGULATION; GOVERNMENTAL REGULATION
Like similar companies, the Company's operations and properties are subject
to a wide variety of federal, state and local laws and regulations, including
those governing the use, storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes, the
remediation of contaminated soil and groundwater, and the health and safety of
employees (collectively, "Environmental Laws"). As such, the nature of the
Company's operations exposes it to the risk of claims with respect to
environmental protection and health and safety matters and there can be no
assurance that material costs or liabilities will not be incurred in connection
with such claims. Based upon its experience to date, management of the Company
believes that the future cost of compliance with existing Environmental Laws,
and liability for known claims of this type, will not have a material adverse
effect on the Company's financial condition and results of operations. However,
future events, such as new information, changes in existing Environmental Laws
or their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
- ------------
- -Registered Trademark-DuPont registered trademark.
10
<PAGE>
material to the Company's financial condition and results of operations. See
"Business -- Environmental Regulation and Compliance."
INTEGRATION OF ACQUIRED COMPANIES; ACQUISITION STRATEGY
The Company intends to manage the operations of SPI, CPG and Arcon as an
integrated entity. While the Company believes that it can successfully integrate
the operations acquired from CPG and Arcon into those of SPI, there can be no
assurance that this will be the case. There also can be no assurance that the
Company will be able to realize expected operating and economic efficiencies
following the Acquisitions. In addition, the Company intends to continue to grow
through selected strategic acquisitions of businesses in complementary markets.
See "Business -- Business Strategy." There can be no assurance that the Company
will be able to locate suitable acquisition candidates, consummate acquisitions
on favorable terms or successfully integrate newly acquired businesses with the
Company's operations.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on its
executive officers and other key management personnel. There can be no assurance
that the Company will be able to retain its executive officers and key personnel
or attract additional qualified 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.
There can be no assurance that the Company will be able to retain such
management personnel.
FRAUDULENT TRANSFER STATUTES
Under applicable provisions of Federal bankruptcy law and comparable
provisions of state fraudulent transfer laws, if it were found that any
Guarantor (i) had incurred indebtedness represented by its Guarantee with an
intent to hinder, delay or defraud creditors or had received less than a
reasonably equivalent value or fair consideration for such indebtedness and
(ii)(A) was insolvent, (B) was rendered insolvent by reason of such incurrence,
(C) was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its business
or (D) intended to incur or believed that it would incur debts beyond its
ability to pay as such debts matured, the obligations of such Guarantor under
its Guarantee could be avoided or claims in respect of such Guarantee and
collateral could be subordinated to all other debts of such Guarantor. A legal
challenge of a Guarantee on fraudulent conveyance grounds could, among other
things, focus on the benefits, if any, realized by a Guarantor as a result of
the issuance by SPI of the Notes. To the extent that a Guarantee was held to be
unenforceable as a fraudulent conveyance for any reason, the holders of the
Notes would cease to have any direct claim in respect of a Guarantor and would
be solely creditors of SPI. In the event a Guarantee was held to be
subordinated, the claims of the holders of the Notes would be subordinated to
claims of other creditors of such Guarantor.
The measures of insolvency for purposes of the foregoing considerations will
vary depending on the law applied in any proceeding with respect to the
foregoing. Generally, however, an issuer would be considered insolvent if the
sum of its debts, including contingent liabilities, were greater than the fair
saleable value of its assets at a fair valuation or if the present fair saleable
value of its assets were less than the amount that would be required to pay its
probable liabilities on its existing debts, including contingent liabilities, as
they become absolute and mature. There can be no assurance, however, as to what
standard a court would apply in making such determination.
SPI believes that the Guarantors will receive equivalent value at the time
the indebtedness is incurred under the Guarantees. In addition, SPI believes
that none of the Guarantors (i) is or will be insolvent, (ii) is or will be
engaged in a business or transaction for which its remaining assets constitute
unreasonable
11
<PAGE>
small capital, or (iii) intends or will intend to incur debt beyond its ability
to repay such debts as they mature. Since each of the components of the question
of whether a Guarantee is a fraudulent conveyance is inherently fact based and
fact specific, there can be no assurance that a court passing on such questions
would agree with SPI. Neither counsel for SPI nor counsel for the Initial
Purchaser will express any opinion as to Federal or state laws relating to
fraudulent transfers.
SEASONALITY
The Company's business is seasonal in nature. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources -- Seasonality."
ABSENCE OF PUBLIC MARKET
There has not previously been any public market for the New Notes. There can
be no assurance as to the liquidity of any markets that may develop for the New
Notes, the ability of holders to sell the New Notes, or the price at which
holders would be able to sell the New Notes. Future trading prices of the New
Notes will depend on many factors, including, among other things, prevailing
interest rates, the Company's operating results and the market for similar
securities. Historically, the market for securities similar to the New Notes,
including non-investment grade debt, has been subject to disruptions that have
caused substantial volatility in the prices of such securities. There can be no
assurance that any market for the New Notes, if such market develops, will not
be subject to similar disruptions.
12
<PAGE>
THE ACQUISITIONS
CPG ACQUISITION. Pursuant to the CPG Merger Agreement, on October 31, 1996,
a wholly-owned subsidiary of SPI was merged with and into CPG and CPG became a
wholly-owned subsidiary of SPI. The beneficial owners of the issued and
outstanding capital stock of CPG, including members of CPG's management,
received in the merger aggregate consideration of $53.0 million less
approximately $9.8 million in outstanding indebtedness of CPG at closing. The
purchase price is subject to post closing adjustments equal to the amount by
which the Closing Net Worth of CPG differs from approximately $22.8 million (the
"CPG Purchase Price"). "Closing Net Worth" is defined in the Merger Agreement to
mean the total assets of CPG, including cash, less total liabilities of CPG,
excluding outstanding indebtedness, in each case as set forth in a closing
balance sheet of CPG as of the open of business on the closing date of the CPG
Acquisition. Out of the CPG Purchase Price (a) $300,000 was placed into an
escrow account as security for the satisfaction of certain environmental
indemnification obligations contained in the CPG Merger Agreement (the "CPG
Environmental Escrow") and (b) $3.0 million was placed into an escrow account as
security for the satisfaction of certain other indemnification obligations
contained in the CPG Merger Agreement (including environmental indemnification
matters which exceed the amount of the CPG Environmental Escrow).
ARCON ACQUISITION. Pursuant to the Arcon Stock Purchase Agreement, on
October 31, 1996, SPI purchased all of the issued and outstanding capital stock
of Arcon for an aggregate purchase price of approximately $32.0 million less
approximately $8.5 million in outstanding indebtedness of Arcon at closing (the
"Arcon Purchase Price"). Two million dollars of the Arcon Purchase Price was
placed into an escrow account as security for the satisfaction of certain
indemnification obligations contained in the Arcon Stock Purchase Agreement.
USE OF PROCEEDS OF THE NEW NOTES
This Exchange Offer is intended to satisfy certain obligations of SPI under
the Registration Rights Agreement. SPI will not receive any proceeds from the
issuance of the New Notes offered hereby. In consideration for issuing the New
Notes as contemplated in this Prospectus, SPI will receive, in exchange, Old
Notes in like principal amount. The form and terms of the New Notes are
identical in all material respects to the form and terms of the Old Notes,
except as otherwise described herein under "The Exchange Offer--Terms of the
Exchange Offer." The Old Notes surrendered in exchange for the New Notes will be
retired and cancelled and cannot be reissued. Accordingly, issuance of the New
Notes will not result in any increase in the outstanding debt of SPI.
13
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among SPI, the
Guarantors and the Initial Purchaser, SPI has agreed (a) to file a registration
statement with respect to an offer to exchange the Old Notes for senior debt
securities of SPI with terms substantially identical to the Old Notes (except
that the New Notes will not contain terms with respect to transfer restrictions)
on or prior to the later of (i) the 60th day after the Issue Date and (ii) the
30th day after the Exchange Offer Filing Date and (b) to use their best efforts
to cause such registration statement to become effective under the Securities
Act on or prior to the later of (i) the 150th day after the Issue Date and (ii)
the 90th day after the Exchange Offer Filing Date. In the event that applicable
law or interpretations of the staff of the Commission do not permit SPI to file
the registration statement containing this Prospectus or to effect the Exchange
Offer, or if certain holders of the Old Notes notify SPI that they are not
permitted to participate in, or would not receive freely tradeable New Notes
pursuant to, the Exchange Offer, SPI will use its best efforts to cause to
become effective the Shelf Registration Statement with respect to the resale of
the Old Notes and to keep the Shelf Registration Statement effective until three
years after the original issuance of the Old Notes. The interest rate on the Old
Notes is subject to increase under certain circumstances if SPI is not in
compliance with its obligations under the Registration Rights Agreement. See
"Old Notes Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of SPI or, if
it is an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. See "Old Notes
Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, SPI believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of SPI within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and such holder does not intend to participate and has no arrangement
or understanding with any person to participate in the distribution of such New
Notes. Any holder who tenders in the Exchange Offer with the intention or for
the purpose of participating in a distribution of the New Notes cannot rely on
such interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing the selling security
holders information required by Item 507 of Regulation S-K under the Securities
Act. This Prospectus may be used for an offer to resell, resale or other
retransfer of New Notes only as specifically set forth herein. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, SPI will accept for exchange any and all Old
Notes properly tendered and not withdrawn prior
14
<PAGE>
to 5:00 p.m., New York City time, on the Expiration Date. SPI will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes surrendered pursuant to the Exchange Offer. Old Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes. The New Notes will be issued
under and entitled to the benefits of the Indenture, which also authorized the
issuance of the Old Notes, such that both series will be treated as a single
class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $100 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in the Exchange Offer.
SPI intends to conduct the Exchange Offer in accordance with the provisions
of the Registration Rights Agreement and the applicable requirements of the
Exchange Act, and the rules and regulations of the Commission thereunder. Old
Notes which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
SPI shall be deemed to have accepted for exchange properly tendered Old
Notes when, as and if SPI shall have given oral or written notice thereof to the
Exchange Agent and complied with the provisions of Section 2 of the Registration
Rights Agreement. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Notes from SPI. SPI expressly reserves the
right to amend or terminate the Exchange Offer, and not to accept for exchange
any Old Notes not theretofore accepted for exchange, upon the occurrence of any
of the conditions specified below under "-- Certain Conditions to the Exchange
Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. SPI will pay all charges and expenses, other
than certain applicable taxes described below, in connection with the Exchange
Offer. "See -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
March 12, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, SPI will notify the Exchange Agent of
any extension by oral or written notice and will mail to the registered holders
of Old Notes an announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
SPI reserves the right, in its sole discretion, (i) to delay accepting for
exchange any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "The Exchange
Offer -- Conditions" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders of Old
Notes. If the Exchange Offer is amended in a manner determined by SPI to
constitute a material change, SPI will
15
<PAGE>
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and SPI will extend the Exchange
Offer, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 9 3/8% per annum, payable
semi-annually, on each April 15 and October 15, commencing April 15, 1997.
Holders of New Notes will receive interest on April 15, 1997 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, SPI will not be
required to accept for exchange, or exchange any New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in SPI's reasonable judgment, might materially impair the ability of
SPI to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in SPI's reasonable judgment, might
materially impair the ability of SPI to proceed with the Exchange Offer; or
(c) any governmental approval has not been obtained, which approval SPI
shall, in its reasonable discretion, deem necessary for the consummation of
the Exchange Offer as contemplated hereby.
SPI expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Notes, by giving oral or written notice
of such extension to the holders thereof. During any such extensions, all Old
Notes previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by SPI. Any Old Notes not accepted for exchange for any
reason will be returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
SPI expressly reserves the right to amend or terminate the Exchange Offer,
and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above under "-- Certain Conditions to the Exchange Offer." SPI will
give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The foregoing conditions are for the sole benefit of SPI and may be asserted
by SPI regardless of the circumstances giving rise to any such condition or may
be waived by SPI in whole or in part at any time and from time to time in its
sole discretion. The failure by SPI at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
In addition, SPI will not accept for exchange any Old Notes tendered, and no
New Notes will be issued in exchange for any such Old Notes, if at such time any
stop order shall be threatened or in effect with respect to the Registration
Statement of which this Prospectus constitutes a part or the qualification of
the Indenture under the Trust Indenture Act of 1939 (the "TIA").
16
<PAGE>
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must (i) complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date or (ii) comply with
DTC's ATOP procedures described below. In addition, either (i) Old Notes must be
received by the Exchange Agent or (ii) a timely confirmation of book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility" or "DTC") pursuant to the procedure for
book-entry transfer described below together with the Letter of Transmittal or a
properly transmitted Agent's Message (as defined below) must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required documents or a
properly transmitted Agent's Message must be received by the Exchange Agent at
the address set forth below under "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and SPI in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT (INCLUDING DELIVERY THROUGH DTC AND ANY
ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED THROUGH ATOP), IS AT THE ELECTION
AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO SPI. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of Old Notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder of Old Notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case may be, must be guaranteed by an Eligible Institution (as
defined below) unless the Old Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantor must be a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
17
<PAGE>
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by SPI, evidence
satisfactory to SPI of their authority to so act must be submitted with the
Letter of Transmittal.
The Exchange Agent and the DTC have confirmed that any financial institution
that is a participant in the DTC's system may utilize the DTC's ATOP to tender
Old Notes. Accordingly, participants in the DTC's ATOP may, in lieu of
physically completing and signing the Letter of Transmittal and delivering it to
the Exchange Agent, electronically transmit their acceptance of the Exchange
Offer by causing the DTC to transfer the Old Notes to the Exchange Agent in
accordance with the DTC's ATOP procedures for transfer. The DTC will then send
an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that the DTC has received an express acknowledgment from a participant in the
DTC's ATOP that is tendering Old Notes, which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal (or, in the case of an Agent's Message
relating to guaranteed delivery, that such participant has received and agrees
to be bound by the applicable Notice of Guaranteed Delivery), and that the
agreement may be enforced against such participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by SPI in its sole discretion, which determination will be
final and binding. SPI reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes SPI's acceptance of which would, in
the opinion of counsel for SPI, be unlawful. SPI also reserves the right to
waive any defects, irregularities or conditions of tender as to particular Old
Notes. SPI's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as SPI shall
determine. Although SPI intends to notify holders of defects or irregularities
with respect to tenders of Old Notes, neither SPI, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Notes or a timely Book-Entry Confirmation of such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
18
<PAGE>
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Dates, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
(3) New York Stock Exchange trading days after the Expiration Date, either
(i) the Letter of Transmittal (or facsimile thereof) together with the Old
Notes or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent or (ii) the Exchange Agent will
receive a properly transmitted Agent's Message; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal or a properly transmitted
Agent's Message, are received by the Exchange Agent within three (3) New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, (i) a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent" or (ii) the participant must comply with the appropriate
procedures of DTC's ATOP system. Any such notice of withdrawal must specify the
name of the person having tendered the Old Notes to be withdrawn, identify the
Old Notes to be withdrawn (including the principal amount of such Old Notes),
and (where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes were registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the
19
<PAGE>
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by SPI, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL OR BY BY HAND:
OVERNIGHT COURIER:
Wilmington Trust Company Wilmington Trust Company
Attn: Jill Rylee c/o Harris Trust Company of New York,
Corporate Trust Administration as Agent
1100 North Market Street 75 Water Street
Rodney Square North New York, New York 10004
Wilmington, Delaware 19890-0001
BY FACSIMILE:
Wilmington Trust Company
Corporate Trust Administration
Facsimile: (302) 651-1079
Confirm by Telephone: (302) 651-8869
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by SPI. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telephone or in person by officers and regular employees of SPI
and its affiliates.
SPI has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to broker-dealers or others soliciting
acceptances of the Exchange Offer. SPI, however, will
20
<PAGE>
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 cash expenses to be incurred in connection with the Exchange Offer will
be paid by SPI and are estimated in the aggregate to be approximately $350,000.
Such expenses include registration fees, fees and expenses of the Exchange Agent
and Trustee, accounting and legal fees and printing costs, and related fees and
expenses.
SPI will pay all transfer taxes, if any, applicable to the exchange of Notes
pursuant to the Exchange Offer. If, however, certificates representing Old Notes
for principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
holder of Old Notes tendered, or if tendered Old Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct SPI
to register New Notes in the name of, or request that Old Notes not tendered or
not accepted in the Exchange Offer be returned to, a person other than the
registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth (i) in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws and (ii) otherwise set forth under
"Transfer Restrictions" in the Offering Memorandum dated October 4, 1996
distributed in connection with the Offering. In general, the Old Notes may not
be offered or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. SPI does not currently anticipate that it will
register the Old Notes under the Securities Act. Based on interpretations by the
staff of the Commission, New Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of SPI 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 respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer. Any holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Notes (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or such securities laws have been complied
with. SPI has agreed, pursuant to the Registration Rights Agreement and subject
to certain specified limitations therein, to register or qualify the New Notes
for offer or sale under the securities or blue sky laws of such jurisdictions as
any holder of the New Notes reasonably requests in writing.
21
<PAGE>
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of the Company giving
effect to the Transactions as if they had occurred on September 30, 1996. This
table should be read in conjunction with the "Selected Historical Consolidated
Financial Data -- Specialty Paperboard, Inc.," "Selected Historical Consolidated
Financial Data -- CPG Investors Inc.," "Selected Historical Consolidated
Financial Data -- Arcon Holdings Corp." and "Unaudited Pro Forma Consolidated
Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL PRO FORMA
--------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash..................................................................... $ 3.2 $ 6.9
Credit Facility(1)....................................................... 1.8 --
Senior Notes............................................................. -- 100.0
--------- -----------
Total Debt........................................................... 1.8 100.0
Stockholders' Equity..................................................... 45.8 44.0
--------- -----------
Total Capitalization................................................. $ 47.6 $ 144.0
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) SPI may obtain revolving credit loans under the Credit Facility in the
amounts equal to the lesser of (a) $20.0 million or (b) a borrowing base
amount equal to a specified percentage of certain accounts receivable and
inventory. As of January 31, 1997 there were no amounts outstanding under
the Credit Facility. See "Description of Financing Arrangements."
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Combined Consolidated Statements of Income
give effect to the Transactions as if they had occurred on January 1, 1995. The
unaudited pro forma financial data are based on the historical consolidated
financial statements of SPI, CPG and Arcon and the assumptions and adjustments
described in the accompanying notes. The Unaudited Pro Forma Combined
Consolidated Statements of Income do not (a) purport to represent what the
Company's results of operations actually would have been if the Transactions had
occurred as of the date indicated or what such results will be for any future
periods or (b) give effect to certain non-recurring charges expected to result
from the Transactions.
The following Unaudited Pro Forma Combined Consolidated Balance Sheet as of
September 30, 1996 was prepared as if the Transactions had occurred on such
date. The Unaudited Pro Forma Combined Consolidated Balance Sheet reflects the
preliminary allocation of the purchase prices for the Acquisitions to the
Company's tangible and intangible assets and liabilities. The final allocation
of such purchase prices, and the resulting amortization expense in the
accompanying Unaudited Pro Forma Combined Statements of Income, will differ from
the preliminary estimates due to the final allocation being based on: (a) actual
closing date amounts of assets and liabilities, and (b) actual values of
property, plant and equipment and any identifiable intangible assets.
The unaudited pro forma financial data are based upon assumptions that SPI
believes are reasonable and should be read in conjunction with the consolidated
financial statements of SPI and the accompanying notes thereto, the consolidated
financial statements of CPG and the accompanying notes thereto and the
consolidated financial statements of Arcon and the accompanying notes thereto
included elsewhere in this Prospectus.
Although Arcon's fiscal year ends October 31, the historical information of
Arcon in the pro forma statements of income is presented for the twelve months
ended December 31, 1995 and the nine months ended September 30, 1996 and 1995.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
OFFERING ACQUISITIONS COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------------------------------- ----------- -------------------- -----------
<CAPTION>
SPI CPG ARCON CPG ARCON
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash....................... $ 3,174 $ 3 $ 1,825 $ 73,053(a) $ (45,124 (d) $ (26,048 (f) $ 6,883
Accounts receivable........ 11,278 11,030 1,964 -- -- -- 24,272
Cogen receivable........... 1,512 -- -- -- -- -- 1,512
Inventories................ 16,402 8,317 2,695 -- 1,415(e) -- 28,829
Deferred taxes............. -- 716 114 -- -- (114 (g) 716
Other...................... 1,016 307 180 -- -- -- 1,503
----------- ----------- --------- ----------- --------- --------- -----------
Total current assets..... 33,382 20,373 6,778 73,053 (43,709) (26,162) 63,715
Property, plant and
equipment, net........... 36,030 19,444 1,209 -- 36,940(e) -- 93,623
Organizational and
financing costs.......... 1,988 303 401 1,808(b) -- -- 4,500
Other long-term assets..... 487 976 -- -- -- -- 1,463
Goodwill................... -- -- 10,222 -- 7,916(e) 19,856(g) 37,994
Deferred income taxes...... 4,128 135 16 -- -- -- 4,279
----------- ----------- --------- ----------- --------- --------- -----------
Total assets............. $ 76,015 $ 41,231 $ 18,626 $ 74,861 $ 1,147 $ (6,306) $ 205,574
----------- ----------- --------- ----------- --------- --------- -----------
----------- ----------- --------- ----------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of
long-term debt........... $ -- $ 1,750 $ 1,550 $ (3,300)(a) $ -- $ -- $ --
Accounts payable........... 7,155 4,520 1,699 -- -- -- 13,374
Accrued liabilities........ 8,175 5,396 1,065 (1,191)(c) 450(e) 1,529(g) 15,424
----------- ----------- --------- ----------- --------- --------- -----------
Total current
liabilities............ 15,330 11,666 4,314 (4,491) 450 1,529 28,798
LONG-TERM LIABILITIES:
Senior Notes............... -- -- -- 100,000(a) -- -- 100,000
Long-term debt............. 1,845 10,540 6,477 (18,862)(a) -- -- --
----------- ----------- --------- ----------- --------- --------- -----------
Total long-term debt..... 1,845 10,540 6,477 81,138 -- 100,000
Deferred gain.............. 13,033 -- -- -- -- -- 13,033
Deferred income taxes...... -- -- -- -- 15,342(e) -- 15,342
Warrant -- -- 1,752 -- -- (1,752 (h) --
Other long-term liabilities -- 4,380 -- -- -- -- 4,380
----------- ----------- --------- ----------- --------- --------- -----------
Total long-term
liabilities 14,878 14,920 8,229 81,138 15,342 (1,752) 132,755
----------- ----------- --------- ----------- --------- --------- -----------
STOCKHOLDERS' EQUITY:
Common stock............... 4 5 1 -- (5 (h) (1 (h) 4
Preferred stock............ -- -- 6,187 -- -- (6,187 (h) --
Additional paid in
capital.................. 44,733 4,565 179 -- (4,565 (h) (179 (h) 44,733
Unearned compensation...... (26) -- -- -- -- -- (26)
Retained earnings
(deficit)................ 1,096 10,140 (284) (1,786)(c) (10,140 (h) 284(h) (690)
Minimum pension
adjustment............... -- (65) -- -- 65(h) -- --
----------- ----------- --------- ----------- --------- --------- -----------
Total stockholders'
equity................. 45,807 14,645 6,083 (1,786) (14,645) (6,083) 44,021
----------- ----------- --------- ----------- --------- --------- -----------
Total liabilities and
stockholders' equity... $ 76,015 $ 41,231 $ 18,626 $ 74,861 $ 1,147 $ (6,306) $ 205,574
----------- ----------- --------- ----------- --------- --------- -----------
----------- ----------- --------- ----------- --------- --------- -----------
</TABLE>
See accompanying notes
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Balance Sheet reflects the Transactions
as if they had occurred as of September 30, 1996 as follows:
(a) Reflects the issuance of the Notes and application of proceeds
therefrom:
<TABLE>
<S> <C>
Issuance of the Notes............................................. $ 100,000
Expenses for issuance of the Notes................................ (4,500)
Retirement of current maturities of long-term debt................ (3,300)
Retirement of long-term debt...................................... (18,862)
Elimination of debt discount...................................... (285)
---------
$ 73,053
---------
---------
</TABLE>
(b) Reflects the following:
<TABLE>
<CAPTION>
Financing costs related to the Offering............................. $ 4,500
<S> <C>
Write off of financing costs and expenses relating to debt to be
retired........................................................... (2,692)
---------
$ 1,808
---------
---------
</TABLE>
(c) Reflects the following:
<TABLE>
<S> <C>
Elimination of debt discount relating to debt to be retired........ $ (285)
Write off of financing costs and expenses relating to debt to be
retired.......................................................... (2,692)
Tax benefit from above adjustments................................. 1,191
---------
$ (1,786)
---------
---------
</TABLE>
(d) Represents the following cash payments related to the CPG Acquisition:
<TABLE>
<S> <C>
Purchase price--CPG Acquisition................................... $ (53,000)
Net purchase price adjustment..................................... (4,164)
Less debt outstanding............................................. 12,290
---------
Payment to sellers................................................ (44,874)
Acquisition expenses.............................................. (250)
---------
$ (45,124)
---------
---------
</TABLE>
25
<PAGE>
(e) The CPG Acquisition will be accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of CPG based upon preliminary estimates of
their fair market values, with the remainder allocated to goodwill.
<TABLE>
<S> <C>
Payment to sellers -- CPG Acquisition.............................. $ 44,874
Acquisition expenses............................................... 250
Book value of net assets acquired.................................. (14,645)
---------
Increase in basis.................................................. $ 30,479
---------
---------
Allocation of increase in basis:
Increase in inventory value to convert LIFO to fair value.......... $ 1,415
Increase in fair value of property, plant and equipment, net....... 36,940
Increase in Goodwill............................................... 7,916
Accrual for Acquisition-related severance costs to be incurred at
CPG.............................................................. (450)
Increase in deferred tax liabilities--long-term.................... (15,342)
---------
$ 30,479
---------
---------
</TABLE>
(f) Represents the following cash payments related to the Arcon Acquisition:
<TABLE>
<S> <C>
Purchase price--Arcon Acquisition................................. $ (32,000)
Less debt outstanding............................................. 8,027
Plus cash accounts to sellers..................................... (1,825)
---------
Payment to sellers for shares, options and warrant................ (25,798)
Acquisition expenses.............................................. (250)
---------
$ (26,048)
---------
---------
</TABLE>
(g) The Arcon Acquisition will be accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of Arcon based upon preliminary estimates of
their fair market values, with the remainder allocated to goodwill.
<TABLE>
<S> <C>
Payment to sellers for shares, options and warrant--Arcon
Acquisition...................................................... $ 23,973
Acquisition expenses............................................... 250
Book value of net assets acquired.................................. (6,010)
---------
Increase in basis.................................................. $ 18,213
---------
---------
Allocation of increase in basis:
Increase in goodwill............................................... $ 19,856
Decrease in deferred compensation.................................. 284
Accrual for acquisition-related severance and relocation costs to
be incurred at Arcon............................................. (1,813)
Decrease in deferred tax asset--current............................ (114)
---------
$ 18,213
---------
---------
</TABLE>
(h) Reflects the elimination of CPG and Arcon equity balances and warrant
pursuant to purchase accounting.
26
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL PRO FORMA COMPANY
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
---------- --------- ----------
Net sales..................................... $ 117,516 $ 95,795 $ 26,153 $ 239,464 $ -- $ 239,464
Cost of product sold.......................... 100,106 84,419 19,135 203,660 (700)(a) 202,960
---------- --------- ---------- ---------- ----------- -----------
Gross profit................................ 17,410 11,376 7,018 35,804 700 36,504
General and administrative.................... 8,397 5,310 3,401 17,108 (3,097)(b) 14,011
---------- --------- ---------- ---------- ----------- -----------
Income from operations...................... 9,013 6,066 3,617 18,696 3,797 22,493
Other (income) expenses, net.................. (1,198) -- -- (1,198) -- (1,198)
Loss on sale of assets........................ 8,302 -- -- 8,302 -- 8,302
Cogeneration income........................... (6,512) -- -- (6,512) -- (6,512)
Interest expense.............................. 892 1,345 1,793 4,030 5,795(c) 9,825
---------- --------- ---------- ---------- ----------- -----------
Income before income taxes.................. 7,529 4,721 1,824 14,074 (1,998) 12,076
Income tax provision (benefit)................ (424) 1,842 956 2,374 (1,014)(d) 1,360
---------- --------- ---------- ---------- ----------- -----------
Net income.................................... $ 7,953 $ 2,879 $ 868 $ 11,700 $ (984) $ 10,716
---------- --------- ---------- ---------- ----------- -----------
---------- --------- ---------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................. $ 23,885 $ 29,454
Depreciation and amortization (f)........... 5,189 6,961
Capital expenditures........................ 9,445 9,445
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the year ended
December 31, 1995 reflects the Transactions as if they had occurred on January
1, 1995 as follows:
<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value...................... $ (1,272)
Additional depreciation expense on increased property basis due to
purchase accounting adjustment......................................... 1,847
Reduction in headcount and operational expenses due to integration of
Arcon.................................................................. (1,275)
---------
$ (700)
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (987)
Reversal of management fees.............................................. (100)
Amortization of goodwill acquired........................................ 950
Reversal of deferred compensation expense................................ (135)
Reduction in headcount and operational expense due to integration of
CPG and Arcon.......................................................... (2,825)
---------
$ (3,097)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 9,375
Reversal of interest expense............................................. (3,247)
Reversal of warrant accretion............................................ (500)
Reversal of amortization of financing costs relating to debt to be
retired................................................................ (283)
Amortization of financing costs relating to the issuance of the Notes.... 450
---------
$ 5,795
---------
---------
</TABLE>
(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.
(e) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.
(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(995) and $(995) of amortization included in
other (income) expense and $283 and $450 of amortization included in
interest expense in the total historical and pro forma results,
respectively.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
--------- --------- ---------
Net sales....................................... $ 91,557 $ 72,395 $ 19,444 $ 183,396 $ -- $ 183,396
Cost of product sold............................ 78,601 63,674 14,274 156,549 (711)(a) 155,838
--------- --------- --------- ---------- ----------- -----------
Gross profit.................................. 12,956 8,721 5,170 26,847 711 27,558
General and administrative...................... 6,189 4,064 2,570 12,823 (2,290)(b) 10,533
--------- --------- --------- ---------- ----------- -----------
Income from operations........................ 6,767 4,657 2,600 14,024 3,001 17,025
Other (income) expenses, net.................... (782) -- -- (782) (782)
Loss on sale of assets.......................... 8,159 -- -- 8,159 8,159
Cogeneration income............................. (6,512) -- -- (6,512) (6,512)
Interest expense................................ 811 1,037 1,238 3,086 4,284(c) 7,370
--------- --------- --------- ---------- ----------- -----------
Income before income taxes.................... 5,091 3,620 1,362 10,073 (1,283) 8,790
Income tax provisions (benefit)................. (1,364) 1,376 707 719 (612)(d) 107
--------- --------- --------- ---------- ----------- -----------
Net income...................................... $ 6,455 $ 2,244 $ 655 $ 9,354 $ (671) $ 8,683
--------- --------- --------- ---------- ----------- -----------
--------- --------- --------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................... $ 17,959 $ 22,298
Depreciation and amortization (f)............. 3,935 5,273
Capital expenditures.......................... 5,303 5,303
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the nine months
ended September 30, 1995 reflects the Transactions as if they had occurred on
January 1, 1995 as follows:
<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value...................... $ (1,140)
Additional depreciation expense on increased property basis due to
purchase accounting adjustment......................................... 1,385
Reduction in headcount and operational expenses due to integration of
Arcon.................................................................. (956)
---------
$ (711)
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (732)
Reversal of management fees.............................................. (75)
Amortization of goodwill acquired........................................ 712
Reversal of deferred compensation expense................................ (76)
Reduction in headcount and operational expenses due to integration of CPG
and Arcon.............................................................. (2,119)
---------
$ (2,290)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 7,031
Reversal of interest expense............................................. (2,610)
Reversal of warrant accretion............................................ (262)
Reversal of amortization of financing costs relating to debt to be
retired................................................................ (213)
Amortization of financing costs relating to the issuance of the Notes.... 338
---------
$ 4,284
---------
---------
</TABLE>
(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.
(e) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.
(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(646) and $(646) of amortization included in
other (income) expense and $213 and $338 of amortization included in
interest expense in the total historical and pro forma results,
respectively.
30
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
--------- --------- ---------
Net sales....................................... $ 77,734 $ 69,719 $ 21,533 $ 168,986 $ -- $ 168,986
Cost of product sold............................ 64,105 58,469 15,541 138,115 1,497(a) 139,612
--------- --------- --------- ---------- ----------- -----------
Gross profit.................................. 13,629 11,250 5,992 30,871 (1,497) 29,374
General and administrative...................... 6,316 4,330 2,324 12,970 (2,258)(b) 10,712
--------- --------- --------- ---------- ----------- -----------
Income from operations........................ 7,313 6,920 3,668 17,901 761 18,662
Other (income) expenses, net.................... (991) -- -- (991) (991)
Interest expense................................ 310 797 1,717 2,824 4,546(c) 7,370
--------- --------- --------- ---------- ----------- -----------
Income before income taxes.................... 7,994 6,123 1,951 16,068 (3,785) 12,283
Income tax provision (benefit).................. 3,037 2,449 1,226 6,712 (1,964)(d) 4,748
--------- --------- --------- ---------- ----------- -----------
Net income...................................... $ 4,957 $ 3,674 $ 725 $ 9,356 $ (1,821) $ 7,535
--------- --------- --------- ---------- ----------- -----------
--------- --------- --------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................... $ 21,972 $ 24,074
Depreciation and amortization (f)............. 4,071 5,412
Capital expenditures.......................... 6,825 6,825
</TABLE>
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the nine months
ended September 30, 1996 reflects the Transactions as if they had occurred on
January 1, 1996 as follows:
<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value............................ $ 1,068
Additional depreciation expense on increased property basis due to purchase
accounting adjustment.......................................................... 1,385
Reduction in headcount and operational expense due to integration of Arcon..... (956)
---------
$ 1,497
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (729)
Reversal of management fees.............................................. (74)
Amortization of goodwill acquired........................................ 712
Reversal of deferred compensation expense................................ (48)
Reduction in headcount and operational expenses due to integration of CPG
and Arcon.............................................................. (2,119)
---------
$ (2,258)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 7,031
Reversal of interest expense............................................. (1,500)
Reversal of warrant accretion............................................ (1,110)
Reversal of amortization of financing cost relating to debt to be
retired................................................................ (213)
Amortization of financing costs relating to the issuance of the Notes.... 338
---------
$ 4,546
---------
---------
</TABLE>
(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.
(e) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.
(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(677) and $(677) of amortization included in
other (income) expense and $213 and $338 of amortization included in
interest expense, in the total historical and pro forma results,
respectively.
32
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
SPECIALTY PAPERBOARD, INC.
The following selected historical consolidated financial data for each of
the years in the three-year period ended December 31, 1995 have been derived
from, and are qualified by reference to, the audited consolidated financial
statements of SPI included elsewhere in this Prospectus. The selected historical
consolidated financial data for each of the years in the two year period ended
December 31, 1992 have been derived from the audited consolidated financial
statements of SPI. The selected historical consolidated unaudited financial data
set forth below for the nine month periods ended September 30, 1995 and 1996
have been derived from, and are qualified by reference to, SPI's consolidated
unaudited financial statements included elsewhere herein and include all
adjustments, consisting of normal recurring adjustments, which management
considers necessary for a fair presentation of the results of SPI for such
periods. Results for the interim periods are not necessarily indicative of the
results for the full year. The selected historical consolidated financial data
set forth below should be read in conjunction with, and are qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of SPI and
accompanying notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
----------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................... $ 82,549 $ 84,219 $ 79,982 $ 105,416 $ 117,516 $ 91,557
Cost of products sold................................... 67,505 68,614 66,360 88,138 100,106 78,601
--------- --------- --------- --------- --------- ---------
Gross profit.......................................... 15,044 15,605 13,622 17,728 17,410 12,956
General and administrative.............................. 9,322 5,955 7,881 8,584 8,397 6,189
--------- --------- --------- --------- --------- ---------
Income from operations................................ 5,722 9,650 5,741 8,694 9,013 6,767
Loss on disposition of asset, net....................... 1,047 -- -- -- 8,302 8,159
Other (income) expenses, net............................ 651 464 374 (658) (1,198) (782)
Cogeneration income (a)................................. -- -- (4,404) -- (6,512) (6,512)
Interest expense........................................ 8,231 7,752 3,137 1,356 892 811
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
items............................................... (4,207) 1,434 6,634 7,996 7,529 5,091
Income tax provision (benefit).......................... -- 583 1,921 2,768 (424) (1,364)
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary items.............. (4,207) 851 4,713 5,228 7,953 6,455
Extraordinary items..................................... -- 573 (2,103) (149) -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)....................................... ($ 4,207) $ 1,424 $ 2,610 $ 5,079 $ 7,953 $ 6,455
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (b).............................................. $ 10,233 $ 12,911 $ 8,920 $ 11,988 $ 11,779 $ 8,806
Depreciation and amortization (c)....................... 4,511 3,261 3,179 3,294 2,766 2,039
Capital expenditures.................................... 850 1,235 900 1,603 4,865 4,298
<CAPTION>
<S> <C>
1996
---------
<S> <C>
INCOME STATEMENT DATA:
Net sales............................................... $ 77,734
Cost of products sold................................... 64,105
---------
Gross profit.......................................... 13,629
General and administrative.............................. 6,316
---------
Income from operations................................ 7,313
Loss on disposition of asset, net....................... --
Other (income) expenses, net............................ (991)
Cogeneration income (a)................................. --
Interest expense........................................ 310
---------
Income (loss) before income taxes and extraordinary
items............................................... 7,994
Income tax provision (benefit).......................... 3,037
---------
Income (loss) before extraordinary items.............. 4,957
Extraordinary items..................................... --
---------
Net income (loss)....................................... $ 4,957
---------
---------
OTHER DATA:
EBITDA (b).............................................. $ 9,090
Depreciation and amortization (c)....................... 1,777
Capital expenditures.................................... 2,303
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 18,214
Total assets....................................................................................... 76,015
Long-term debt, less current maturities............................................................ 1,845
Stockholders' equity............................................................................... 45,807
</TABLE>
(FOOTNOTES CONTINUED ON NEXT PAGE)
33
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
- ------------------------------
(a) SPI has entered into agreements with Kamine/Besicorp Beaver Falls L.P.
("Kamine"), pursuant to which the Company is the host to a cogeneration
facility developed by Kamine at the Company's Beaver Falls mill, in
consideration of which the Company is entitled to receive cash payments
totalling $7.0 million from Kamine between May 1995 and May 1997. The
present value of these cash payments, in the amount of $6.5 million, was
recorded as income in the first quarter of 1995. Cash payments of $3.0
million and $2.0 million, respectively, were received in May 1995 and May
1996 and a final payment of $2.0 million is due in May 1997.
(b) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.
(c) Depreciation and amortization includes only those items included in income
from operations and excludes $849, $828, $1,565, $(65), $(995), $(646) and
$(677) of amortization included in other (income) expense for the years
ended December 31, 1991, 1992, 1993, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996, respectively.
34
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
CPG INVESTORS INC.
The following selected historical consolidated financial data for each of
the years in the two year period ended December 31, 1995 have been derived from,
and are qualified by reference to, the audited consolidated financial statements
of CPG included elsewhere in this Prospectus. The selected historical financial
data for the nine month periods ended September 30, 1995 and 1996 have been
derived from, and are qualified by reference to, the unaudited consolidated
financial statements of CPG, included elsewhere herein, and include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the results of CPG for such
periods. Results for the interim periods are not necessarily indicative of
results for the full year. The selected historical consolidated financial data
for each of the years in the three year period ended December 31, 1993 have been
derived from the unaudited consolidated financial statements of CPG and its
predecessor businesses. CPG was formed on November 1, 1993. Its predecessor
business operated as a subsidiary of Rexam plc during the period from March 18,
1993 to October 31, 1993, as a subsidiary of Specialty Coatings International
Inc. during the period from April 30, 1991 to March 18, 1993, and as a division
of James River Corporation of Virginia prior to April 30, 1991. The selected
historical consolidated financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of CPG and accompanying notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................. $ 91,596 $ 87,660 $ 90,606 $ 95,952 $ 95,795 $ 72,395 $ 69,719
Cost of products sold..................... 73,294 71,766 75,823 82,079 84,419 63,674 58,469
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 18,302 15,894 14,783 13,873 11,376 8,721 11,250
Selling, general and administrative....... 10,125 9,171 6,066 6,169 5,310 4,064 4,330
--------- --------- --------- --------- --------- --------- ---------
Operating income (a).................... 8,177 6,723 8,717 7,704 6,066 4,657 6,920
Interest expense.......................... -- -- -- 1,440 1,345 1,037 797
--------- --------- --------- ---------
Income before income taxes (a).......... -- -- -- 6,264 4,721 3,620 6,123
Income tax provision (benefit) (a)........ -- -- -- 2,388 1,842 1,376 2,449
--------- --------- --------- ---------
Net income (a)............................ -- -- -- $ 3,876 $ 2,879 $ 2,244 $ 3,674
--------- --------- --------- ---------
--------- --------- --------- ---------
OTHER DATA:
EBITDA (b)................................ $ 8,951 $ 6,883 $ 9,141 $ 8,653 $ 7,250 $ 5,641 $ 8,223
Depreciation and amortization (c)......... 774 160 424 949 1,184 984 1,303
Capital expenditures...................... 2,000 2,141 3,175 2,888 4,366 2,868 2,464
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 8,707
Total assets....................................................................................... 41,231
Long-term debt, less current maturities............................................................ 10,540
</TABLE>
(FOOTNOTES CONTINUED ON NEXT PAGE)
35
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
- ------------------------------
(a) Interest expense and income tax provision are not available for the years
ended December 31, 1991, 1992 and 1993. During these years, CPG was a
component of larger companies with different capital structures and no
separate amounts are calculable for this period.
(b) EBITDA is defined as operating income, plus depreciation and amortization to
the extent such depreciation and amortization are included in the
calculation of operating income. EBITDA is provided because it is a measure
of an issuer's ability to service its indebtedness commonly used by certain
investors. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income as a measure of performance or to cash flow as a
measure of liquidity.
(c) Depreciation and amortization includes only those items included in the
calculation of operating income and excludes $194, $225, $169 and $169 of
amortization included in interest expense for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1995 and 1996,
respectively.
36
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
ARCON HOLDINGS CORP.
The following selected historical consolidated financial data for the year
ended October 31, 1995 has been derived from, and are qualified by reference to,
the audited consolidated financial statements of Arcon included elsewhere in
this Prospectus. The selected historical financial data for the year ended
October 31, 1994 have been derived from the audited financial statements of
Arcon Coating Mills, Inc. for the period from November 1, 1993 to April 14, 1994
and from the audited financial statements of Arcon for the period from April 14,
1994 to October 31, 1995. Arcon acquired all of the outstanding capital stock of
Arcon Coating Mills, Inc. on April 14, 1994. The selected historical financial
data for the year ended October 31, 1993 have been derived from, and are
qualified by reference to, the audited financial statements of Arcon Coating
Mills, Inc. included elsewhere in this Prospectus. The selected historical
financial data for each of the years in the two year period ended October 31,
1992 have been derived from the unaudited financial statements of Arcon. The
selected historical financial data for the two months ended December 31, 1994
and 1995 and for the nine month periods ended September 30, 1995 and 1996 have
been derived from, and are qualified by reference to, the unaudited financial
statements of Arcon, included elsewhere herein, and include all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the results of Arcon for such periods.
Results for the interim periods are not necessarily indicative of results for
the full year. The selected historical financial data set forth below should be
read in conjunction with, and are qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Arcon and the financial statements of
Arcon Coating Mills, Inc. and accompanying notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
TWO MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED SEPTEMBER
OCTOBER 31, OCTOBER 31, DECEMBER 31, 30,
-------------------- ------------------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994(A) 1995 1994 1995 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $ 16,160 $ 18,325 $ 19,052 $ 21,285 $ 25,789 $ 4,088 $ 4,452 $ 19,444
Cost of products sold................ 12,263 13,645 14,423 16,095 18,893 3,043 3,285 14,274
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 3,897 4,680 4,629 5,190 6,896 1,045 1,167 5,170
Selling, general and
administrative..................... 2,519 2,552 2,626 2,687 3,410 540 531 2,570
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income................. 1,378 2,128 2,003 2,503 3,486 505 636 2,600
Interest expense..................... 1,580 1,610 1,633 1,317 1,576 255 471 1,238
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes.......................... (202) 518 370 1,186 1,910 250 165 1,362
Income tax provision................. 50 321 214 496 887 124 193 707
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (252) $ 197 $ 156 $ 690 $ 1,023 $ 126 $ (28) $ 655
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (b)........................... $ 2,284 $ 3,033 $ 3,038 $ 3,403 $ 4,723 $ 708 $ 841 $ 3,512
Depreciation and amortization (c).... 906 905 1,340 900 1,237 203 205 912
Capital expenditures................. 155 199 130 181 187 15 42 132
<CAPTION>
<S> <C>
1996
---------
<S> <C>
INCOME STATEMENT DATA:
Net sales............................ $ 21,533
Cost of products sold................ 15,541
---------
Gross profit..................... 5,992
Selling, general and
administrative..................... 2,324
---------
Operating income................. 3,668
Interest expense..................... 1,717
---------
Income (loss) before income
taxes.......................... 1,951
Income tax provision................. 1,226
---------
Net income (loss).................... $ 725
---------
---------
OTHER DATA:
EBITDA (b)........................... $ 4,659
Depreciation and amortization (c).... 991
Capital expenditures................. 63
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 2,748
Total assets....................................................................................... 18,626
Long-term debt, less current maturities............................................................ 6,477
</TABLE>
(FOOTNOTES ON NEXT PAGE)
37
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
- ------------------------------
(a) Amounts were derived by combining the historical financial statements of
Arcon Coating Mills, Inc. for the period November 1, 1993 to April 14, 1994
with the historical financial statements of Arcon for the period April 14,
1994 to October 31, 1994. The audited financial statements of these
companies, contained elsewhere in this Prospectus, should be read to fully
understand how the change in ownership and the use of different accounting
policies affects the above presentation and comparability of the results of
operations of Arcon for the twelve months ended October 31, 1994.
<TABLE>
<CAPTION>
APRIL 14, 1994
THROUGH
NOVEMBER 1, 1993 OCTOBER 31,
TO APRIL 14, 1994 1994 TOTAL
----------------- --------------- ---------
<S> <C> <C> <C>
Net sales.................................. $ 9,112 $ 12,173 $ 21,285
Cost of products sold...................... 6,944 9,151 16,095
------ ------- ---------
Gross profit............................. 2,168 3,022 5,190
Selling, general and administration........ 986 1,701 2,687
------ ------- ---------
Operating income......................... 1,182 1,321 2,503
Interest expense........................... 585 732 1,317
------ ------- ---------
Income before income taxes............... 597 589 1,186
Income tax provisions...................... 270 226 496
------ ------- ---------
Net income................................. $ 327 $ 363 $ 690
------ ------- ---------
------ ------- ---------
</TABLE>
(b) EBITDA is defined as operating income, plus depreciation and amortization to
the extent such depreciation and amortization are included in the
calculation of operating income. EBITDA is provided because it is a measure
of an issuer's ability to service its indebtedness commonly used by certain
investors. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income as a measure of performance or to cash flow as a
measure of liquidity.
(c) Depreciation and amortization includes only those items included in
operating income and excludes $58, $44 and $44 of amortization included in
interest expense, for the year ended October 31, 1995 and the nine months
ended September 30, 1995 and 1996.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading manufacturer and converter of specialty paper and
related products with a wide range of consumer and industrial end-uses. Pursuant
to the CPG Merger Agreement and the Arcon Stock Purchase Agreement, SPI acquired
all of the outstanding capital stock of both CPG and Arcon. The Company believes
that it can achieve approximately $4.2 million in annual overhead cost savings
through the consolidation of the administrative functions of CPG and Arcon at
SPI's Brattleboro headquarters and can achieve further operational savings by
adjusting current grade mixes on each of its machines and shifting production
among facilities to better match products, machine capabilities and cost
structures. The Company believes that its future operating results may not be
directly comparable to historical operating results of SPI, CPG or Arcon due to
the Company's increased size, integration of the three businesses and related
cost savings. Certain factors which have affected or may affect the operating
results of the Company are discussed below.
ACQUISITION AND DISPOSITION. On June 30, 1994, SPI completed the Endura
Acquisition for a total purchase price of approximately $26.4 million plus
approximately $1.0 million in expenses paid. The acquisition was accounted for
on the purchase method, which resulted in goodwill of approximately $526,000,
which is being amortized over 30 years. On March 22, 1995, SPI sold the assets
of its Lewis mill and gasket business to Armstrong World Industries, Inc.
("Armstrong") for $12.9 million, together with $1.1 million of inventory, which
was sold to Armstrong at book value. This transaction resulted in a loss of $8.3
million before taxes. In addition, the Company intends to close the Arcon
facility in Oceanside in early 1997 and relocate those operations to the
Company's facility in Quakertown. The Company has initiated a review of its
combined papermaking and converting facilities and, at the completion of the
Transactions, will initiate a product line rationalization to ensure optimal use
of available assets.
PURCHASE ACCOUNTING. The Acquisitions will be accounted for as purchases of
CPG and Arcon by SPI. As a result, the assets and liabilities of CPG and Arcon
will be recorded at their estimated fair market value. An amount equal to the
excess of the purchase prices over the fair value of assumed liabilities will be
allocated to inventories, property and equipment, identifiable intangible assets
and goodwill. Goodwill will be amortized over 40 years. Consequently, the
post-Acquisitions statements of income will be affected by the amortization of
such excess purchase prices. See "Unaudited Pro Forma Consolidated Financial
Data."
RAW MATERIALS. Hardwood and softwood pulp and secondary fiber are the
Company's primary raw material requirement. These materials are cyclical in both
price and supply with the cyclic trends generally coinciding with the strength
of the overall economy and therefore the overall demand level for the Company's
products. Historically, there have been periods of significant and rapid
short-term pulp price changes, both up and down, with a concurrent short-term
impact on the Company's operating margins. However, over the full cycle of the
pulp market, the Company generally has been able to maintain margin stability
with the larger impact to earnings coming from the overall level of demand for
the Company's products.
39
<PAGE>
RESULTS OF OPERATIONS
SPECIALTY PAPERBOARD, INC.
SPI has three principal product lines: office products, saturated specialty
products and technical specialty products. The following table summarizes SPI's
historical net sales by product line.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Office Products......................................... $ 46,191 $ 50,361 $ 52,999 $ 39,837 $ 37,134
Saturated Specialty Products............................ 14,431 30,078 44,873 32,816 32,229
Technical Specialty Products............................ 19,360 24,977 19,644 18,904 8,371
--------- ---------- ---------- --------- ---------
$ 79,982 $ 105,416 $ 117,516 $ 91,557 $ 77,734
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net sales decreased $13.8 million, or 15.1%, to $77.7 million in the first
nine months of 1996 from $91.6 million in the comparable period in 1995. Net
sales of office products decreased $2.7 million, or 6.8%, to $37.1 million as
compared to $39.8 million in the comparable period in 1995, reflecting reduced
orders resulting from customers' reduction of excess inventories built up in
1995 as a hedge against rising paper prices. Net sales of saturated specialties
decreased $0.6 million, or 1.8%, to $32.2 million for the first nine months of
1996, as compared to $32.8 million in the comparable period in 1995, reflecting
reduced orders resulting from customers' reduction of excess inventories built
up in 1995 as a hedge against rising paper prices. Net sales of technical
specialty products material decreased $10.5 million, or 55.7%, to $8.4 million
as compared to $18.9 million in the comparable period in 1995, primarily
reflecting the sale of SPI's gasket business. Net sales of gasket materials
produced under a temporary toll agreement with Armstrong World Industries Inc.,
who bought SPI's gasket business in March 1995, totaled $1.2 million in the
first nine months of 1996, as compared to $7.9 million in the comparable period
in 1995.
Gross profit margin increased to 17.5% for the first nine months of 1996 as
compared to 14.2% for the comparable period in 1995. This improvement was caused
by higher selling prices and lower fiber costs, offset in part by a high level
of production trial activity.
General and administrative expenses increased $0.1 million, or 2.1%, to $6.3
million (8.1% of net sales) in the first nine months of 1996 from $6.2 million
(6.8% of net sales) for the comparable period in 1995. This slight increase
resulted in part from increased selling efforts through SPI's Hong Kong
subsidiary and the addition of a Sales and Marketing Development Manager on
SPI's corporate staff.
Income from operations increased $0.5 million, or 8.1%, to $7.3 million
(9.4% of net sales) in the first nine months of 1996 from $6.8 million (7.4% of
net sales) for the comparable period in 1995. This was the result of decreased
fiber costs, which were partially offset by decreased sales volume. Income from
operations as a percentage of net sales increased as a result of the increase in
gross profit margin which more than offset the increase in general and
administrative expenses as a percentage of net sales.
Other income increased $0.2 million, or 26.7%, to $1.0 million in the first
nine months of 1996 as compared to $0.8 million in the comparable 1995 period.
Interest expense decreased $0.5 million, or 61.8%, to $0.3 million in the
first nine months of 1996 from $0.8 million in the comparable 1995 period. This
decrease was due to lower levels of debt.
40
<PAGE>
The effective tax rate for the first half of 1996 was 38.0%, as compared to
(26.8%) for the comparable period in 1995. The 1995 rate reflects the reversal
of a $3.0 million valuation allowance as SPI concluded that it is appropriate to
recognize all of the deferred tax assets generated in its sale/leaseback
transaction.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased $12.1 million, or 11.5%, to $117.5 million from $105.4
million in 1994. Net sales for 1995 included the first full year of net sales
from the Endura Products Division which was acquired by SPI on June 30, 1994.
Net sales of office products materials increased $2.6 million, or 5.2%, to
$53.0 million in 1995 from $50.4 million in 1994. This increase was primarily
due to strong order levels which SPI believes were principally related to a
build-up of customer inventories as a hedge against rising paper prices during
the first half of 1995. Net sales of saturated specialty products increased
$14.8 million, or 49.2%, to $44.9 million in 1995 from $30.1 million in 1994.
This increase is primarily due to the Endura Acquisition, which occurred in June
1994. Net sales of technical specialty products decreased $5.4 million, or
21.4%, to $19.6 million from $25.0 million in 1994. This decrease is primarily
due to the March 1995 sale of SPI's gasket business.
Gross profit margin decreased to 14.8% in 1995 from 16.4% in 1994. This
decline was primarily due to higher purchase prices for pulp and recycled fiber
and higher lease expenses related to sale-leaseback financing entered into in
April 1994. These increased costs were offset in part by higher selling prices
and the benefits of an upgrade to the Brattleboro paper machine in October 1995
which allowed greater use of lower-cost recycled fiber to manufacture the office
products line.
General and administrative expenses decreased $0.2 million, or 2.2%, to $8.4
million (7.2% of net sales) in 1995 from $8.6 million (8.1% of net sales) in
1994. This decrease resulted from reduced levels of expenses due to the sale of
SPI's gasket business and lower premiums for directors and officers insurance.
Income from operations increased $0.3 million, or 3.7% to $9.0 million (7.7%
of net sales) in 1995 from $8.7 million (8.3% of net sales) in 1994. This
increase resulted primarily from lower levels of general and administrative
expenses described above, offset in part by higher costs for pulp and secondary
fiber. Income from operations decreased as a percentage of net sales due to the
decrease in gross profit margin previously discussed.
Other income increased $0.5 million, or 82.1% to $1.2 million in 1995 as
compared to $0.7 million in 1994. In April 1994, SPI sold and leased back
certain assets at its Brattleboro mill for $25.0 million. This sale is being
amortized over the ten-year life of the lease, resulting in $1.7 million of
deferred gain per year, a $0.8 million annual reduction in depreciation expense
and a $3.2 million annual increase in interest expense. Other income in 1995
included the amortization of $1.7 million in deferred gain on the sale-leaseback
transaction.
Interest expense decreased $0.5 million, or 34.2%, to $0.9 million in 1995
from $1.4 million in 1994. This decrease was due to lower levels of debt
resulting primarily from debt repayment using proceeds from the Lewis mill sale.
Income tax benefit was $0.4 million in 1995. This represents an effective
tax rate of (5.6%) and reflects the reversal of a $3.0 million valuation
allowance. Income tax expense was $2.8 million in 1994 which represented an
effective tax rate of 34.6% and reflects utilization of $21.4 million of net
operating loss carryforwards.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net sales increased $25.4 million, or 31.8%, to $105.4 million from $80.0
million in 1993.
41
<PAGE>
Net sales of office products materials increased $4.2 million, or 9.0%, to
$50.4 million in 1994 from $46.2 million in 1993. This increase was primarily
due to stronger order levels which SPI believes were principally related to
improved economic conditions and to the absence of internal inventory reduction
programs by several major customers that affected sales in 1993. Net sales of
saturated specialty products increased $15.7 million, or 108.4%, to $30.1
million in 1994 from $14.4 million in 1993. This increase is primarily due to
the Endura Acquisition which occurred in June 1994. Net sales of technical
specialty products increased $5.6 million, or 29.0%, to $25.0 million in 1994
from $19.4 million in 1993. This increase was due to strong economic conditions
in the domestic automobile market and to the Endura Acquisition.
Gross profit margin decreased to 16.4% in 1994 from 17.0% in 1993. In 1994,
the sale and leaseback of certain operating assets of the Brattleboro mill
resulted in a net increase of $1.5 million in the cost of sales which represents
a 1.4% reduction in gross margin. This reduction in gross margin was partially
offset by the higher sales volume as described above.
Pulp prices rose sharply during the first half of 1994. The negative effect
of these increases on gross margin was largely mitigated by SPI's ability to
utilize consigned inventories that had been purchased at previous price levels.
To help offset the impact of these increases during the second half of 1994, SPI
enacted selling price increases. Also, the addition of the higher margin product
lines accompanying the Endura Acquisition also helped offset the impact of these
increases.
General and administrative expenses increased $0.7 million, or 8.9%, to $8.6
million (8.1% of net sales) in 1994 from $7.9 million (9.9% of net sales) in
1993. This increase was primarily due to the additional administrative expenses
incurred in connection with the Endura Acquisition.
Income from operations increased $3.0 million, or 51.4% to $8.7 million
(8.3% of net sales) in 1994 from $5.7 million (7.2% of net sales) in 1993. This
increase resulted from higher sales volume and the Endura Acquisition.
Other (income) expense increased $1.1 million to $0.7 million in 1994 as
compared to other expenses of $0.4 million in 1993. Other income in 1994
included the amortization of $1.1 million in deferred gain on the Brattleboro
sale-leaseback transaction.
Interest expense decreased $1.7 million, or 56.8%, to $1.4 million in 1994
from $3.1 million in 1993. This decrease was due to average lower levels of
debt, primarily resulting from the sale-leaseback in April 1994.
Income tax expense was $2.8 million in 1994. This represents an effective
tax rate of 34.6% and reflects utilization of $21.4 million of net operating
loss carryforwards. Income tax expense was $1.9 million in 1993 which
represented an effective tax rate of 29.0% and reflected utilization of $1.8
million of net operating loss carryforwards.
Extraordinary items for 1994 were $0.1 million. This resulted from a $0.2
million write-off of deferred financing costs related to early extinguishment of
debt, net of an income tax benefit of $0.1 million.
42
<PAGE>
CPG
CPG has three principal product lines: office products, technical specialty
products and filtration products. The following table summarizes CPG's
historical net sales by product line.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Office Products............................................ $ 11,443 $ 11,041 $ 11,933 $ 9,231 $ 6,147
Technical Specialty Products............................... 42,226 42,839 41,887 31,521 31,623
Filtration Products........................................ 36,937 42,072 41,975 31,643 31,949
--------- --------- --------- --------- ---------
$ 90,606 $ 95,952 $ 95,795 $ 72,395 $ 69,719
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net sales decreased $2.7 million, or 3.7%, to $69.7 million during the nine
months ended September 30, 1996 from $72.4 million for the comparable period of
the prior year. Net sales of office products decreased $3.1 million, or 33.4%,
to $6.1 million for the first three quarters of 1996 as compared with sales of
$9.2 million during the comparable period of 1995. This decline reflects lower
demand for CPG's cover and text products and loss of certain low margin business
as a result of price increases implemented during the second half of 1995 to
offset increases in pulp costs. Net sales of technical specialty products were
essentially flat, increasing $0.1 million, or 0.3%, to $31.6 million for the
first three quarters of 1996 when compared with net sales of $31.5 million for
the comparable period in 1995. Net sales of filtration products increased
slightly during the first nine months of 1996 by $0.3 million, or 1.0%, to $31.9
million from $31.6 million in 1995 reflecting steady customer demand for these
products.
Gross profit margin increased to 16.1% during the nine months ended
September 30, 1996 from 12.0% for the comparable period in 1995. This increase
is due primarily to the higher selling prices which took effect at the end of
1995 and reductions in pulp costs which occurred during the first half of 1996.
Selling, general and administrative expense during the nine months ended
September 30, 1996 increased $0.3 million, or 6.5%, to $4.3 million (6.2% of net
sales) from $4.1 million (5.6% of net sales) during the comparable period of
1995.
Operating income increased $2.3 million, or 48.6%, during the nine months
ended September 30, 1996 to $6.9 million from the $4.7 million earned during the
comparable period of 1995. This increase in operating income is the result of
the improvement in gross margin which has occurred in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for 1995 of $95.8 million were essentially equal to net sales in
1994 of $96.0 million. Net sales of office products increased $0.9 million, or
8.1%, to $11.9 million in 1995 from $11.0 million in 1994 due primarily to an
increase in net sales related to a one-time toll-production opportunity. Net
sales of filtration products were $42.0 million in 1995 and were essentially
equal to net sales of $42.1 million in 1994. Net sales of technical specialty
products decreased $0.9 million, or 2.2%, to $41.9 million in 1995 from $42.8
million in 1994. This net sales decline was due in part to reduced volumes of
photographic packaging papers and acid-free art board due to competitive
pressures associated with price increases implemented as a result of pulp cost
increases.
Gross profit margin declined to 11.9% in 1995 from 14.5% in 1994 due to
significantly higher pulp costs in 1995.
43
<PAGE>
Selling, general and administrative expense declined $0.9 million, or 13.9%,
to $5.3 million (5.5% of net sales) in 1995 from $6.2 million (6.4% of net
sales) in 1994. The decrease was the result of cost control programs and lower
incentive compensation expenses resulting from decreased profitability.
Operating income declined $1.6 million, or 21.3%, to 6.1 million (6.3% of
net sales) in 1995 from $7.7 million (8.0% of net sales) in 1994. This decline
was a direct result of the unprecedented increase in pulp prices which began in
1994 and extended through much of 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net sales increased by $5.4 million, or 5.9%, in 1994 to $96.0 million from
$90.6 million in 1993. This overall increase was driven by strong net sales of
filtration products which increased $5.2 million, or 14.1% to $42.1 million in
1994 from $36.9 million in 1993 due to strong demand for heavy duty lube and
automotive filter media. Net sales of office products decreased $0.4 million, or
3.5%, to $11.0 million in 1994 from $11.4 million in 1993 due to lower net sales
of text and cover papers. Net sales of technical specialty products increased
$0.6 million, or 1.5%, to $42.8 million in 1994 from $42.2 million during the
prior year. This increase was due primarily to unusually high demand for
electrical insulating papers.
Gross profit margin was 14.5% in 1994 as compared to 16.3% in 1993. This
decline was due to the adoption of the last-in, first-out (LIFO) method of
valuing inventory which resulted in a charge to cost of sales of $1.2 million.
Additionally, CPG idled one of its paper machines in 1994 and recorded a
provision of $715,000 to adjust the carrying value of the machine and related
equipment to net realizable value and to recognize the outstanding lease
commitment associated with certain process control equipment.
Selling, general and administrative expense were $6.2 million (6.4% of net
sales) in 1994, an increase of $0.1 million, or 1.7%, from the $6.1 million
(6.7% of net sales) of selling, general and administrative expense incurred
during 1993.
Operating income decreased $1.0 million, or 11.6%, to $7.7 million (8.0% of
net sales) in 1994 from operating income of $8.7 million (9.6% of net sales) in
1993. Operating income would have been $9.6 million (10.0% of net sales) in 1994
had it not been for the $1.2 million charge incurred as a result of the adoption
of LIFO and the $0.7 million cost of idling a paper machine.
ARCON HOLDINGS CORP.
Arcon has two principal product lines: office products and saturated
specialty products. The following table summarizes Arcon's historical net sales
by product line.
<TABLE>
<CAPTION>
FOR THE NINE
FISCAL YEAR ENDED MONTHS ENDED
OCTOBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Office Products............................................ $ 12,990 $ 15,146 $ 18,583 $ 13,884 $ 15,522
Saturated Specialty Products............................... 6,062 6,139 7,206 5,560 6,011
--------- --------- --------- --------- ---------
$ 19,052 $ 21,285 $ 25,789 $ 19,444 $ 21,533
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net sales increased $2.1 million, or 10.7%, to $21.5 million in the
nine-month period ended September 30, 1996 from $19.4 million in the comparable
period in 1995.
Net sales of office products increased $1.6 million, or 11.8%, to $15.5
million in the nine-month period ended September 30, 1996 as compared to $13.9
million in the comparable period in 1995. This is
44
<PAGE>
the result of the completion of a major customer conversion to Super Arco
Flex-Registered Trademark- and incremental new business. Net sales in saturated
specialty products increased $.4 million, or 8.1%, to $6 million in the nine-
month period ended September 30, 1996 from $5.6 million in the comparable period
in 1995. This increase is the result of incremental new business.
Gross profit margin increased to 27.8% for the nine-month period ended
September 30, 1996 as compared to 26.6% for the comparable period in 1995. This
increase reflects the results of a profit improvement program.
Selling, general and administrative expenses decreased $.3 million, or
10.5%, to $2.3 million (10.7% of net sales) in the nine-month period ended
September 30, 1996 from $2.6 million (13.4% of net sales) for the comparable
period in 1995, reflecting improved management of discretionary spending.
Operating income increased $1.1 million, or 42.4%, to $3.7 million (17.0% of
net sales) in the nine-month period ended September 30, 1996 from $2.6 million
(13.3% of net sales) for the comparable period in 1995, as a result of increased
net sales in all markets and the effect of improved performance in the cost of
products sold and selling, general and administrative expense.
YEAR ENDED OCTOBER 31, 1995 COMPARED TO YEAR ENDED OCTOBER 31, 1994
Net sales increased $4.5 million, or 21.2%, to $25.8 million in 1995 from
$21.3 million in 1994. This increase is the result of improved price and volume
for all product sectors.
Net sales of office products increased $3.5 million, or 22.7%, to $18.6
million in 1995 from $15.1 million in 1994, reflecting strong economic
conditions and a major customer conversion to Super
ArcoFlex-Registered Trademark-. Net sales of saturated specialty products
increased $1.1 million, or 17.4%, from $6.1 million to $7.2 million due to
increased demand.
Gross profit margin increased to 26.7% in 1995 from 24.4% in 1994 as a
consequence of improved sales and more efficient usage of raw materials.
Selling, general and administrative expenses increased $0.7 million, or
26.9%, to $3.4 million (13.2% of net sales) in 1995 from $2.7 million (12.6% of
net sales) in 1994. This increase is the result of additional deferred
compensation charges not previously recorded and increased management incentive
and profit sharing expenses.
Operating income increased $1.0 million, or 39.3%, to $3.5 million (13.5% of
net sales) in 1995 from $2.5 million (11.8% of net sales) in 1994. This increase
is due to the above-mentioned factors.
YEAR ENDED OCTOBER 31, 1994 COMPARED TO YEAR ENDED OCTOBER 31, 1993
Net sales increased $2.2 million, or 11.7% to $21.3 million in 1994 from
$19.1 million in 1993.
Net sales of office products increased $2.1 million, or 16.6%, to $15.1
million in 1994 from $13.0 million in 1993. This increase was primarily due to
stronger order levels principally related to improved economic conditions. Net
sales of saturated specialty products were $6.1 million in 1994 and $6.1 million
in 1993.
Gross profit margin remained relatively flat at 24.4% in 1994 versus 24.3%
in 1993.
Selling, general and administrative expenses increased $0.1 million, or
2.3%, to $2.7 million (12.6% of net sales) from $2.6 million (13.8% of net
sales) in 1993.
Operating income increased $0.5 million, or 25.0%, to $2.5 million (11.8% of
net sales) in 1994 from $2.0 million (10.5% of net sales) in 1993. This
improvement is directly related to sales volume.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's historical requirements for capital have been primarily for
servicing debt, capital expenditures and working capital. Pro forma cash flows
from operating activities were $14.4 million for the year ended December 31,
1995 and $12.7 million and $5.1 million for the nine months ended September 30,
1996 and September 30, 1995, respectively. For the year ended December 31, 1995
and the nine month periods ended September 30, 1996 and September 30, 1995,
respectively, the Company paid an aggregate of $3.4 million, $3.3 million, and
$2.5 million, respectively, in rental obligations pursuant to the sale/leaseback
arrangements in respect of its Brattleboro mill. See "Description of Financing
Arrangements." During these periods, additions to property, plant and equipment
were $9.5 million, $6.8 million and $5.3 million, respectively. As of September
30, 1996, the Company's revolving credit line under the Credit Facility was
undrawn and had a total availability of $15.0 million. On December 31, 1996, SPI
and The CIT Group/Business Credit, Inc. amended the Credit Facility to increase
the amount available as revolving loans under the Credit Facility to the lesser
of (a) $20.0 million and (b) a borrowing base amount equal to a specified
percentage of certain accounts receivable and inventory. See "Description of
Financing Arrangements."
Following the Transactions, the debt service costs associated with the
borrowings under the Notes will significantly increase liquidity requirements.
Management believes that, based on current financial performance and anticipated
growth, cash flow from operations, together with the available sources of funds,
will be adequate for the foreseeable future to service the Company's
indebtedness, to fund anticipated capital expenditures and working capital
requirements and to enable the Company and its subsidiaries to comply with the
terms of their debt agreements. However, actual capital requirements may change,
particularly as a result of acquisitions the Company may make. The Company
expects that capital expenditures (exclusive of acquisitions) will be
approximately $12 million annually from 1996 to 1999. The ability of the Company
to meet its debt service and working capital obligations and capital expenditure
requirements will be dependent, however, upon the future performance of the
Company and its subsidiaries which, in turn, will be subject to general economic
conditions and to financial, business and other factors, including factors
beyond the Company's control.
INFLATION
The Company attempts to minimize the effect of inflation on earnings by
controlling operating expenses. During the past several years, the rate of
general inflation has been relatively low and has not had a significant impact
on the Company's results of operations. The Company purchases raw materials
which are subject to cyclical changes in costs that may not reflect the rate of
general inflation.
SEASONALITY
The Company's business is seasonal, with the third quarter of each year
typically having the lowest level of net sales and operating income. This
seasonality is the result of a lower level of purchasing activity in the third
quarter, since many converters shut down their operations during portions of
July.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement is required to be adopted by SPI in 1996. SPI has
yet to analyze in detail the potential impact on its financial statements upon
adoption of this pronouncement.
46
<PAGE>
BUSINESS
HISTORY
SPI was created in 1989 when Boise Cascade Corporation sold certain assets
and liabilities of its Specialty Paperboard division to a group of investors
which included SPI's management and McCown De Leeuw & Co., a private investment
firm. SPI completed an initial public offering of its common stock in early 1993
and is currently traded on the NASDAQ National System under the symbol "SPBI."
Since its inception, SPI has pursued a strategy of establishing itself as a
leading manufacturer and converter of specialty paper products for markets where
its manufacturing expertise, proprietary production methods and customer
relationships provide a competitive advantage. SPI's market focus has been in
two core product areas, pressboard and latex-reinforced saturated and coated
book cover. SPI expanded its core product areas with the Endura Acquisition,
which broadened SPI's product offerings to include industrial and consumer
masking tape substrates and printed circuit board substrates. In 1995, SPI sold
its automotive gasket business to Armstrong World Industries, Inc. SPI's
headquarters is in Brattleboro, Vermont and it operates four paper mills and
converting facilities.
CPG was a division of James River Corporation of Virginia ("James River")
until 1991. James River had assembled the operating assets of CPG in a series of
acquisitions beginning in 1969. In 1991, James River sold CPG to a private
investment firm. Following various subsequent transactions, the assets now
constituting CPG were purchased by CPG, a corporation formed by management and
certain institutional investors in 1993. CPG's strategy has been to develop
strong, niche market positions by emphasizing its high product quality,
manufacturing flexibility, technical and product development capabilities and
responsive customer service. As a result of this strategy, CPG has built
leadership positions in the automotive fuel and oil filtration papers,
electrical transformer paper and acid-free picture mounting art board markets.
CPG operates five paper mills.
Arcon was founded in 1953 as a supplier of cloth and paper bindings to the
book industry. Arcon has grown rapidly by pioneering the use of
Tyvek-Registered Trademark- as a low cost, durable binding alternative for books
and a wide range of office products. In 1988, Arcon's founder sold the Company
to an investor group, who then sold it to the current owners in 1994. Arcon's
strategy over the past several years has been to continue to convert office
product customers to the more durable Tyvek-Registered Trademark- edge covering
and binding materials and to continue to develop new applications for
Tyvek-Registered Trademark- and other binding products in existing and new niche
markets. Arcon operates two converting facilities.
Pursuant to the CPG Merger Agreement and the Arcon Stock Purchase Agreement,
SPI acquired CPG and Arcon for aggregate consideration of $85.0 million, less
the outstanding indebtedness of CPG and Arcon, subject to certain adjustments.
See "The Acquisitions." The Company had pro forma LTM net sales and EBITDA of
$225.1 million and $31.3 million, respectively for the twelve month period ended
September 30, 1996.
- ------------
- -Registered Trademark- DuPont registered trademark.
47
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to increase sales and earnings by consolidating
and strengthening core product lines, by rationalizing production capacity and
by pursuing selected strategic acquisitions. The following are the key elements
of this strategy:
- CONSOLIDATE AND STRENGTHEN CORE PRODUCT LINES. CPG and Arcon have an array
of products which complement SPI's core product lines. By consolidating
these products and streamlining and focusing its marketing efforts, the
Company believes that it will strengthen its core product lines in office
products, technical specialty products and saturated specialty products.
- RATIONALIZE OVERHEAD AND PRODUCTION CAPACITY. The Company believes that
the Acquisitions provide opportunities for the Company to eliminate
redundant overhead, rationalize inefficient facilities and optimize the
manufacturing of the Company's products over its existing capital
equipment base. The Company believes that it can achieve approximately
$4.2 million in annual overhead cost savings through the consolidation of
the administrative functions of CPG and Arcon at SPI's Brattleboro
headquarters and can achieve further operational savings by adjusting
current grade mixes on each of its machines and shifting production among
facilities to better match products, machine capabilities and cost
structures.
- STRATEGIC ACQUISITIONS. The Company intends to continue growing through
the acquisition of complementary businesses which provide opportunities to
enhance the Company's core product lines and create operating
efficiencies. In implementing this strategy, management intends to build
upon its successful experience in integrating the Endura Acquisition.
- INVEST IN CAPITAL IMPROVEMENTS. The Company seeks to reduce costs,
increase capacity, enhance manufacturing capabilities and improve product
quality through selected capital investments. The Company has invested
approximately $20 million in new equipment, technology and leasehold
improvements at its facilities over the past 12 months and plans to invest
significant additional capital in facilities and equipment over the next
12 to 24 months.
- INCREASE UTILIZATION OF RECYCLED FIBER. The Company intends to continue to
capitalize on its position as a leading manufacturer of specialty paper
products with recycled fiber content. The Company's office product line
contains between 25% and 100% recycled materials, depending on paper
grades. The Company continually seeks to increase the recycled content of
its products to reduce costs and better service customer demands for
recycled content while still meeting performance expectations. See
"--Manufacturing--Use of Recycled Fiber."
- EXPAND INTERNATIONAL SALES. While SPI historically has devoted increasing
resources to its international marketing efforts, CPG and Arcon have not
had a similar focus on these markets. SPI has an established network of
international sales offices and sales agents which sell SPI's existing
range of products. SPI believes that by using this sales and distribution
network it will be able to generate incremental sales of CPG's and Arcon's
products.
48
<PAGE>
OVERVIEW
The Company has four distinctive categories of products. The following table
provides an overview of the Company's product lines and facilities:
<TABLE>
<CAPTION>
PRODUCT TECHNICAL SPECIALTY SATURATED SPECIALTY
LINES OFFICE PRODUCTS PRODUCTS PRODUCTS FILTRATION PRODUCTS
<S> <C> <C> <C> <C>
SPI - PRESSBOARD FILING, - PRINTED CIRCUIT - TAPE SUBSTRATES
COVER AND BINDER BOARD PAPER - HEAVYWEIGHT BOOK
MATERIALS COVER
- LIGHTWEIGHT FILING - LIGHTWEIGHT BOOK
AND COVER MATERIALS COVER
CPG - PREMIUM COVER AND - ELECTRICAL - SATURATED FILTER
TEXT PAPERS TRANSFORMER PAPER PAPER
- LIGHTWEIGHT FILING - PICTURE MOUNTING ART - NON-SATURATED FILTER
AND COVER MATERIALS BOARD PAPER
- PRESSBOARD FILING - PHOTOGRAPHIC - INDUSTRIAL FILTER
AND BINDER MATERIALS PACKAGING PAPER
- WET STRENGTH TAG
- ABRASIVE BACKING
ARCON - BINDING TAPES - CHECKBOOK TAPE
- HINGE AND - BOOKBINDING
REINFORCING TAPES MATERIALS
FACILITIES BRATTLEBORO, VT HUGHESVILLE, NJ QUAKERTOWN, PA RICHMOND, VA
WARREN GLEN, NJ FITCHBURG, MA OWENSBORO, KY ROCHESTER, MI
OCEANSIDE, NY(1) WARREN GLEN, NJ BEAVER FALLS,NY FITCHBURG, MA
RICHMOND, VA OCEANSIDE, NY (1)
OWENSBORO, KY
BEAVER FALLS, NY
</TABLE>
- ------------------------
(1) After the closing of the Transactions, the Company intends to close this
facility and transfer its production to the Company's Quakertown mill.
PRODUCTS AND SERVICES
The following chart displays pro forma net sales of the Company by product
category.
<TABLE>
<CAPTION>
PRO FORMA NET
SALES BY PRODUCT
CATEGORY
DECEMBER 31, 1995
----------------------
<S> <C> <C>
% $
----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Office Products.................................................... $ 83,822 35.0%
Technical Specialty Products....................................... 60,801 25.4
Saturated Specialty Products....................................... 52,866 22.1
Filtration Products................................................ 41,975 17.5
----------- ---------
Total Net Sales................................................ $ 239,464 100.0%
----------- ---------
----------- ---------
</TABLE>
49
<PAGE>
OFFICE PRODUCTS
Market. The Company manufactures a wide range of materials used in the
manufacture of office products. Management believes that the Company is the
largest domestic supplier of pressboard, which is converted into data binders,
notebook covers, report covers, ring binders, and file and index guides, and of
binding and reinforcing tapes used in file folders and notepads. The Company
also pursues niche markets within the office supplies market where its
capabilities and customer relationships give it a competitive advantage.
The total North American market for office supplies at the wholesale level
was approximately $26.6 billion in 1995, as measured by the Business Products
Industry Association. The Company competes in an approximately $3.0 billion
segment of this market comprised primarily of market categories containing
hanging files, expandable folders, date books, ring binder, report covers and
file and index cards. Based on Business Products Industry Association
statistics, the Company estimates that this market has grown at a compound
annual growth rate of approximately 2.0% annually since 1991.
Products. The table below sets forth the primary office product materials
produced by the Company:
<TABLE>
<CAPTION>
OFFICE PRODUCTS
<S> <C> <C>
PRODUCT TYPE CHARACTERISTICS TYPICAL END USES
Pressboard filing, cover High density paperboard Data binders; ring binders;
and binder material designed for strength, report covers; notebook covers
rigidity, durability and
appearance; may be embossed or
acrylic coated; high recycled
content
Binding tapes Tyvek-Registered Trademark- Notepads; composition books
and latex-impregnated paper
tapes
Hinge and reinforcing tapes Durable Expandable file folders
Tyvek-Registered Trademark-
high fold- and tear-strength
reinforcing materials
Lightweight filing and Lighter weight paperboard, Filing products; portfolios;
cover materials designed for decorative report covers; document
embellishments and less covers; presentation covers
demanding end-uses than
pressboard
Premium cover and text Well-formed papers with good Printed report covers;
papers strength, color/texture and promotional and advertising
printable surfaces materials
</TABLE>
The Company's largest product is a heavyweight paperboard (pressboard) which
is densified through a proprietary manufacturing process developed by the
Company. This densification process provides pressboard with the strength,
rigidity, durability and appearance required for data binders, ring binders,
notebook covers and report covers. The Company offers many pressboard products
in acrylic coated and embossed form, providing additional durability and
moisture and stain resistance. The Company has the capability to custom
manufacture pressboard in a variety of colors and can finish its pressboard
products to customer specifications, including glazing (densification), coating,
embossing, laminating, sheeting, slitting and rewinding. The Company and its
predecessors have offered their pressboard line of products for over 75 years
and believes it has established significant brand awareness and loyalty among
its customers.
- ------------
- -Registered Trademark-DuPont registered trademark.
50
<PAGE>
The Company is also a leading supplier of binding tapes and hinge and
reinforcing tapes converted from specialty papers and substrates for the
manufacture of office supplies. These products are primarily used to protect,
bind and decorate finished office supply products, many of which also
incorporate the Company's pressboard material. The Company's
Tyvek-Registered Trademark- tapes, marketed under the trade name Super
ArcoFlex-TM-, are used to decorate pad bindings and are able to withstand the
stress incurred during cutting in high volume manufacturing. The Company also
uses Tyvek-Registered Trademark- in the manufacture of supported gussets for red
wallet expansion folders. Gussets are the accordion folder material between the
two folder side sheets that allow the folder to expand. The Company has
developed a method to strengthen the gussets by laminating coated
Tyvek-Registered Trademark- to the cardboard forming the gusset and sells this
material under the name Expanlin. The Company also sells coated
Tyvek-Registered Trademark- to converters who laminate it to the cardboard
themselves. The result is a material that is stronger, longer lasting and more
reliable than unsupported gussets and, as a result, the Company believes that
Expanlin has become the preferred material used in supported gussets by
expansion folder manufacturers.
The Company produces certain types of lightweight filing and cover materials
for conversion into file folders, expanding wallets, notebook covers and report
covers. The Company is continuing its focus on certain products for the
lightweight filing and cover material market, such as colored file folder and
report covers for the growing on-demand document printing market, with specific
emphasis on products with substantial recycled content. The Company's
lightweight filing and cover materials are generally manufactured using similar
equipment and processes and are sold to many of the same customers as the
Company's heavyweight office products. The Brattleboro paper machine upgrade,
completed in October 1995, expanded the machine's ability to use lower-cost
recycled fiber and its capacity to produce lighter weight grades used in filing
and cover applications. The Company is working to build this lightweight
business through the strength of its relationships with office products
converters. These lightweight materials, coupled with increasing consumer demand
for recycled paper products, provide an opportunity for the Company to increase
its penetration in the office products market.
The Company manufactures a line of premium cover and text papers sold
through paper distributors to commercial printers. These papers have good
strength and may have colored or textured surfaces and are typically used for
printed report covers and promotional and advertising materials.
Customers. The Company sells its office products through its own sales
representatives to major domestic office product converters, including: Acco
World Corporation, a division of American Brands Inc.; Ampad Corp.; Smead
Manufacturing Company; Esselte Pendaflex Corp.; Mead Corp.; and Avery Dennison
Corp. These customers collectively account for the majority of the Company's
sales of office product materials with the remainder of the Company's sales
being accounted for by smaller independent manufacturers. The Company has
long-term relationships with all of its major customers in this market. The
Company's customers produce office products from the Company's paper-based
materials and sell end-use products through contract stationers, office product
wholesalers, buying groups, warehouse clubs, catalog sales, office products
superstores, retail office supply stores and other outlets. The Company also
markets its materials through direct sales representatives or manufacturer's
representatives in Asia, Canada, Mexico, Central and South America and Europe.
Competition. In the office products supply market, the Company competes with
a number of other producers of heavyweight pressboard, colored file folder paper
and lightweight filing and cover materials, including International Paper
Company ("International Paper"), Temple-Inland Inc., Brownville Specialty
Products, Merrimac Paper Co. Inc. ("Merrimac") and Crocker Technical Papers,
Inc. ("Crocker"). The Company believes it holds a leading position in the
domestic market for pressboard and a growing presence in the lightweight filing
and cover materials market. In markets that use pressboard, the Company also
competes with producers of vinyl and plastic office product materials.
In the binding tape and hinge and reinforcing tape markets, the Company
competes against several smaller competitors, including Rexford Paper Co.
("Rexford"), Northeast Paper Converting Company and
51
<PAGE>
Southern Label Company, Inc. The Company believes it holds a leading position in
the market for Tyvek-Registered Trademark--based binding tapes and hinge and
reinforcing tapes. In the premium cover and text market, the Company competes
against divisions of International Paper and Georgia Pacific Corp., Fox River
Paper Co., Crown Vantage Inc. and a number of smaller paper manufacturers.
TECHNICAL SPECIALTY PRODUCTS
Market. The Company manufactures specialty paper products with customized
physical performance characteristics which meet the unique requirements of
specific end-use markets. Technical specialty products include paper used as
insulation material in electrical transformer coils, acid-free picture mounting
art board used for archival quality picture mounting and records storage
applications, photographic packaging papers, printed circuit board papers, wet
strength tag used primarily in the laundry and dry-cleaning industries and paper
backings for sandpaper and other abrasives. The Company has been able to
successfully enter niche markets in the technical specialties area in which it
believes its manufacturing flexibility and technical expertise give it a
competitive advantage in meeting rigorous customer requirements. The Company
believes that it is a market leader in many of its markets, including electrical
transformer papers, acid-free picture mounting art board and photographic
packaging papers. Many of the Company's technical specialty products have been
used in their current applications for many years and have proven to be
cost-effective in meeting the performance requirements for which they are
utilized. To supplement these products, the Company works to develop new
products which have the potential to experience rapid growth due to superior
performance, lower cost or both.
Products. The table below sets forth the Company's principal technical
specialty products:
<TABLE>
<CAPTION>
TECHNICAL SPECIALTY PRODUCTS
<S> <C> <C>
PRODUCT TYPE CHARACTERISTICS END USES
Electrical transformer High dielectric strength Power transformer coil
paper insulation
Picture mounting art board High pH (acid-free), Archival quality picture
exceptional cleanliness mounting and document
storage
Photographic packaging Totally opaque; high-strength Photographic film protection
papers
Printed circuit board Low density; uniform Interior of printed circuit
papers saturability; high bulk boards
Wet strength tag High-strength saturated sheet; Laundry and dry-cleaning
moisture and solvent labels
resistant
Backing papers for High tear strength, smooth Heavyweight sandpaper and
sandpaper and other surfaces and controlled other commercial abrasives
abrasives electrostatic properties
</TABLE>
The Company is a leading supplier of electrical transformer papers with high
dielectric strength which are wrapped around individual electrical transformer
coils as insulating material. The Company is the major supplier of such paper to
Bedford Materials, Inc., which operates the transformer insulation business
formerly owned by Westinghouse Electrical Corp., and is one of two major
suppliers to the other major U.S. manufacturer of electrical transformers.
The Company believes that it is a leading provider of acid-free board used
as picture mounting art board and archival storage media. Acid-free picture
mounting art board and storage media are designed to
52
<PAGE>
prevent the degradation and discoloration of artwork and documents caused by
acidic exposure. The Company believes that these superior performance
characteristics have resulted in wide acceptance of the Company's acid-free
products.
The Company's photographic packaging papers are primarily dual composition
papers used by Eastman Kodak Company ("Kodak") and Polaroid Corp. ("Polaroid")
to package certain films. Such products must meet demanding standards for
opacity in order to prevent premature exposure of the film. The Company's strong
position in the market for photographic packaging papers is based in part upon
the Company's ability to manufacture multi-ply paper.
The Company also manufactures printed circuit board papers which are used in
the manufacture of circuit boards for remote control devices and other
electrical components. The Company's printed circuit board papers have the
advantage of low density and high bulk, allowing circuit board manufacturers to
lower their costs and increase their output by processing fewer sheets than they
would with competing materials.
The Company's wet strength papers are primarily used as tags in the laundry
and dry cleaning industries to identify clothing as it is processed through
washing machines and dry cleaning equipment. These products, in addition to
withstanding physically and chemically harsh processes, are manufactured in
multiple colors that must not be transferred onto the clothing to which they are
attached. The Company is a major producer of this paper in the United States and
is now exporting to the United Kingdom, with opportunities to expand into other
European markets.
Sandpaper and other abrasive backing papers are used in the manufacture of
heavyweight sandpaper and other commercial abrasives. The Company's sandpaper
and other abrasive backing papers are designed to meet customers' exacting
specifications for tear strength, smooth surfaces and controlled electrostatic
properties.
Customers. The Company sells its technical specialty papers through its own
sales force to a variety of customers. Major customers include: Bedford
Materials, Inc. and the TMC division of Avery Dennison Corp. (electrical
transformer paper); the Nielsen and Bainbridge division of Esselte Corp. and the
Crescent Cardboard division of Potomac Corp. (acid free papers); Kodak and
Polaroid (photographic packaging papers). Other clients include the AlliedSignal
Corp. (printed circuit board paper), PermaFiber Corp. (wet strength tags) and 3M
(abrasive backings) and various commercial printers. The Company works with its
customers to develop new products and to provide technical support for existing
products.
Competition. The Company's competitors in technical specialty papers vary by
product type. Generally, the Company faces competition from both foreign and
domestic specialty manufacturers. The Company's focus is to compete in products
and markets which require manufacturing flexibility, product properties and
quality levels not provided by integrated papermills. The Company's key
competitors include Kimberly Clark, The Sorg Paper Company, a subsidiary of
Mosinee Paper Company, Arjo Wiggins USA, Inc., Robert Cordier AG, Crocker and
Merrimac.
SATURATED SPECIALTY PRODUCTS
Market. The primary markets for the Company's saturated specialty products
are tape substrates (primarily industrial and consumer masking tapes) and book
cover materials. There are seven major North American producers of pressure
sensitive tape, who, together, account for approximately 80% of the industry's
total sales. Most of these producers have self-saturating capabilities for
general purpose tapes and look to suppliers like the Company for specialty paper
backings.
The Company believes that it is one of the two leading domestic producers of
latex-reinforced material used in book covers and related products. These
materials are used by customers in applications where durability and distinctive
appearance are important, such as flexible covers for books, menus, photo
albums, desktop calendars, appointment books and reports.
53
<PAGE>
The Company has also sought out for its saturated specialty products niche
markets in which it believes that it can achieve a competitive advantage. The
Company produces converted specialty paper that is used as end sheets in book
rebinding and in the publishing industry as spine reinforcement materials for
use in the bookbinding industry. Other products include specialty binding tapes
for the checkbook industry, blue jean tag and specialty papers for various tag
and label applications.
Products. The following table sets forth the Company's principal saturated
specialty products:
<TABLE>
<CAPTION>
SATURATED SPECIALTY PRODUCTS
<S> <C> <C>
PRODUCT TYPE CHARACTERISTICS TYPICAL END USES
Tape substrates Enhanced strength, release, Industrial and commercial
impermeability or heat masking tapes; barrier
resistance tapes; pressure-sensitive
tapes; bandolier tapes;
packaging tapes
Heavyweight book cover Strong cotton fiber base Flexible covers for softbound
sheets; latex reinforced and books, menus, photo albums,
leather-like texture desktop calendars and
accessories, appointment
books and reports
Lightweight book cover Latex-reinforced base sheets Exterior cover material for
of higher bulk and lower hardbound books; photo
weight albums; report covers
</TABLE>
The Company is one of the largest producers of specialty tape substrates and
a broad range of saturated, coated and non-woven papers. The Company's tape
substrates are used in the manufacture of industrial and consumer masking tapes,
barrier tapes, other pressure-sensitive tapes and bandoliering tapes. The
Company's products have the strength and technical properties to meet various
performance demands. These products include barrier-coated and heat-resistant
industrial masking tapes for the automotive paint and aircraft manufacturing
industries and packaging tapes which withstand the rigors of worldwide shipping.
The Company's bandoliering tapes are used by the electronics industry to carry
resistors, capacitators and other items during high-speed automated assembly of
electronic devices.
Using proprietary manufacturing processes, the Company combines pulp, latex,
recycled rag fiber and other materials to produce flexible and durable specialty
materials for use in a variety of book cover applications. The Company sells its
book cover materials directly to customers in this market, who in turn coat,
emboss and decorate the material and sell it to manufacturers of end-use
products. The Company's primary latex product is manufactured using recycled rag
fibers, resulting in increased durability and a leather-like texture and
appearance. These products are used for day books, diaries, menu covers and
soft-cover books. The Company is also a leading supplier of light-weight
materials used in covering hardbound books.
The Company converts specialty paper into endsheets and spine reinforcement
materials for use in the bookbinding industry. The Company has developed papers
used in spinal binding that, with appropriate equipment, allows soft-cover books
to lay flat when opened. The Company also provides specialty tapes for use in
binding materials for checkbooks and deposit books.
Other saturated specialty products include imitation leatherstock which is
sold to garment label manufacturers who cut and print the material with various
brand and product information for use as blue
54
<PAGE>
jean tags. This material is expected to maintain its crisp appearance after
repeated washing cycles. The Company has also developed a tag and label product
line for manufacturers who require tags and labels with the strength of
Tyvek-Registered Trademark-. These products can be color-coated and are used as
luggage tags by the airline industry, as flame-retardant labels for the
automotive industry and other types of demanding packaging applications.
Customers. The Company offers its customers a broad product line with
flexible product development and manufacturing capabilities. This flexibility
has fostered long-term relationships with its client base. The Company sells its
specialty tape substrates to many of the leading tape manufacturers, including
American Tape Company and 3M. The Company believes that the international
customer base for these products may increase as the Company's sales force is
trained to sell these additional product lines.
The Company markets its book cover materials through a sales staff
experienced in serving the specialized book cover market. Endpapers and spine
reinforcing materials are supplied directly to participants in the bookbinding
industry. In the checkbook industry, the Company's major customer is Deluxe
Check Printers, a division of Deluxe Corp. The Company sells blue jean tags and
its other tag and label products to a variety of converters and end-users.
Competition. For tape backing, the Company primarily competes against
Kimberly-Clark, Inc. ("Kimberly-Clark"). In the latex-reinforced book cover
market, the Company primarily competes with Rexam DSI Inc. and, to a lesser
degree, with producers of plastic coated and coated cloth book cover materials.
In the checkbook binding tape market, the Company competes primarily against
Rexford. In its other niche markets, the Company competes with various small
competitors, none of which has a dominant market position.
FILTRATION PRODUCTS
Market. The Company is a major supplier of saturated and non-saturated
filter papers used in fluid and air filters for the automotive and heavy duty
truck and equipment industries. The Company estimates that the market for both
saturated and non-saturated papers was approximately $160 million in 1995, of
which approximately 90% was utilized in the automotive and heavy duty truck and
equipment markets. The other major market for these products is for filters used
to purify the solvents used in the dry cleaning industry. The five largest
manufacturers account for over 60% of total sales to the U.S. automotive and
heavy truck and equipment filter paper market. The market for automotive and
heavy duty truck and equipment filters has grown at a compound annual growth
rate of approximately 5.7% over the ten-year period from 1985-1995. The Company
also manufactures industrial filter paper used in a variety of applications and
processes.
- ------------
- -Registered Trademark-DuPont registered trademark.
55
<PAGE>
Products. The table below sets forth the primary materials produced by the
Company for use in filtration applications.
<TABLE>
<CAPTION>
FILTRATION PRODUCTS
<S> <C> <C>
PRODUCT TYPE CHARACTERISTICS TYPICAL END USES
Saturated filter paper Controlled porosity; enhanced Oil, fuel and hydraulic filters for
strength and rigidity; high heavy and light duty trucks and
temperature and chemical passenger cars; fuel, hydraulic
resistance. fluid and dry-cleaning solvent
filters
Non-saturated filter paper Controlled porosity; high density; Oil filters for heavy-duty equipment
may be impregnated with activated and diesel trucks; home water
carbon and other fillers. filters
Industrial filter paper Controlled porosity; high Hot oil filters for the fast-food
temperature resistance; industry; paint and lacquer
cleanliness. manufacturing; fruit juice
processing
</TABLE>
The Company's major filtration product is solvent-based saturated filter
paper, which is controlled porosity paper saturated with phenolic and other
resins to increase its strength and rigidity for use in various high temperature
applications. This product is purchased by filter manufacturers who cut, pleat
and cure the paper for use in oil, fuel and hydraulic fluid filters for heavy
and light duty trucks and passenger cars. These filters are sold primarily to
the replacement market but also to original equipment manufacturers. The Company
manufactures many grades of saturated filter paper to specifications provided by
its customers. The Company believes that it is one of the three largest
producers of saturated filter paper in the United States.
The Company also produces non-saturated filter paper. This category includes
non-saturated paper containing activated carbons and other fillers and edge
filter media. Primary uses of non-saturated filter paper include oil filtration
in heavy equipment and diesel trucks and home water filters. In addition, the
Company produces industrial filter papers for various food service and
industrial applications, including filtration of hot oil used in fast-food
preparation, the manufacture of paints and lacquers and the processing of fruit
juices.
The Company is nearing completion of a capital improvement plan that will
increase its annual saturated filter paper capacity at its Richmond mill by over
50%. In addition, the Company has improved its manufacturing processes at these
facilities to increase productivity and lower its costs.
Customers. The Company sells its filtration products primarily through its
own sales staff directly to its customers. Principal customers for the Company's
saturated filter papers include the Fleetguard Filtration Systems division of
Cummins Engine Co., Inc. ("Fleetguard"), the Delphi Automotive Systems division
of General Motors Corp. ("General Motors"), AlliedSignal, Inc. (Fram filters),
Purolator Products, Inc. and Miki Sangyo U.S.A. Inc., a trading company and the
major supplier of filter paper used in filters supplied to the U.S.
manufacturing sites of Nissan Motor Co., Ltd and Honda Motor Co., Ltd. The
Company's saturated filter paper is used to make filters which are used on
vehicles manufactured by General Motors, Chrysler Corp. and Ford Motor Corp.
Fleetguard is also the Company's primary customer for non-saturated filter
papers. The Company has long-term relationships with its customers and believes
that these relationships with its customers are based on its ability to provide
superior service and technical support.
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<PAGE>
The Company's major customers for its industrial filter paper products
include National Filters, Inc. and Lubrizol Corp. for commercial manufacturing
applications, Seneca Foods Corp. for food processing applications and the KFC
North America division of PepsiCo Inc. in the hot oil filtration market. In
addition, the Company supplies industrial filter papers to various smaller
manufacturers and users.
Competition. The Company's primary competition in solvent-based saturated
filter papers comes from Ahlstrom Filtration, Inc. ("Ahlstrom"), a division of
A. Ahlstrom Corp. In addition, the Hollingsworth & Vose Company is the dominant
manufacturer of water-based saturated filter papers, a market in which the
Company has a smaller presence. To the extent that industry efforts to develop
water-based alternatives to solvent-based saturated filter papers are
successful, the Company's solvent-based filterpapers may face increased
competition from such water-based alternatives.
In the markets for non-saturated filter papers and industrial filter papers,
the Company competes primarily with Ahlstrom, Knowlton Specialty Papers, Inc.
and Lydall, Inc. In each of these markets, producers tend to manufacture custom
designed products on an exclusive basis for their customers.
MANUFACTURING
Mills and Converting Facilities. The Company operates ten facilities, of
which eight are owned and two are leased. The Company intends to close the Arcon
facility in Oceanside by early 1997 and relocate those operations to the
Company's facility in Quakertown.
The Company has initiated a review of its combined papermaking and
converting facilities and, at the completion of the Transactions, will initiate
a product line rationalization to ensure optimal use of available assets. The
Company believes that additional savings will result from the consolidation and
rationalization of its production capacity.
Provided in the following table is a summary of the Company's facilities:
<TABLE>
<CAPTION>
WIDTH
LOCATION/BUSINESS PRODUCTS(1) MACHINE (INCHES)
- ----------------------------------------- ------------ ------------------------ -------------
<S> <C> <C> <C>
PAPER MANUFACTURING:
Richmond, VA/(CPG) FP,TS Fourdrinier 80
Rochester, MI/(CPG) FP Fourdrinier 60
Brattleboro, VT/(SPI)(2) OP Cylinder: 7 Ultraformers 86
Warren Glen, NJ/(CPG) OP,TS
Cylinder: 5 Vat 108
Owensboro, KY/(SPI) SS,TS Fourdrinier 124
Beaver Falls, NY/(SPI) SS,TS Cylinder: 5 Vat 57
Fourdrinier 59
Hughesville, NJ/(CPG) TS Rotoformer/Fourdrinier 100
Fitchburg, MA/(CPG) FP,TS Fourdrinier 64
Cylinder: 4 Vat 100
CONVERTING FACILITIES:
Quakertown, PA/(SPI) SS 3 Saturators, Water Base 80
2 Coaters, Water Based 60
1 Calendar 63
Oceanside, NY/(Arcon)(3) OP,SS 2 Coaters, Water Based 50
4 Slitters 54
1 Sheeters 60
<CAPTION>
FINISHING
LOCATION/BUSINESS CAPABILITY
- ----------------------------------------- -----------------------------------------
<S> <C>
PAPER MANUFACTURING:
Richmond, VA/(CPG) Off Machine Saturation
Rochester, MI/(CPG) In-line Saturation
Brattleboro, VT/(SPI)(2) Coating, embossing, glazing
Warren Glen, NJ/(CPG)
Duplex Capability
Owensboro, KY/(SPI)
Beaver Falls, NY/(SPI) In-Line Size Press
In-line two side coating
Hughesville, NJ/(CPG) Duplex Capability
Fitchburg, MA/(CPG) Sheeting
Sheeting
CONVERTING FACILITIES:
Quakertown, PA/(SPI)
Oceanside, NY/(Arcon)(3)
</TABLE>
- ------------------------
(1) FP=Filter Products; OP=Office Products; SS=Saturated Specialty Products;
TS=Technical Specialty Products.
(2) The Brattleboro Mill also contains the Company's executive offices.
(3) This facility is scheduled to be closed after the consummation of the
Transactions.
OFFICE PRODUCTS. The Company's main mills for the production of office
products are located in Brattleboro and Warren Glen. In addition, upon the
consummation of the Arcon Acquisition, the Company intends to consolidate the
manufacture of the binding tape and hinge and reinforcing tapes currently
manufactured in Oceanside in the Company's Quakertown converting facility. See
"-- Saturated Specialty Products." The Company has recently completed upgrades
of the Brattleboro and Warren Glen
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<PAGE>
mills. Recent improvements have included an upgrade to the Brattleboro mill
which is expected to increase its capacity, and will enable it to utilize a
higher percentage of recycled fiber and produce a new range of lighter weight
products. The Company has also recently completed a series of capital
improvements at its Warren Glen mill, which have increased productivity, reduced
costs and waste and increased the ability of the mill to use recycled fiber.
The cylinder paper machines in use at the Brattleboro and Warren Glen mills
are configured to produce a broad range of highly densified heavyweight
pressboard products of various weights, colors and finishes. The machine in the
Brattleboro mill features computer-controlled monitoring of color, weight,
thickness and moisture content. The configuration of the cylinder machine allows
the production of multiple-ply products, resulting in greater strength and
stiffness than a comparable one-ply product made on a Fourdrinier paper machine.
In addition, this process enables the Company to use lower-cost recycled fiber
pulp in the interior layers and higher-cost virgin pulp layers on the exterior
of a product providing greater strength and the surface appearance desired by
consumers. Finishing capabilities at the Brattleboro mill include glazing,
coating, embossing, rewinding, laminating and sheeting.
TECHNICAL SPECIALTY PRODUCTS. The Company manufactures technical specialty
products at a number of its facilities, including its Hughesville, Warren Glen,
Richmond, Fitchburg, Owensboro and Beaver Falls facilities. The Hughesville mill
manufactures primarily technical specialty papers, including photographic
packaging, electrical transformer paper and wet-strength tag.
SATURATED SPECIALTY PRODUCTS. Saturated specialty products are manufactured
in the Company's Owensboro and Beaver Falls mills and its Quakertown converting
facility. The Company's main converting facility for saturated specialty
products is located at Quakertown. A significant portion of the saturating base
paper used in this facility is provided by the Owensboro mill. In addition,
substantially all capacity currently located in Oceanside will be relocated to
the Quakertown facility. The Company's mill located in Beaver Falls specializes
in the production of proprietary latex-impregnated materials for use as book
covers and similar products. The stock preparation process at the Beaver Falls
mill allows blending of latex, cork, cotton fiber, pulp and other materials into
a variety of products with specific performance characteristics. The mill has a
fiber reclamation system enabling it to utilize recycled fiber.
FILTRATION PRODUCTS. The Company's filtration products are produced
primarily at its Richmond, Rochester and Fitchburg mills. The Richmond mill uses
a methanol-based resin saturating process that allows the saturation of base
paper off the paper machine. The Rochester mill uses an in-line saturating
process. The Company manufactures its non-saturated filter papers at its
Fitchburg mill.
Raw Materials. The Company uses a wide array of raw materials to formulate
its products, including virgin hardwood and softwood pulp, secondary wood fiber
from pre-and post-consumer waste, secondary cotton fiber from the apparel
industry, synthetic fibers (such as nylon and fiberglass), synthetic latex and a
wide variety of chemicals, pigments and dyes. These materials are procured from
numerous suppliers in the United States and Canada. The Company does not produce
pulp. Pulp and secondary fiber prices are subject to substantial cyclical price
fluctuations. The Company experienced a significant increase in raw material
costs during 1994 and 1995, but was able to partially recover these increases
with selling price increases, cost containment efforts and the early benefits of
the paper machine upgrade performed in 1995. There can be no assurance that the
Company will be able to pass any future increases in the price of pulp through
to its customers in the form of price increases. The Company's sole source of
supply of the Tyvek-Registered Trademark- used in production of certain of its
products is DuPont. The Company has a long-standing relationship with DuPont as
an approved converter of Tyvek-Registered Trademark- and has never experienced a
disruption in supply. Although management believes that is has a good
relationship with DuPont, there can be no assurance that the Company will be
able to continually purchase adequate supplies of Tyvek-Registered Trademark-.
Any material interruption in the Company's supply of Tyvek-Registered Trademark-
could have a material adverse effect on the results of operations and financial
condition of the Company.
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<PAGE>
Use of Recycled Fiber. The Company believes that materials with recycled
content continue to grow in consumer acceptance. The Company has made
significant capital investments in recycling equipment and systems. The use of
the Company's cylinder paper machines in the manufacturing process for
pressboard products allows the use of recycled fiber in the product interior,
while virgin pulp is used on the product exterior providing greater strength as
well as the product appearance desire by customers. In addition to using
recycled fiber, the end-use products manufactured from the Company's pressboard
materials are themselves recyclable.
The Company's office products are manufactured with 25% to 100% recycled
fiber, of which up to 50% may be post-consumer waste. Post-consumer waste refers
to paper waste from end-users of paper products, and is generally considered the
standard by which government agencies and environmentally conscious consumers
evaluate recycled content. In particular, government agencies have established
and are continuing to update standards for recycled content (both pre- and
post-consumer waste) in the procurement of office supplies. The Company
anticipates that demand for office product materials with recycled content will
continue to grow.
Research and Development. The Company's expenditures on research and
development were $2.0 million, $2.3 million, and $1.7 million in 1995, 1994 and
1993, respectively. The Company has a research and development staff with
expertise in chemistry, papermaking and materials science. This staff works
closely with the Company's customers to develop, test and produce new product
formulations designed to meet customer specifications.
EMPLOYEES
As of October 31, 1996, the Company employed a total of 1,012 employees, of
which 302 were salaried and 710 were hourly. Of the salaried employees, 136 were
in manufacturing, 49 in sales and marketing, 15 in research and development and
102 in professional or administrative support.
The hourly employees at the Oceanside and Quakertown locations are all
non-union. The remaining hourly employees are either members of the United
Paperworkers International Union, the International Brotherhood of Boilermakers,
Iron Shipworkers, Blacksmiths, Forgers and Helpers or the International
Brotherhood of Electrical Workers. The table below sets out the expiration dates
of the Company's labor contracts by facility:
<TABLE>
<CAPTION>
EXPIRATION
FACILITY DATE
- -------------------------------------------------------------------------- ------------------
<S> <C>
Owensboro, KY............................................................. April 1, 1996
Fitchburg, MA............................................................. April 30, 1998
Warren Glen, NJ........................................................... May 23, 1999
Hughesville, NJ........................................................... May 23, 1999
Rochester, MI............................................................. June 26, 1999
Richmond, VA.............................................................. April 28, 2000
Beaver Falls, NY (Latex Mill)............................................. June 30, 2000
Brattleboro, VT........................................................... August 31, 2002
</TABLE>
The Company believes that, in general, it has good relations with its
employees and their unions. The labor contract governing the 30 employees in the
bargaining unit at the Company's Owensboro mill expired on April 1, 1996 and the
employees have continued to work under the terms of the expired contract. The
employees at this mill are represented by the International Brotherhood of
Boilermakers, Iron Shipworkers, Blacksmiths, Forgers and Helpers. The Company
has made a final offer which includes substantial revisions to the work rules at
the Owensboro mill which are intended to bring such work rules
59
<PAGE>
more into line with labor agreements in place throughout the paper industry. The
union's representatives have not accepted this final offer. The employees in the
bargaining unit have voted not to strike. In the event of a work stoppage,
management believes that the Company could continue to operate the Owensboro
mill. In any event, the Company believes that it has sufficient production
capacity throughout its various mill facilities to adequately meet its
production requirements.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL REGULATION AND COMPLIANCE
Like similar companies, the Company's operations and properties are subject
to a wide variety of federal, state and local laws and regulations, including
those governing the use, storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes, the
remediation of contaminated soil and groundwater, and the health and safety of
employees, (collectively, "Environmental Laws"). As such, the nature of the
Company's operations exposes it to the risk of claims with respect to
environmental protection and health and safety matters and there can be no
assurance that material costs or liabilities will not be incurred in connection
with such claims.
The Company and its predecessors have made substantial investments in
pollution control facilities to comply with existing Environmental Laws. The
Company made expenditures for environmental purposes of $3.5 million, $2.2
million, and $2.0 million in 1995, 1994 and 1993, respectively. While the
Company believes that it has made sufficient capital expenditures to maintain
compliance with existing Environmental Laws, any failure by the Company to
comply with present and future Environmental Laws could subject it to future
liability or require the suspension of operations. In addition, such
Environmental Laws could restrict the Company's ability to expand its facilities
or could require the Company to acquire costly equipment or to incur significant
expenses to comply with environmental regulations.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA") and similar state laws provide for responses to, and
liability for, releases of certain hazardous substances from a facility into the
environment. These obligations are imposed on the current owner or operator of a
facility from which there has been a release, the owner or operator of a
facility at the time of the disposal of hazardous substances at the facility, on
any person who arranged for the treatment or disposal of hazardous substances at
the facility, and any person who accepted hazardous substances for transport to
a facility selected by such person. Liability under CERCLA can be strict, joint
and several. Pursuant to the Environmental Laws, there are currently pending
investigations at certain of the Company's plants relating to the release of
hazardous substances, materials and/or wastes. In addition, various predecessors
of the Company have been named as potentially responsible parties ("PRPs") by
the United States Environmental Protection Agency ("EPA") for costs incurred and
to be incurred in responding to the investigation and clean-up of various
third-party sites. The Company has not received any notification or inquiry from
EPA or any other agency concerning these sites. Management believes that the
Company will have no liability in connection with the clean-up of these sites.
However, no assurance can be given that such predecessors will perform their
responsibilities in connection with such sites and, in the event of such
nonperformance, the Company may incur material liabilities in connection with
such sites, and no assurance can be given that the Company will not receive PRP
notices in connection with these or other sites in the future.
In connection with the CPG Acquisition, the former owners of CPG have agreed
to indemnify (subject to certain limitations) the Company for certain identified
and potential environmental liabilities arising from the historical use of the
property acquired pursuant to the CPG Merger Agreement or from CPG's conduct
prior to the CPG Acquisition. Management believes that the amount of the escrow
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<PAGE>
established as security for these and other indemnity obligations of the former
CPG owners under the CPG Merger Agreement will be sufficient to cover
environmental liabilities expected to be incurred in connection with the CPG
Acquisition. However, no assurance can be given that the limited indemnity
provided by the former owners of CPG will be sufficient to cover all material
environmental liabilities associated with the CPG Acquisition.
Based upon its experience to date, the management of the Company believes
that the future cost of compliance with existing Environmental Laws, and
liability for known environmental claims pursuant to such laws, will not have a
material adverse effect on the Company's financial condition and results of
operation. However, future events, such as new information, changes in existing
Environmental Laws or their interpretation, and more vigorous enforcement
policies of regulatory authorities, may give rise to additional expenditures or
liabilities that could be material to the Company's financial condition and
results of operations.
61
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
SPI's Directors and Executive Officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
K. Peter Norrie...................................... 57 Chairman of the Board of Directors
Alex Kwader.......................................... 54 President, Chief Executive Officer and Director
Brian C. Kerester.................................... 38 Director
George E. McCown..................................... 61 Director
Glenn S. McKenzie.................................... 44 Director
Jon H. Miller........................................ 58 Director
Wayne T. Stephens.................................... 46 Director
Fred P. Thompson, Jr. ............................... 69 Director
John D. Weil......................................... 49 Director
Bruce P. Moore....................................... 49 Vice President and Chief Financial Officer
Stephen A. Steidle................................... 51 Vice President and General Sales Manager
</TABLE>
K. PETER NORRIE, age 57, has served as Chairman of the Board of Directors of
SPI since June 1989 and as Chief Executive Officer from SPI's inception in June
1989 to November 1990. He is also a member of the Compensation Committee of the
Board of Directors. From 1976 until June 1989, Mr. Norrie was Senior Vice
President and General Manager of Boise Cascade Corporation's Paper Group. From
1964 to 1976, he was employed by Boise Cascade Corporation ("BCC") in various
management positions, including Vice President and General Sales Manager of the
White Paper Division of the Paper Group. Mr. Norrie received a B.S. in Civil
Engineering from Gonzaga University and an M.B.A. from Harvard University. Mr.
Norrie serves as a director of Tree-Free Fiber Company, LLC, a private pulp and
paper concern and also serves as a member of the Advisory Board of Compensation
Resource Group, Inc. a management compensation advisory concern.
ALEX KWADER, age 54, has been the President and Chief Executive Officer of
SPI since August 1991 and a Director since November 1991. Since 1970, Mr. Kwader
has been employed by SPI and BCC in various management positions. He served as
Senior Vice President of SPI from March 1990 to August 1991 and as Vice
President from SPI's inception in June 1989 until March 1990. Mr. Kwader was
also General Manager of the Pressboard Division from June 1989 until August
1991, serving in the same capacity for the BCC Pressboard Division from 1986
until June 1989. From 1980 to 1985, he served as General Manager of the BCC
Latex Fiber Products Division. Mr. Kwader holds a B.S. in Mechanical Engineering
from the University of Massachusetts and a M.S. from Carnegie Mellon University
and attended the Harvard Business School Executive Program.
BRIAN C. KERESTER, age 38, has been a director of SPI since May 1996. Mr.
Kerester joined McCown De Leeuw & Co. in 1988 and currently serves as an
operating affiliate. He previously held positions with the Venture Capital Group
of First Boston Corporation and the World Corporate Department of Bankers Trust
Company. He received a B.S. in Economics from the University of Pennsylvania and
an M.B.A. from Columbia University. Mr. Kerester currently serves as a director
of three McCown De Leeuw & Co. portfolio companies: Century Fasteners, Inc.,
Thrifty Foods, Inc., and Victoria Mortgage Corp.
GEORGE E. MCCOWN, age 61, has been a director of SPI since its inception in
June 1989. He is also a member of the Compensation Committee of the Board of
Directors. Mr. McCown was co-founder and has been a Managing Partner of MDC
Management Company, the general partner of McCown De Leeuw & Co., since 1984.
Mr. McCown received a B.S. in Mechanical Engineering from Stanford University
and an M.B.A. from Harvard University. He currently serves as a director of
three publicly held companies: BMC West Corporation, a building materials
retailer, Nimbus CD International, Inc., a CD audio and CD ROM
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<PAGE>
manufacturer, and Vans, Inc., a casual shoe manufacturer. Mr. McCown also serves
as a director of several other McCown De Leeuw & Co. portfolio companies.
GLENN S. MCKENZIE, age 44, has been a director of SPI since January 1994.
Since October 1991, Mr. McKenzie has been President of Alpha Investments, Inc.,
a management consulting firm. Alpha Investments provides consulting services to
McCown De Leeuw & Co., with which Messrs. McCown, Kerester, and Weil are
affiliated. He holds a B.A. in Economics and an M.B.A. from the University of
North Carolina. Mr. McKenzie currently serves as a director of Nimbus CD
International, Inc and DEC International, Inc.
JON H. MILLER, age 58, has been a director of SPI since its inception in
June 1989. He is also a member of the Compensation Committee of the Board of
Directors. Mr. Miller was President and Chief Operating Officer of BCC from 1978
until his retirement in 1990. In addition to serving on the Board of SPI, he is
a director of Idaho Power Company. Mr. Miller received a B.A. in Economics and
an M.B.A. from Stanford University.
WAYNE T. STEPHENS, age 46, has been a director of SPI since February 1991
and served as acting President of SPI from January 1991 to August 1991. He is
also a member of the Audit Committee of the Board of Directors. From April 1989
to November 1992, Mr. Stephens served as a principal with the Finley Group, a
management consulting firm. Since November 1992, he has been the President and
Chief Executive Officer of The Barcalounger Company, a North Carolina furniture
manufacturer. From January 1972 to April 1989, he was a partner at Deloitte &
Touche, a public accounting firm. Mr. Stephens holds a B.S. in Business from the
University of South Carolina.
FRED P. THOMPSON, JR., age 69, has been a director of SPI since April 1994.
He also serves as a member of the Audit Committee of the Board of Directors. Mr.
Thompson is currently and has served as President and Chief Executive Officer of
Peregrine Industries, Inc., a cabinet manufacturer, and Executive Management,
Inc., a management services firm, since 1972 and 1985, respectively. He is also
currently and has been Chairman and Chief Executive Officer of Nelson-Ball Paper
Products, Inc., a paper products manufacturer, and Powder River, Inc., a fence
manufacturer, since 1984 and 1990, respectively. Mr. Thompson received a B.S.
from the University of Oregon and attended the Harvard Business School Advanced
Management Program.
JOHN D. WEIL, age 49, has been a director of SPI since May 1996. Mr. Weil
has over 25 years of experience in national manufacturing and service
organizations. From 1982 to 1994, he served as President and Chief Executive
Officer and as a director of American Envelope Company. In 1995, Mr. Weil joined
the venture banking firm of McCown De Leeuw & Co. as an operating affiliate to
assist in portfolio management. He currently serves as Chairman of the Board of
Directors of DEC International, Inc., a manufacturer of custom paper products
and a McCown De Leeuw & Co. portfolio company, and as a director of Tiara
Motorcoach Corporation and International Data Response Corporation, both McCown
De Leeuw & Co. portfolio companies, and Sage Enterprises, Inc., a food service
distributor. Mr. Weil received a B.S. in Economics from the University of
Illinois and an M.B.A. from Northwestern University.
BRUCE P. MOORE, age 49, has served as Vice President of SPI since its
inception in June 1989 and as Chief Financial Officer since December 1990. From
1980 to 1989, Mr. Moore was employed by BCC in various management positions,
including Controller and General Manager of the Latex Fiber Products Division.
Mr. Moore holds a B.A. in Business Administration from Siena College and
attended the Stanford University Executive Program.
STEPHEN A. STEIDLE, age 51, has served as Vice President and General Sales
Manager for the office products and book cover markets since February 1994. He
has held sales management positions with SPI and BCC for more than 10 years and
has a total of 25 years of service with SPI and BCC. Mr. Steidle began
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his career as Safety Director of the Personnel Department at BCC's St. Helens
mill in Oregon. Mr. Steidle received a B.A. in Psychology from the University of
Maine and an M.B.A. from the University of Maine.
------------------------
There are no family relationships among any of the directors or executive
officers of SPI.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF DIRECTORS
SPI has a policy of paying the Chairman of the Board of Directors and
directors who are not full-time employees of SPI a quarterly fee of $2,500 for
services to the Board, together with a fee of $1,500 for each meeting of the
Board of Directors they attend. In the event a director attends a Board meeting
telephonically, such director receives a fee of $750 rather than $1,500. In
addition, directors are paid a fee of $1,500 for each committee meeting of the
Board of Directors they attend ($750 if the committee meeting is held in
conjunction with a Board meeting). In 1995, Mr. Norrie received an aggregate of
$68,448 in fees for his services as Chairman of the Board and for health
benefits as an employee of the Company. In the fiscal year ended December 31,
1995, the total compensation paid to non-employee directors (excluding the
$68,488 in fees paid to Mr. Norrie) was $78,500. All of the non-employee
directors are reimbursed for their travel expenses for each Board and committee
meeting attended.
Directors of SPI who are not full-time employees of SPI ("Non-Employee
Directors") are also eligible to receive stock options under the 1994 Directors
Stock Option Plan (the "Directors Plan"). Pursuant to the Directors Plan,
automatic stock option grants were made to seven directors of the Company on May
16, 1994. The options granted were for 5,000 shares of common stock for each
Non-Employee Director at the then current market value of $8.50 per share. Each
person who is, after May 16, 1994, elected for the first time to be a
Non-Employee Director shall, upon the date of their initial election, be granted
options to purchase 5,000 shares of common stock. Twenty percent (20%) of the
options vest immediately and 20% vest on each one-year anniversary of the grant
date thereafter, provided that the person is still serving as a director of SPI.
No options were granted in 1995. On May 9, 1996, the Directors Plan was amended.
Pursuant to such amendment, each Non-Employee Director was granted additional
options (the "New Options") to purchase 10,000 shares of common stock at the
then fair market price of $14.12. Fifty percent (50%) of the New Options vest
and become exercisable when the fair market value of the common stock reaches a
closing price of at least $18.00 per share for 20 consecutive trading days or is
valued in a merger at such price. Twenty-five percent (25%) of the New Options
vest and become exercisable when the fair market value of the common stock
reaches a closing price of at least at $22.00 per share for 20 consecutive
trading days or is valued in a merger at such price. The remaining 25% of the
New Options vest and become exercisable when the fair market value of the common
stock reaches a closing price of at least $26.00 per share for 20 consecutive
trading days or is valued in a merger at such price. In the event that a holder
of a New Option ceases to be a director, the New Options shall expire one year
after the date of termination of service, except in the case of death, where New
Options shall expire 18 months after the date of death. All options granted
under the Directors Plan are exercisable for a period of 10 years from the grant
date. As of September 30, 1996, no options under the Directors Plan had been
exercised.
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<PAGE>
SUMMARY OF COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1993,
1994, and 1995, compensation awarded or paid to, or earned by SPI's Chief
Executive Officer and its other executive officers who earned over $100,000 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
-------------------- ------------- ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) # ($)(3)
- ----------------------------------------------------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alex Kwader,......................................... 1995 270,008 149,314 12,000(2) 9,603
President and Chief Executive Officer 1994 243,756 126,454 9,500(2) 7,934
1993 216,251 37,249 0 10,466
Bruce P. Moore,...................................... 1995 135,012 74,660 6,000(2) 7,498
Vice President and Chief Financial Officer 1994 119,679 63,227 4,500(2) 6,117
1993 102,009 17,168 0 6,148
Stephen A. Steidle,(4)............................... 1995 107,132 59,605 3,500(2) 6,984
Vice President and General Sales Manager 1994 100,737 51,270 3,000(2) 5,142
</TABLE>
- ------------------------
(1) Includes amounts earned but deferred at the election of the executive
officer. As permitted by rules promulgated by the Commission, no amounts are
shown with respect to certain "perquisites" where such amounts do not exceed
the larger of 10% of the sum of the amount in the salary and bonus columns,
or $50,000.
(2) The awards consist of stock options granted under the 1994 Stock Option
Plan. The options vest in installments of 20% upon the one-year anniversary
of the grant date and 1.66% at the end of each month thereafter, unless
accelerated by the Compensation Committee of the Board of Directors.
(3) Consists of SPI's matching and discretionary payments under its Savings and
Supplemental Retirement Plan ("401(k) Plan"). The matching payments under
its 401(k) Plan to Messrs. Kwader, Moore, and Steidle in 1995 were $4,500
each. Discretionary SPI payments under the 401(k) Plan to Messrs. Kwader,
Moore and Steidle in 1995 were $5,103, $2,998, and $2,484, respectively.
(4) In February 1994, Mr. Steidle was elected as Vice President and General
Sales Manager. His annual salary and bonus in 1994 is reported in the table.
BONUS PLAN, STOCK OPTION PLAN AND OTHER BENEFIT PLANS AND ARRANGEMENTS
BONUS COMPENSATION. To provide incentive to the executive officers to
achieve certain performance goals, the Committee administers a bonus program. In
1994, the Compensation Committee of the Board of Directors (the "Committee")
adopted the Executive Bonus Plan, which provides for bonus payments of a
percentage of base salary based upon achievement by SPI of certain levels of
earnings per share. The Executive Bonus Plan utilizes a sliding scale so that
the percentage of base salary paid as bonus compensation increases as the
earnings per share of SPI increase. The Executive Bonus Plan is designed to
directly align the interests of the executive officers and the stockholders.
Although the Executive Bonus Plan is subject to annual review by the Committee,
the Committee expects it to remain in place for a five-year term.
STOCK OPTIONS. The Committee uses stock option grants to executive officers
and other key employees to provide such individuals with incentives to remain in
the employ of SPI and to work to maximize the
65
<PAGE>
value of SPI's stock. Stock option grants are viewed by the Committee as
long-term compensation intended to directly align the executive's interest with
the interests of the stockholders. Since stock options are also used by other
competitors, the Committee believes that the granting of stock options is
necessary to make the Company's compensation package competitive. The Committee
grants options with vesting over a five (5) year period to encourage executives
to remain in the employ of the Company.
In February 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan"), which was approved at the annual meeting of the stockholders.
Under the 1994 Plan, an aggregate of 200,000 shares is reserved for issuance to
key employees and executive officers of SPI. The amount of shares reserved under
the 1994 Plan (together with shares granted under the 1992 Plan) was established
based on a review by the Committee of industry averages with respect to the
percentage of outstanding shares reserved for stock option plans for executive
officers and other persons.
On August 17, 1995, the Committee granted options to purchase an aggregate
of 44,100 shares to executive officers and key managers. The options vest in
installments of 20% after the first year and 1.66% monthly thereafter. The
Committee's decision to grant options for 44,100 shares was based on a review of
levels of executive stock ownership in the paper industry and in consideration
of the need to minimize dilution of the stockholder's interest. The vesting
schedule was intended to provide individuals with incentive to remain in the
employ of SPI. The Committee's distribution of the options was based on the
relative level of responsibility and salary of the executive officer or key
manager, as well as such individual's previous stock ownership in SPI. SPI
expects to periodically grant options to purchase the remaining shares reserved
under the 1994 Plan, based on its evaluation of the factors discussed above.
OTHER BENEFIT PROGRAMS. The executive officers also participate in other
employee benefit programs including health insurance, group life insurance, and
a savings and supplemental retirement plan (the "401(k) Plan") on the same basis
as other employees of SPI.
STOCK OPTION GRANTS IN THE LAST FISCAL YEAR
During 1995, the Board of Directors granted incentive stock options under
the 1994 Plan. SPI has reserved 200,000 shares of its Common Stock for issuance
upon exercise of options granted to selected executive officers and key
employees of the company under the 1994 Plan. As of September 30, 1996, options
to purchase 120,850 shares had been issued, and a balance of 79,150 shares
remained to be granted under the 1994 Plan. The 1994 Plan is administered by the
Committee. The Committee has the authority to determine to whom options shall be
granted, the number of shares subject to each option, whether the options will
be incentive or nonstatutory, when the options may be exercised, and the
exercise price. The 1994 Plan expires on February 27, 2004. The following table
contains information concerning the stock options granted to the Named Executive
Officers under the 1994 Plan during the last fiscal year.
66
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL VALUE AT ASSUMED
GRANTS ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM (4)
UNDERLYING EMPLOYEES IN EXERCISE ----------------------
OPTIONS GRANTED FISCAL PRICE EXPIRATION POTENTIAL REALIZABLE
(#)(1) YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($)
--------------- ------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alex Kwader................................... 12,000 27.21 11.75 8/17/05 229,680 365,760
Bruce P. Moore................................ 6,000 13.60 11.75 8/17/05 114,840 182,880
Stephen A. Steidle............................ 3,500 7.90 11.75 8/17/05 66,990 106,680
</TABLE>
- ------------------------
(1) Options vest in installments of 20% upon the one-year anniversary of the
grant date and 1.66% at the end of each month thereafter, unless accelerated
by the Committee. In the event of a merger or change of control, as defined
in the 1994 Plan, if the surviving company shall refuse to assume the
options or substitute similar options for those outstanding options under
the 1994 Plan, the options shall become immediately exercisable and shall
terminate if not exercised prior to such event. Options expire 90 days after
an optionee's employment with SPI is terminated for any reason, unless the
termination is by reason of the optionee's death, disability, or retirement.
The options expire 10 years from the grant date. As of December 31, 1995,
none of the options granted to the Named Executive Officers in the last
fiscal year had vested.
(2) Of the SPI's employees, 14 were granted incentive options under the 1994
Plan. During the 1995 fiscal year, a total of 44,100 shares were granted to
executive officers and key employees.
(3) Represents the closing market price of the SPI's Common Stock on the day
immediately preceding the grant date.
(4) The potential realizable value is based on the term of the option at its
time of grant (10 years). It is calculated by assuming that the stock price
on the date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option, and that the option is exercised
and sold on the last day of its term for the appreciated stock price. No
gain to the optionee is possible unless the stock price increased over the
option term, which will benefit all stockholders. For example, a stockholder
who purchased one share of stock on December 31, 1995, at $11.75, and held
the stock for 10 years and sold it on December 31, 2005, while the stock
appreciated at 5% and 10% would have profits of $7.39 and $18.73,
respectively, on his $11.75 investment.
AGGREGATED STOCK OPTIONS
The following table shows, as of December 31, 1995, information regarding
unexercised stock options held by the Named Executive Officers. No stock options
were exercised by the Named Executive Officers during the year.
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<PAGE>
AGGREGATE OPTIONS IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
1995(1) DECEMBER 31, 1995(1)(2)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
Alex Kwader............................................... 47,704 30,061 $ 311,990 $ 106,306
Bruce P. Moore............................................ 23,871 14,852 166,675 52,664
Stephen Steidle........................................... 16,918 9,669 118,751 36,801
</TABLE>
- ------------------------
(1) The table includes options granted under the 1992 Amended and Restated
Stock Option Plan and the 1994 Stock Option Plan as of December 31, 1995,
and valued at the closing market price of the stock on December 29, 1995.
(2) Value in this table is the aggregate amount by which the market price per
share of $12.25 at December 29, 1995, exceeded the following exercise prices
of $5.00, $9.50, and $11.75.
SEVERANCE AGREEMENTS
The Board has approved severance agreements with certain executive officers,
pursuant to which such persons will receive their base salary for a specified
period in the event of termination by the Company without cause. Pursuant to
such arrangements and based on current annual salaries, Messrs. Kwader and Moore
would be entitled to severance payments of approximately $201,923 and $86,538,
respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Committee consists of Messrs. Miller, Norrie and McCown.
Mr. Norrie served as Chief Executive Officer of SPI from June 1989 to November
1990. Mr. Norrie, in his role as Chairman of the Board of Directors, is
compensated as an employee of the Company. In 1995, Mr. Norrie received an
aggregate of $68,448 for his services as Chairman of the Board and for health
benefits as an employee of SPI. Mr. McCown is a general partner of MDC
Management Company. MDC Management Company, the general partner of McCown De
Leeuw & Co., provides management, consulting, and financial services to SPI for
an annual fee. Services rendered by MDC Management Company, include, but are not
necessarily limited to, advice and assistance concerning the operation,
planning, and financing of SPI, including assistance in identifying and
implementing acquisitions. The management fee is paid pursuant to an agreement.
Such fee was $250,000 in 1995. Under the terms of the agreement, the principals
of MDC Management Company (including Mr. McCown) are not obligated to devote
more than 25% of their time in any given month to the affairs of SPI.
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<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of SPI's Common Stock as of February 1, 1997, by: (i) each director; (ii) each
of the executive officers named in the Summary Compensation Table employed by
SPI in that capacity on September 30, 1996; (iii) all executive officers and
directors of SPI as a group; and (iv) all those known by SPI to be beneficial
owners of more than 5% of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
--------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(2)
- --------------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Kirkpatrick, Pettis, Smith, Polian, Inc.(3)............................................ 636,225 15.8
10250 Regency Circle
Omaha, NE 68114
Heartland Advisors, Inc.(3)............................................................ 411,800 10.2
790 North Milwaukee Street
Milwaukee, WI 53202
Dalton, Greiner, Hartman Maher & Co.(3)................................................ 304,100 7.5
630 Fifth Avenue, Ste. 3425
New York, NY 10111
McCown De Leeuw & Co.(4)............................................................... 206,152 5.1%
3000 Sand Hill Road, Bldg. 3, Ste. 290
Menlo Park, CA 94025
Alex Kwader, President, CEO and Director(5)............................................ 67,655 2.4
K. Peter Norrie, Chairman of the Board of Directors(6)................................. 31,358 *
George E. McCown, Director(7........................................................... 270,197 6.7
Brian C. Kerester, Director(8)......................................................... 17,960 *
Glenn S. McKenzie, Director(9)......................................................... 18,000 *
Jon H. Miller, Director(10)............................................................ 15,000 *
Wayne T. Stephens, Director(11)........................................................ 18,000 *
Fred P. Thompson, Jr., Director(12).................................................... 15,500 *
John D. Weil, Director(13)............................................................. 16,000 *
Bruce P. Moore, Vice President and CFO(14)............................................. 114,287 3.2
Stephen A. Steidle, Vice President and General Sales Manager(15)....................... 51,190 1.3
All executive officers and directors as a group (11 persons)........................... 635,147 13.6
</TABLE>
- ------------------------
* Represents holdings of less than 1%.
(1) This table is based upon information supplied by executive officers,
directors, and principal stockholders and Schedules 13D and 13G, if any,
filed with the Commission. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, each of
the stockholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned.
(2) Applicable percentages of ownership are based on 4,039,092 outstanding
shares of the Company's Common Stock on February 1, 1997, as adjusted as
required by rules promulgated by the Commission.
(3) Assumes the number of shares owned as of December 1, 1996.
(4) Includes 180,360 shares held by McCown De Leetuw & Co and 25,792 shares
held by MDC/JAFCO Ventures, an investment partnership affiliated with McCown
DeLeeuw & Co.
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<PAGE>
(5) Mr. Kwader owns 4,146 shares as of February 1, 1997. He has vested options
for 56,265 shares under the 1992 Stock Option Plan and options for 62,500
shares under the 1994 Stock Option Plan, of which 7,224 shares are vested.
(6) Mr. Norrie owns 16,358 shares as of February 1, 1997. Mr. Norrie has 5,000
shares granted under the 1994 Directors Stock Option Plan (options vest at a
rate of 1,000 shares per year), of which 3,000 are vested, and an option for
10,000 shares granted under the 1996 Amendment to the 1994 Director Stock
Option Plan (options vest over ten (10) years with accelerated vesting if
stock reaches a certain market price over a period of time), of which 7,500
are vested.
(7) Mr. McCown owns 49,045 shares directly as of February 1, 1997. Includes
180,360 shares held by McCown DeLeeuw & Co. and 25,792 shares held by
MDC/JAFCO Ventures, an investment partnership affiliated with McCown De
Leeuw & Co. Mr. McCown, a director of SPL may be deemed to own beneficially
all of the shares held by McCown De Leeuw & Co. and MDC/JAFCO Ventures
because of his position as General Partner of MDC Management Company, the
general partner of McCown De Leeuw & Co. and MDC/JAFCO Ventures. Mr. McCown
has 5,000 shares granted under the 1994 Directors Stock Option Plan (options
vest at rate of 1,00 shares per year), of which 3,000 are vested, and
includes vesting of an option for 10,000 shares granted under the 1994
Directors Stock Option Plan (options vest at a rate of 1,000 shares per
year) under the 1996 Amendment to the 1994 Director Stock Option Plan
(options vest over ten (10) years with accelerated vesting if stock reaches
a certain market price over a period of time), of which 7,500 are vested.
(8) Mr. Kerester holds sole investment and voting power over 1,000 shares and
shares investment and voting power over 1,960 shares. Mr. Kerester currently
has 5,000 shares granted under the 1994 Directors Stock Option Plan (options
vest at a rate of 1,000 shares per year), of which 1,000 are vested, and
vesting of an option for 10,000 shares granted under the 1996 Amendment to
the 1994 Director Stock Option Plan (options vest over ten (10) years with
accelerated vesting if stock reaches a certain market price over a period of
time), of which 7,500 are vested.
(9) Mr. McKenzie owns 3,000 shares as of February 1, 1997. Mr. McKenzie
currently has 5,000 shares granted under the 1994 Directors Stock Option
Plan (options vest at a rate of 1,000 per year), of which 3,000 are vested,
and an option for 10,000 shares granted under the 1996 Amendment to the 1994
Director Stock Option Plan (options vest over ten (10) years with
accelerated vesting if stock reaches a certain market price over a period of
time), of which 7,500 are vested.
(10) Mr. Miller currently has an option for 5,000 shares under the 1994
Directors Stock Option Plan (options vest at a rate of 1,000 shares per
year), of which 3,000 are vested, and an option for 10,000 shares granted
under the 1996 Amendment to the 1994 Director Stock Option Plan (options
vest over ten (10) years with accelerated vesting if stock reaches a certain
market price over a period of time), of which 7,500 are vested.
(11) Mr. Stephens owns 3,000 shares as of February 1, 1997. Mr. Stephens
currently has 5,000 shares granted under the 1994 Directors Stock Option
Plan (options vest at a rate of 1,000 shares per year), of which 3,000 are
vested, and an option for 10,000 shares granted under the 1996 Amendment to
the 1994 Director Stock Option Plan (options vest over ten (10) years with
accelerated vesting if stock reaches a certain market price over a period of
time), of which 7,500 are vested.
(12) Mr. Thompson owns 500 shares as of February 1, 1997. Mr. Thompson
currently has 5,000 shares granted under the 1994 Directors Stock Option
Plan (options vest at a rate of 1,000 shares per year), of which 2,000 are
vested, and an option for 10,000 shares granted under the 1996 Amendment to
the 1994 Director Stock Option Plan (options vest over ten (10) years with
accelerated vesting if stock reaches a certain market price over a period of
time), of which 7,500 are vested.
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<PAGE>
(13) Mr. Weil owns 1,000 shares as of February 1, 1997. Mr. Weil currently has
5,000 shares granted under the 1994 Directors Stock Option Plan (options
vest at a rate of 1,000 shares per year), of which 1,000 are vested, and an
option for 10,000 shares granted under the 1996 Amendment to the 1994
Director Stock Option Plan (options vest over ten (10) years with
accelerated vesting if stock reaches a certain market price over a period of
time), of which 7,500 are vested.
(14) Mr. Moore owns 82,539 shares as of February 1, 1997. Mr. Moore has options
for 28,133 shares vested as of 2/1/97 under the 1992 Stock Option Plan and
28,500 shares granted as options under the 1994 Stock Option Plan of which
3,487 have vested.
(15) Mr. Seidle has options for 20,095 shares vested as of February 1, 1997
under the 1992 Stock Option Plan and options for 14,000 shares granted under
the 1994 Stock Option Plan of which 2,523 are vested.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the CPG Acquisition, certain members of CPG's management
received payments for equity interests in CPG. Such payments were in the
aggregate approximately $21 million, less an allocable portion of the
outstanding indebtedness of CPG at closing, plus or minus an amount equal to
certain post-closing adjustments. A portion of such payments were placed into an
escrow account. See "The Acquisitions."
In connection with the Arcon Acquisition, certain members of Arcon's
management received payments for their respective equity interests in Arcon.
Such payments were in the aggregate approximately $2.5 million, less an
allocable portion of the outstanding indebtedness of Arcon at closing. A portion
of such payments was placed into an escrow account. See "The Acquisitions."
ADVISORY SERVICES
SPI paid a fee of $250,000, $250,000 and $264,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, to an affiliate, MDC Management
Company ("MDC") for certain consulting, financial and managerial services. The
payment of fees related to these services was approved by the members of the
Board of Directors of SPI who do not have a direct financial interest in MDC.
SPI believes that the fees received for the professional services rendered are
at least as favorable to SPI as those which could be negotiated with a third
party. In addition to the annual fee paid to MDC, SPI will pay a fee to MDC or
certain of its affiliates in connection with advisory services rendered and
expenses incurred by MDC and certain of its affiliates in connection with the
Transactions.
CERTAIN CUSTOMERS
Four of the Company's customers are owned by persons who are stockholders of
CPG and, in one case, a director of CPG. Net sales to these customers aggregated
$0.9 million, $5.0 million and $4.9 million in 1993, 1994 and 1995,
respectively. Accounts receivable from these customers aggregated $0.7 million
at December 31, 1994 and $0.6 million at December 31, 1995.
CERTAIN OTHER MATTERS
SPI has engaged Compensation Resource Group, Inc. ("CRG"), a management
compensation advisory concern to review SPI's compensation practices. Mr. Peter
Norrie, the Chairman of the Board of Directors of SPI, serves as a member of the
Advisory Board of CRG. To date, Mr. Norrie has received no compensation as a
result of this relationship, however, it is anticipated that Mr. Norrie will
receive an as of yet undetermined referral fee from CRG in accordance with CRG's
standard practice of paying such fees to Advisory Board members who successfully
refer clients to CRG.
DESCRIPTION OF FINANCING ARRANGEMENTS
THE CREDIT FACILITY
SPI has entered into a second amended and restated Financing Agreement and
Guaranty dated as of December 31, 1996 (the "Credit Facility") with The CIT
Group/Business Credit Corp. (the "Lender"). Pursuant to the terms of the Credit
Facility, the Lender agreed to provide SPI with revolving credit loans, subject
to the terms and conditions of the Credit Facility.
The Credit Facility provides for a revolving credit facility which will
enable SPI to obtain revolving credit loans from time to time for general
corporate purposes in an aggregate amount not to exceed the lesser of (x) $20.0
million or (y) an amount equal to the sum of (a) 85% of eligible accounts
receivable plus
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<PAGE>
(b) 50% of the aggregate value of eligible inventory. The revolving credit loans
bear interest at a rate based on the Lender's prime rate or LIBOR. As of January
31, 1997, there were no amounts outstanding under the Credit Facility. During
the term of the Credit Facility, SPI has agreed to pay the Lender an annual fee
based upon the amount of the average unused revolving loan commitments and an
annual collateral management fee.
The Lender will be able to terminate the Credit Facility in April of the
year 2000 or any anniversary of the closing date subsequent to April of the year
2000 by giving SPI at least 60 days notice of termination or sooner upon the
occurrence of an Event of Default (as defined).
The Credit Facility will rank PARI PASSU with the Notes and will be secured
by liens on substantially all of the Company's accounts receivable, inventory,
instruments, documents, general intangibles, contract rights and chattel paper
and certain of SPI's equipment and real estate. In addition, SPI's obligations
under the Credit Facility will be guaranteed by SPI's domestic subsidiaries. The
guarantees will be secured by a lien on substantially all of the domestic
subsidiaries' accounts receivable, inventory, instruments, documents, general
intangibles, contract rights and chattel paper.
The Credit Facility will contain various restrictive covenants and events of
default customary for a transaction of its type.
SALE/LEASEBACK TRANSACTION
On April 29, 1994, SPI sold to and leased from The CIT Group/Equipment
Financing, Inc. ("Lessor") substantially all of the equipment at its Brattleboro
mill. Pursuant to the Sale/Leaseback Agreement, SPI is obligated to make
quarterly rental payments equal to approximately $1.2 million through April,
1999 and approximately $1.0 million thereafter through April, 2004. The
Sale/Leaseback Agreement contains various restrictive covenants and events of
default (including, but not limited to, an event of default under the Credit
Facility) customary for transactions of this type.
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<PAGE>
DESCRIPTION OF THE NOTES
The New Notes will be issued, and the Old Notes were issued under an
Indenture dated as of October 15, 1996 (the "Indenture") among the Company, the
Guarantors and Wilmington Trust Company, as trustee (the "Trustee"). For
purposes of the following summary, the Old Notes and the New Notes shall be
collectively referred to as the "Notes." The terms and conditions of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 as in effect on the date of the
Indenture. The following statements are summaries of the provisions of the Notes
and the Indenture and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions." A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Notes will be senior obligations of the Company, ranking PARI PASSU in
right of payment with all other senior obligations of the Company. Each
Guarantee will be a senior obligation of the applicable Guarantor ranking PARI
PASSU in right of payment with all senior obligations of such Guarantor.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any paying agent and registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered addresses of the Holders. Any Old Notes that remain
outstanding after the completion of the Exchange Offer, together with the New
Notes issued in connection with the Exchange Offer, will be treated as a single
class of securities under the Indenture. See "The Exchange Offer" and "Old Notes
Registration Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100,000,000 and will
mature on October 15, 2006. Interest on the Notes will accrue at the rate of
9 3/8% per annum and will be payable semiannually in cash on each April 15 and
October 15, commencing on April 15, 1997, to the persons who are registered
Holders at the close of business on the April 1, and October 1, immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after October 15,
2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on October 15, of the year
set forth below, plus, in each case, accrued and unpaid interest thereon, if
any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. 104.688%
2002............................................................................. 103.125%
2003............................................................................. 101.562%
2004 and thereafter.............................................................. 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to October 15, 1999, the Company may, at its option, use
the net cash proceeds of one or more Public Equity
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Offerings (as defined below) to redeem the Notes at a redemption price equal to
109.375% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; PROVIDED that at least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption. In order to effect the foregoing redemption with the
proceeds of any Public Equity Offering, the Company shall make such redemption
not more than 120 days after the consummation of any such Public Equity
Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior basis, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount PRO RATA, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "--Certain Covenants--Merger, Consolidation and Sale
of Assets." In the event all of the Capital Stock (or all or substantially all
of the assets) of a Guarantor is sold by the Company and the sale complies with
the provisions set forth in "--Certain Covenants--Limitation on Asset Sales,"
the Guarantor's Guarantee will be released.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
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CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness
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(including, without limitation, Acquired Indebtedness) and any Restricted
Subsidiary may incur Acquired Indebtedness, in each case if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.00
to 1.00.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, or (c) make any Investment (other
than Permitted Investments) (each of the foregoing actions set forth in clauses
(a), (b) and (c) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (i) a
Default or an Event of Default shall have occurred and be continuing or (ii) the
Company is not able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the covenant described under
"--Limitation on Incurrence of Additional Indebtedness" or (iii) the aggregate
amount of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall
exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date") (treating such period as a
single accounting period); plus (x) 100% of the aggregate net cash proceeds
received by the Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus (y) without
duplication of any amounts included in clause (iii)(x) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock (excluding, in the case of clauses
(iii)(x) and (y), any net cash proceeds from a Public Equity Offering to the
extent used to redeem the Notes); plus (z) an amount equal to the consolidated
net Investments on the date of Revocation made by the Company or any of the
Restricted Subsidiaries in any Subsidiary of the Company that has been
designated an Unrestricted Subsidiary after the Issue Date upon its
redesignation as a Restricted Subsidiary in accordance with the covenant
described under "--Limitation on Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
if the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any Indebtedness of the Company or a Guarantor that is subordinate or junior in
right of payment to the Notes or such Guarantor's Guarantee, as the case may be,
either (i) solely in exchange for shares of Qualified Capital Stock of the
Company, or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of (A)
shares of Qualified Capital Stock of the Company or (B) Refinancing
Indebtedness; and (4) so long as no Default or Event of Default shall have
occurred and be continuing, repurchases by the Company of Common Stock of the
Company or options to purchase Common Stock of the Company, stock appreciation
rights or any similar equity interest in the Company from directors and
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an aggregate amount not to exceed $750,000 in any calendar year
and (5) if no Default or Event of Default shall have occurred and be continuing,
the making of other Restricted Payments not to exceed $3.0 million in the
aggregate. In determining the aggregate amount of Restricted Payments made
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subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, amounts expended pursuant to clauses (1), (2), (4) and (5)
shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either (A) to prepay any Indebtedness ranking at least PARI PASSU with the Notes
and, in the case of any such Indebtedness under any revolving credit facility,
effect a permanent reduction in the availability under such revolving credit
facility, (B) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in properties
and assets that will be used in the business of the Company and the Restricted
Subsidiaries as existing on the Issue Date or in businesses reasonably related
thereto ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
366th day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a PRO RATA basis, that amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5,000,000 resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5,000,000, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset
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Sale is for fair market value; PROVIDED that any consideration not constituting
Replacement Assets received by the Company or any of the Restricted Subsidiaries
in connection with any Asset Sale permitted to be consummated under this
paragraph shall constitute Net Cash Proceeds subject to the provisions of the
two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or the properties or assets of the Person so acquired (including, but
not limited to, such Person's direct and indirect Subsidiaries); (5) agreements
existing on the Issue Date to the extent and in the manner such agreements are
in effect on the Issue Date; or (6) an agreement governing Indebtedness incurred
to Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; PROVIDED, HOWEVER, that
the provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of the Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes are equally and ratably secured,
except for (a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date; (b) Liens securing
Indebtedness under the Credit Agreement; (c) Liens securing the Notes and the
Guarantees; (d) Liens of the Company
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or a Guarantor on assets of any Restricted Subsidiary of the Company; (e) Liens
securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
PROVIDED, HOWEVER, that such Liens (A) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (B) do not extend to
or cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (f) Permitted
Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness"; (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of the Indenture described
under "--Limitation on Asset Sales") will not, and the Company will
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not cause or permit any Guarantor to, consolidate with or merge with or into any
Person other than the Company or any other Guarantor unless: (i) the entity
formed by or surviving any such consolidation or merger (if other than the
Guarantor) or to which such sale, lease, conveyance or other disposition shall
have been made is a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia; (ii) such entity
assumes by supplemental indenture all of the obligations of the Guarantor on the
Guarantee; (iii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; and (iv) immediately
after giving effect to such transaction and the use of any net proceeds
therefrom on a PRO FORMA basis, the Company could satisfy the provisions of
clause (ii) of the first paragraph of this covenant. Any merger or consolidation
of a Guarantor with and into the Company (with the Company being the surviving
entity) or another Guarantor need only comply with clause (iv) of the first
paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1,000,000 shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $5,000,000, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain an opinion stating that such
transaction or series of related transactions are fair to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors; (ii)
transactions exclusively between or among the Company and any of the Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
Restricted Payments permitted by the Indenture; and (iv) advisory fees to MDC
Entities not to exceed $500,000 in any fiscal year.
ADDITIONAL GUARANTEES. If the Company or any of the Restricted Subsidiaries
transfers or causes to be transferred, in one transaction or a series of related
transactions, any property to any domestic Restricted Subsidiary that is not a
Guarantor, or if the Company or any of the Restricted Subsidiaries shall
organize, acquire or otherwise invest in or hold an investment in another
domestic Restricted Subsidiary having total consolidated assets with a book
value in excess of $1,000,000, then such transferee or acquired or other
Restricted Subsidiary shall (i) execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Restricted Subsidiary shall unconditionally guarantee all of the
Company's obligations under the Notes and the Indenture on the terms set forth
in the Indenture and (ii) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary
shall be a Guarantor for all purposes of the Indenture.
REPORTS TO HOLDERS. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents
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and other reports, if any, which the Company is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture
further provides that, notwithstanding that the Company may not be subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will file with the Commission, to the extent permitted, and provide the
Trustee and Holders with such annual reports and such information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act. The
Company will also comply with the other provisions of TIA Section 314(a).
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of (i)
fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
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(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the covenant described
under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which
will constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness if the
aggregate principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay
principal at final maturity or which has been accelerated, aggregates
$5,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
shall have been rendered against the Company or any of the Restricted
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect or any Guarantee of a Significant Subsidiary is declared to
be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any of the Guarantors which is a
Significant Subsidiary denies its liability under its Guarantee (other than
by reason of release of a Guarantor in accordance with the terms of the
Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of
and accrued interest on all the Notes to be due and payable by notice in writing
to the Company and the Trustee specifying the respective Event of Default, and
the same shall become immediately due and payable. If an Event of Default
specified in clause (vi) above occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid interest on all of the
outstanding Notes shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
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Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the
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Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee
an officers' certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding any
other creditors of the Company or others; (vii) the Company shall have delivered
to the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) amend, change or modify in
any material respect the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto;
(vii) modify or change any provision of the Indenture or the related definitions
affecting the subordination or ranking of the Notes or any Guarantee in a manner
which adversely affects the Holders; or (viii) release any Guarantor from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
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GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Guarantor, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee will be permitted to engage in other
transactions; PROVIDED that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"AFFILIATE TRANSACTION" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"ASSET ACQUISITION" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction or any
disposition of assets of the Company or CPG or any of their respective
Subsidiaries made to obtain
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termination of the waiting period related to the Acquisition (whether
consummated before or after the consummation of such Acquisition) of CPG by the
Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended) to any Person other than the Company or a Restricted Subsidiary of (a)
any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets of the Company or any Restricted Subsidiary other than in the ordinary
course of business; PROVIDED, HOWEVER, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or the
Restricted Subsidiaries receive aggregate consideration of less than $1,000,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "--Certain
Covenants--Merger, Consolidation and Sale of Assets," (iii) disposals or
replacements of obsolete equipment in the ordinary course of business and (iv)
the sale, lease, conveyance, disposition or other transfer by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not
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otherwise in compliance with the provisions of the Indenture); (iii) any Person
or Group shall become the owner, directly or indirectly, beneficially or of
record, of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Capital Stock of the Company; or
(iv) the replacement of a majority of the Board of Directors of the Company over
a two-year period from the directors who constituted the Board of Directors of
the Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of the
Company then still in office who either were members of such Board of Directors
at the beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "--Change
of Control."
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"COMPANY" means Specialty Paperboard, Inc.
"CONSOLIDATED EBITDA" means, for any period, the sum (without duplication)
of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income
has been reduced thereby, (A) all income taxes of the Company and the Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges LESS any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means the ratio of Consolidated
EBITDA during the four full fiscal quarters (the "Four Quarter Period") ending
on or prior to the date of the transaction giving rise to the need to calculate
the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges for the Four Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a PRO FORMA (including any PRO FORMA expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) basis for the period of such calculation to (i) the incurrence
or repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of the Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the
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Company or any of the Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any such
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses, (c)
the net income (or loss) of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or is
merged or consolidated with the Company or any Restricted Subsidiary, (d) the
net income (but not loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than a Restricted Subsidiary, except to the
extent of cash dividends or distributions paid to the Company or to a Restricted
Subsidiary by such Person, (f) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued) and (g)
in the case of a successor to the Company by consolidation or merger or as a
transferee of the Company's assets, any net income of the successor corporation
prior to such consolidation, merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person; PROVIDED that the Consolidated Net Worth of any
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Person shall exclude the effect of any non-cash charges relating to the
acceleration of stock options or similar securities of such Person or another
Person with which such Person is merged or consolidated.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charges constituting an extraordinary item or loss
or any such charge which requires an accrual of or a reserve for cash charges
for any future period).
"COVENANT DEFEASANCE" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"CREDIT AGREEMENT" means the Amended and Restated Financing Agreement and
Guaranty dated as of June 30, 1994, between the Company, the lenders party
thereto in their capacities as lenders thereunder and The CIT Group/Business
Credit, Inc., as agent, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is permitted by the
covenant described under "--Certain Covenants-- Limitation on Incurrence of
Additional Indebtedness") or adding Subsidiaries as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
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by such other entity as may be approved by a significant segment of the
accounting profession of the United States, which are in effect as of the Issue
Date.
"GUARANTOR" means (i) each of the Company's domestic Subsidiaries as of the
Issue Date and (ii) each of the Company's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the Indenture as a Guarantor; PROVIDED that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms of the Indenture.
"INCUR" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 160 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the Company.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INITIAL PURCHASER" means BT Securities Corporation.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other
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securities or evidences of Indebtedness issued by, any Person. "Investment"
shall exclude extensions of trade credit by the Company and the Restricted
Subsidiaries on commercially reasonable terms in accordance with normal trade
practices of the Company or such Restricted Subsidiary, as the case may be. If
the Company or any Restricted Subsidiary sells or otherwise disposes of any
Common Stock of any direct or indirect Restricted Subsidiary such that, after
giving effect to any such sale or disposition, it ceases to be a Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MDC ENTITIES" means, collectively, McCown De Leeuw & Co., MDC Management
Company and MDC/JAFCO Ventures and any of their respective Affiliates.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of the Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes, the Indenture and the Guarantees;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the greater
of (x) $20.0 million and (y) the sum of (A) 85% of the net book value of the
accounts receivable of the Company and the Restricted Subsidiaries and (B)
50% of the net book value of the inventory of the Company and the Restricted
Subsidiaries, less any required permanent repayments under all revolving
credit facilities (which are accompanied by a corresponding permanent
commitment reduction) thereunder;
(iii) other Indebtedness (including Capitalized Lease Obligations) of the
Company and the Restricted Subsidiaries outstanding on the Issue Date
reduced by the amount of any scheduled amortization payments or mandatory
prepayments when actually paid or permanent reductions thereon;
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(iv) Interest Swap Obligations of the Company or a Guarantor covering
Indebtedness of the Company or any of the Restricted Subsidiaries and
Interest Swap Obligations of any Restricted Subsidiary covering Indebtedness
of such Restricted Subsidiary; PROVIDED, HOWEVER, that such Interest Swap
Obligations are entered into to protect the Company and the Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred in
accordance with the Indenture to the extent the notional principal amount of
such Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and the Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; PROVIDED that if
as of any date any Person other than the Company or a Restricted Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; PROVIDED that (a) any Indebtedness of the Company to any
Restricted Subsidiary that is not a Guarantor is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other than a
Restricted Subsidiary owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) Indebtedness of the Company or any of the Restricted Subsidiaries
incurred to finance the acquisition by SPI of all of the outstanding Capital
Stock of Arcon Holdings Corp. not to exceed $33,000,000 at any one time
outstanding; PROVIDED that such Indebtedness shall not constitute Permitted
Indebtedness after the consummation of the Acquisitions; and
(xii) additional Indebtedness of the Company and the Guarantors in an
aggregate principal amount not to exceed $12,500,000 at any one time
outstanding (which Indebtedness may, but need not be, incurred under the
Credit Agreement).
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary, (ii) Investments in the Company by any
Restricted Subsidiary; PROVIDED that any Indebtedness evidencing such Investment
by any Restricted
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Subsidiary other than a Guarantor is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Notes and the
Indenture; (iii) investments in cash and Cash Equivalents; (iv) loans and
advances to employees and officers of the Company and the Restricted
Subsidiaries in the ordinary course of business for bona fide business purposes
not in excess of $1,500,000 at any one time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the
Company's or a Restricted Subsidiary's businesses and otherwise in compliance
with the Indenture; (vi) Investments in Unrestricted Subsidiaries not to exceed
$2,000,000 at any one time outstanding; (vii) Investments in securities of trade
creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (viii) Investments made by the Company or the Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made in
compliance with the covenant described under "--Certain Covenants--Limitation on
Asset Sales"; and (ix) the Acquisitions.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of the Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary acquired after the Issue Date; PROVIDED,
HOWEVER, that (A) the related purchase money Indebtedness shall not exceed
the cost of such property or assets and shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets so acquired and (B) the Lien securing such Indebtedness
shall be created within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
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(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements; and
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness"; PROVIDED that (A) such Liens secured such
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were not
granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such
Liens do not extend to or cover any property or assets of the Company or of
any of the Restricted Subsidiaries other than the property or assets that
secured the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary and are no
more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary; and
(xiv) Liens securing Indebtedness permitted to be outstanding under
clause (xi) of the definition of Permitted Indebtedness contained in the
Indenture.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PUBLIC EQUITY OFFERING" has the meaning set forth under
"--Redemption--Optional Redemption Upon Public Equity Offerings."
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFERENCE DATE" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix) or (xi) of the definition of Permitted Indebtedness), in each case
that does not (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company or any Restricted Subsidiary in connection with such Refinancing)
or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is
less than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness being
Refinanced is Indebtedness of the Company or a Guarantor, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company and/or a Guarantor and
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(y) if such Indebtedness being Refinanced is subordinate or junior to the Notes,
then such Refinancing Indebtedness shall be subordinate to the Notes at least to
the same extent and in the same manner as the Indebtedness being Refinanced.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Guarantors and the Initial
Purchaser.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants-- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"REVOCATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(v)
of Regulation S-X under the Securities Act.
"SUBSIDIARY", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"SURVIVING ENTITY" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.
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OLD NOTES REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, SPI and the Guarantors have
agreed to file with the Commission the Exchange Offer Registration Statement on
an appropriate form under the Securities Act with respect to an offer to
exchange the Old Notes for the New Notes. Upon the effectiveness of the Exchange
Offer Registration Statement, SPI will offer to the holders of Old Notes who are
able to make certain representations the opportunity to exchange their Old Notes
for New Notes. If (a) SPI is not permitted to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (b) any holder
of Old Notes notifies SPI on or prior to the 30th day following the Issue Date
that (i) due to a change in applicable law or policy it is not entitled to
participate in the Exchange Offer, (ii) due to a change in applicable law or
policy 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 such holder or (iii) it owns Old Notes acquired directly from SPI or
an affiliate of SPI, SPI and the Guarantors will file with the Commission the
Shelf Registration Statement to cover resales of each Transfer Restricted Note
(as defined) by the holder thereof. SPI and the Guarantors will use their best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission. For purposes of the foregoing, a
"Transfer Restricted Note" means each Old Note until (a) the date on which such
Old Note has been exchanged by a person other than a broker-dealer for a New
Note in the Exchange Offer, (b) following the exchange by a broker-dealer in the
Exchange Offer of an Old Note for a New Note, the date on which such New Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (c) the date on which such Old Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (d) the day on which such Old Note is eligible for sale
to the public without volume or manner of sale restrictions under Rule 144(k)
under the Securities Act or (e) such Old Note ceases to be outstanding.
Under existing Commission interpretations, the New Notes would, in general,
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act will be delivered upon resale by such broker-dealer in
connection with resales of the New Notes. SPI and the Guarantors have agreed,
for a period of 180 days after consummation of the Exchange Offer, to make
available a prospectus meeting the requirements of the Securities Act to any
such broker-dealer for use in connection with any resale of any New Notes
acquired in the Exchange Offer. A broker-dealer which delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Old Notes who wishes to exchange such Old Notes for New Notes
in the Exchange Offer will be required to make certain representations,
including representations that (a) any New Notes to be received by it will be
acquired in the ordinary course of its business, (b) it has no arrangement with
any person to participate in the distribution of the New Notes and (c) it is not
an "affiliate," as defined in Rule 405 of the Securities Act, of SPI, or, if it
is an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
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The Registration Rights Agreement provides that: (a) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, SPI and the
Guarantors will file the Exchange Offer Registration Statement with the
Commission on or prior to the later of (i) the 60th day after the Issue Date and
(ii) 30 days after the Exchange Offer Filing Date, (b) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, SPI and the
Guarantors will use their best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to the later of (i)
the 150th day after the Issue Date and (ii) 90 days after the Exchange Offer
Filing Date, (c) unless the Exchange Offer would not be permitted by applicable
law or Commission policy, SPI will commence the Exchange Offer and use its best
efforts to issue, on or prior to 20 business days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission,
New Notes in exchange for all Old Notes tendered prior thereto in the Exchange
Offer and (d) if obligated to file the Shelf Registration Statement, SPI and the
Guarantors will file the Shelf Registration Statement prior to the later of (i)
60 days after the Issue Date and (ii) 60 days after such filing obligation
arises and use their best efforts to cause the Shelf Registration Statement to
be declared effective by the Commission on or prior to 90 days after the filing
thereof; PROVIDED that if SPI has not commenced the Exchange Offer within the
later of (i) 150 days of the Issue Date and (ii) 90 days after the Exchange
Offer Filing Date, SPI and the Guarantors will file the Shelf Registration with
the Commission on or prior to the later of (i) the 151st day after the Issue
Date and (ii) the 91st day after the Exchange Offer Filing Date. SPI and the
Guarantors shall use their best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended until the third
anniversary of the Issue Date or such shorter period that will terminate when
all the Transfer Restricted Notes covered by the Shelf Registration Statement
have been sold pursuant thereto.
If (a) SPI fails to file any of the registration statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such registration statements are not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) SPI fails to consummate the Exchange Offer
within 20 business days of the Effectiveness Target Date with respect to the
Exchange Offer Registration Statement or (d) the Shelf Registration Statement or
the Exchange Offer Registration Statement is declared effective but thereafter,
subject to certain exceptions, ceases to be effective or usable in connection
with the Exchange Offer or resales of Transfer Restricted Notes, as the case may
be, during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above, a "Registration Default"),
then the interest rate on Transfer Restricted Notes will increase ("Additional
Interest"), with respect to the first 90-day period immediately following the
occurrence of such Registration Default by 0.5% PER ANNUM and will increase by
an additional 0.5% PER ANNUM with respect to each subsequent 90-day period until
such Registration Default has been cured, up to a maximum amount of 1.0% PER
ANNUM. Following the cure of all Registration Defaults, the accrual of
Additional Interest will cease and the interest rate will revert to the original
rate.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the issuance of New Notes and the Exchange Offer is based upon
the provisions of the Internal Revenue Code of 1986, as amended, the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. The following
summary is based on an opinion of White & Case, special counsel to SPI, which is
not binding on the Internal Revenue Service ("IRS") and there can be no
assurance that the IRS will take a similar view with respect to the tax
consequences described below. No ruling has been or will be requested by SPI
from the IRS on any tax matters relating to the New Notes or the Exchange Offer.
This discussion does not purport to address all of the possible federal income
tax consequences or any state, local or foreign tax consequences of the
acquisition, ownership and disposition of the Old Notes, the New Notes or the
Exchange Offer. It is limited to investors who will hold the Old Notes and the
New Notes as capital assets and does not address the federal income tax
consequences that
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may be relevant to particular investors in light of their unique circumstances
or to certain types of investors (such as dealers in securities, insurance
companies, financial institutions, foreign corporations, partnerships, trusts,
nonresident individuals, and tax-exempt entities) who may be subject to special
treatment under federal income tax laws.
INDEBTEDNESS
The Old Notes and the New Notes should be treated as indebtedness of SPI. In
the unlikely event the Old Notes or the New Notes were treated as equity, the
amount treated as a distribution on any such Old Note or New Note would first be
taxable to the holder as dividend income to the extent of SPI's current and
accumulated earnings and profits, and would next be treated as a return of
capital to the extent of the holder's tax basis in the Old Notes or New Notes,
with any remaining amount treated as a gain from the sale of an Old Note or a
New Note. In addition, in the event of equity treatment, amounts received in
retirement of an Old Note or a New Note might in certain circumstances be
treated as a dividend, and SPI could not deduct amounts paid as interest on such
Old Notes or New Notes. The remainder of this discussion assumes that the Old
Notes and the New Notes will constitute indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an "exchange" because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes received by a holder of the Old Notes should be treated as a
continuation of the Old Notes in the hands of such holder. As a result, there
should be no federal income tax consequences to holders exchanging the Old Notes
for the New Notes pursuant to the Exchange Offer, and the holding period of New
Notes in the hands of a holder should include the holding period of the Old
Notes exchanged into such New Notes.
INTEREST
A holder of an Old Note or a New Note will be required to report stated
interest on the Old Note and the New Note as interest income in accordance with
the holder's method of accounting for tax purposes. Because the Old Notes were
issued at par there is no original issue discount pursuant to the de minimis
exception to the "original issue discount" rules.
TAX BASIS IN OLD NOTES AND NEW NOTES
A holder's tax basis in an Old Note will generally be the holder's purchase
price for the Old Note. If a holder of an Old Note exchanges the Old Note for a
New Note pursuant to the Exchange Offer, the tax basis of the New Note
immediately after such exchange should equal the holder's tax basis in the Old
Note immediately prior to the exchange.
DISPOSITION OF OLD NOTES OR NEW NOTES
The sale, exchange, redemption or other disposition of an Old Note or a New
Note, except in the case of an exchange pursuant to the Exchange Offer (see the
above discussion), generally will be a taxable event. A holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition of the Old Note or the New Note (except
to the extent attributable to accrued interest) and (ii) the holder's adjusted
tax basis in such debt instrument. Such gain or loss will be capital gain or
loss, and will be long term if the Old Notes or the New Notes have been held for
more than one year at the time of the sale or other disposition.
PURCHASERS OF OLD NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes other than at par, including those
provisions of the Internal Revenue Code relating to
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the treatment of "market discount," and "amortizable bond premium." Any such
purchaser should consult its tax advisor as to the consequences to him of the
acquisition, ownership, and disposition of Old Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to SPI and certifies
that such number is correct, generally under the federal income tax backup
withholding rules, 31% of (1) the interest paid on the Old Notes and the New
Notes, and (2) proceeds of sale of the Old Notes and the New Notes, must be
withheld and remitted to the United States Treasury. Therefore, each holder
should complete and sign the Substitute Form W-9 included so as to provide the
information and certification necessary to avoid backup withholding. However,
certain holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual holder to qualify as an exempt foreign recipient, that holder must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from SPI.
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Old Notes are held in more than one name), contact SPI's Chief
Financial Officer, Brudies Road, Battleboro, Vermont 05302 or telephone number
(802) 257-0365.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
PLAN OF DISTRIBUTION
Based on interpretations by the Commission set forth in no-action letters
issued to third parties, SPI believes that New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an "affiliate" of SPI within the meaning of Rule 405 under the Securities Act,
(ii) a broker-dealer who acquired Notes directly from SPI or (iii)
broker-dealers who acquired Notes as a result of market-making or other trading
activities) 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 are not engaged
in, and do not intend to engage in, and have no arrangement or understanding
with any person to participate in, a distribution of such New Notes; provided
that broker-dealers ("Participating Broker-Dealers") receiving New Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with respect
to resales of such New Notes. To date, the Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Old Notes to the Initial Purchasers) with
the Prospectus, contained in the Exchange Offer Registration Statement. Pursuant
to the Registration Rights Agreement, SPI has agreed to permit Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such New
Notes. SPI and the Guarantors have agreed that, for a period of 180 days after
the Expiration Date, they will make this Prospectus, and any amendment or
supplement to this Prospectus, available to any broker-dealer that requests such
documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
SPI as set forth in "The Exchange Offer -- Purpose and Effect of the Exchange
Offer." In addition, each holder who is a broker-dealer and who receives New
Notes for its own account in exchange for Old Notes that were acquired by it as
a result of market-making activities or other trading activities, will be
required to acknowledge that it will deliver a prospectus in connection with any
resale by it of such New Notes.
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SPI will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
SPI has agreed to pay all expenses incidental to the Exchange Offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
BOOK-ENTRY; DELIVERY AND FORM
The New Notes initially will be represented by a single, permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited on the Closing Date with, or on behalf of, DTC and
registered in the name of a nominee of DTC.
THE GLOBAL NOTES. SPI expects that pursuant to procedures established by
DTC (a) upon the issuance of the Global Notes, DTC or its custodian will credit,
on its internal system, the principal amount of Notes of the individual
beneficial interests represented by the Global Notes to the respective accounts
of persons who have accounts with DTC and (b) ownership of beneficial interests
in the Global Notes will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of Participants (as defined herein)) and the records of Participants
(with respect to interests of persons other than Participants). Such accounts
initially will be designated by or on behalf of the Initial Purchaser and
ownership of beneficial interests in the Global Notes will be limited to persons
who have accounts with DTC ("Participants") or persons who hold interests
through Participants. Interests in the Global Notes may be held directly through
DTC, by Participants, or indirectly through organizations which are
Participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in any Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of SPI, the Trustee or
any paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
SPI expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Notes, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. SPI
also expects that payments by
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Participants to owners of beneficial interests in the Global Notes held through
such Participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such Participants.
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery of
the Notes, or to pledge such securities, such holder must transfer its interest
in a Global Note in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised SPI that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more Participants to whose account the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such Participant
or Participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Notes in whole for
Certificated Notes, which it will distribute to the Participants.
DTC has advised SPI as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for
Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among Participants, it is under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither SPI nor the Trustee will have any responsibility for the
performance by DTC or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by SPI within 90 days, Certificated Notes will be issued in exchange for the
Global Notes.
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EXPERTS
The SPI balance sheets as of December 31, 1994 and 1995 and the statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1995 included in this Prospectus have been audited
by Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), independent accountants, as
stated in their report herein and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
On March 28, 1996, the Audit Committee of the Board of Directors of SPI (the
"Board of Directors") accepted the resignation of Coopers & Lybrand as SPI's
independent auditors and approved the appointment of KPMG Peat Marwick ("KPMG")
to audit SPI's financial statements for the fiscal year ending December 31,
1996, in place of Coopers & Lybrand. These decisions were authorized by the
Board of Directors. The independent auditor's report of Coopers & Lybrand on the
consolidated financial statements of SPI for the three years ended December 31,
1995, dated January 26, 1996, included in the Form 10-K filed with the
Commission on March 27, 1996, contained no adverse opinion or disclaimer of
opinion and was not qualified as to audit scope or accounting principles.
In connection with SPI's audits for the fiscal years ended December 31, 1994
and 1995, and in the subsequent interim period prior to Coopers & Lybrand's
resignation on March 28, 1996, there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to
make reference to the subject matter of the disagreement in connection with
their report.
The CPG consolidated balance sheet as of October 31, 1996 and the
consolidated statements of income and retained earnings, and cash flows for the
ten months then ended included in this Prospectus have been audited by KPMG Peat
Marwick LLP, independent public accountants, as indicated in their report
thereon and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The CPG consolidated balance sheet as of December 31, 1994 and 1995, and the
consolidated statements of income and retained earnings, and cash flows for the
period from November 1, 1993 (commencement of operations) to December 31, 1993
and for the years ended December 31, 1994 and 1995, included in this Prospectus,
have been included herein in reliance on the report, which includes an
explanatory paragraph regarding a change by CPG in its method of accounting for
inventories in 1994, of Coopers & Lybrand, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The Arcon consolidated balance sheet as of October 31, 1996 and the
consolidated statements of income and retained earnings, and cash flows for the
year then ended included in this Prospectus have been audited by KPMG Peat
Marwick LLP, independent public accountants, as indicated in their report
thereon and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The Arcon consolidated balance sheets and the related consolidated
statements of income and retained earnings (deficit), equity and cash flow for
the year ended October 31, 1995 and the period from April 14, 1994 (inception)
through October 31, 1994 included in this Prospectus have been audited by Price
Waterhouse LLP, independent public accountants, as indicated in their report
thereon. The Arcon Coating Mills, Inc. statements of income and accumulated
deficit and cash flows for the period from November 1, 1993 to April 14, 1994
have been audited by Price Waterhouse LLP, independent public accountants, as
indicated in their report thereon and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of securities offered hereby and certain tax
matters will be passed upon for SPI and the Guarantors by White & Case, New
York, New York.
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INDEX TO FINANCIAL STATEMENTS
SPECIALTY PAPERBOARD, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-3
Consolidated Balance Sheets at December 31, 1995 and 1994 and September 30, 1996 (unaudited)............... F-4
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 and the nine months
ended September 30, 1996 and 1995 (unaudited)............................................................. F-5
Consolidated Statement of Stockholders Equity for the years ended December 31, 1995, 1994 and 1993 and the
nine months ended September 30, 1996 (unaudited).......................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and the nine
months ended September 30, 1996 and 1995 (unaudited)...................................................... F-7
Notes to Financial Statements.............................................................................. F-8
</TABLE>
CPG INVESTORS INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-20
Consolidated Balance Sheet as of October 31, 1996.................................... F-21
Consolidated Statement of Income for the ten months ended October 31, 1996........... F-22
Consolidated Statement of Stockholders' Equity for the ten months ended October 31,
1996................................................................................ F-23
Consolidated Statement of Cash Flows for the ten months ended October 31, 1996....... F-24
Notes to the Consolidated Financial Statements....................................... F-25
Report of Independent Accountants.................................................... F-34
Financial Statements:
Consolidated Balance Sheet as of December 31, 1994 and 1995
and September 30, 1996 (Unaudited)............................................... F-35
Consolidated Statement of Income and Retained Earnings for the period November 1,
1993 (commencement of operations) to December 26, 1993 and for the years ended
December 31, 1994 and 1995, and for the nine months ended September 30, 1995 and
1996 (Unaudited)................................................................. F-36
Consolidated Statement of Cash Flows for the period November 1, 1993 (commencement
of operations) to December 26, 1993 and for the years ended December 31, 1994 and
1995, and for the nine months ended September 30, 1995 and 1996 (Unaudited)...... F-37
Notes to Consolidated Financial Statements (Information as of September 30, 1996
and for the nine months ended September 30, 1995 and 1996 is Unaudited).......... F-38
</TABLE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-49
Consolidated Balance Sheet as of October 31, 1996.................................... F-50
Consolidated Statements of Income and Retained Earnings for the year ended
October 31, 1996.................................................................... F-51
Consolidated Statement of Cash Flows for the year ended October 31, 1996............. F-52
Notes to the Consolidated Financial Statements....................................... F-53
Report of Independent Accountants.................................................... F-61
Consolidated Balance Sheet at October 31, 1995 and 1994 and September 30, 1996
(unaudited)......................................................................... F-62
Consolidated Statement of Income and Retained Earnings (Deficit) for the year ended
October 31, 1995, the period from April 14, 1994 (Inception) through October 31,
1994 and the eleven month periods ended September 30, 1996 and 1995 (unaudited)..... F-63
Consolidated Statement of Cash Flows for the year ended October 31, 1995, the period
from April 14, 1994 (Inception) through October 31, 1994 and the eleven month
periods ended September 30, 1996 and 1995........................................... F-64
Notes to Consolidated Financial Statements........................................... F-65
</TABLE>
F-1
<PAGE>
ARCON COATING MILLS, INC.
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-72
Statement of Income and Accumulated Deficit for the period from November 1, 1993 to
April 14, 1994...................................................................... F-73
Statement of Cash Flows for the period from November 1, 1993 to April 14, 1994....... F-74
Notes to Financial Statements........................................................ F-75
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Specialty Paperboard, Inc.:
We have audited the consolidated balance sheets of Specialty Paperboard,
Inc. (the "Company") as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Specialty Paperboard, Inc. at December 31, 1995 and 1994 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 26, 1996
F-3
<PAGE>
SPECIALTY PAPERBOARD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
1995 1994 SEPTEMBER 30, 1996
--------- ---------- ------------------
<S> <C> <C> <C>
ASSETS (Note 5)
Current:
Cash................................................................. $ 1,518 $ 1,367 $ 3,174
Accounts receivable (net of allowances of $253 and $258)............. 9,406 11,227 11,278
Cogen receivable..................................................... 1,680 -- 1,512
Inventories (Note 3)................................................. 16,856 16,555 16,402
Other................................................................ 2,948 3,181 1,016
Deferred income taxes................................................ 162 -- 162
--------- ---------- -------
Total current assets............................................. 32,570 32,330 33,544
Long term Cogen receivable............................................. 1,832 --
Property, plant and equipment, net (Note 4)............................ 33,551 52,050 36,030
Organizational and financing costs (net of accumulated amortization of
$2,742 and $2,193) (Note 2).......................................... 2,199 3,033 1,988
Other long term assets................................................. 500 -- 487
Deferred income taxes (Note 13)........................................ 3,966 404 3,966
--------- ---------- -------
Total assets..................................................... $ 74,618 $ 87,817 $ 76,015
--------- ---------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable..................................................... 7,702 10,964 7,155
Accrued compensation and benefits.................................... 2,604 3,273 8,175
Other accrued liabilities............................................ 2,942 1,997 --
Current portion of long-term debt (Note 5)........................... 1,688 1,800 --
--------- ---------- -------
Total current liabilities........................................ 14,936 18,034 15,330
Long-term debt, less current portion (Note 5).......................... 4,625 21,081 1,845
Deferred gain (Note 6)................................................. 14,322 16,040 13,033
--------- ---------- -------
Total long-term liabilities...................................... 18,947 37,121 14,878
Commitments and Contingencies (Note 15)
Stockholders' equity (Notes 7, 8 and 16):
Preferred stock, par value $.001 per share; 2,000,000 shares
authorized and none issued (Note 8)................................ -- -- --
Common stock, par value $.001 per share; 20,000,000 shares
authorized; and 4,033,432 shares issued and outstanding............ 4 4 4
Additional paid-in capital........................................... 44,713 44,713 44,733
Unearned compensation................................................ (121) (241) (26)
Accumulated deficit.................................................. (3,861) (11,814) 1,096
--------- ---------- -------
Total stockholders' equity....................................... 40,735 32,662 45,807
--------- ---------- -------
Total liabilities and stockholders' equity..................... $ 74,618 $ 87,817 $ 76,015
--------- ---------- -------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
SPECIALTY PAPERBOARD, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1995 1994 1993 1996 1995
---------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................................... $ 117,516 $ 105,416 $ 79,982 $ 77,734 $ 91,557
Cost of sales........................................... 100,106 88,138 66,360 64,105 78,601
---------- ---------- --------- --------- ---------
Gross profit............................................ 17,410 17,278 13,622 13,629 12,956
General and administrative expenses..................... 8,397 8,584 7,881 6,316 6,189
---------- ---------- --------- --------- ---------
Income from operations.................................. 9,013 8,694 5,741 7,313 6,767
Other (income) expenses, net............................ (1,198) (658) 374 (991) (782)
Loss on sale of assets (Note 10)........................ 8,302 -- -- -- 8,159
Cogeneration income (Note 14)........................... (6,512) -- (4,404) -- (6,512)
Interest expense........................................ 892 1,356 3,137 310 811
---------- ---------- --------- --------- ---------
Income before income taxes and extraordinary items...... 7,529 7,996 6,634 7,994 5,091
Income tax (benefit) expense............................ (424) 2,768 1,921 3,037 (1,364)
---------- ---------- --------- --------- ---------
Income before extraordinary items....................... 7,953 5,228 4,713 4,957 6,455
Extraordinary items:
Loss on early extinguishment of debt (net of income
tax benefit of $99 and $1,415) (Note 5)............. -- (149) (2,103) -- --
---------- ---------- --------- --------- ---------
Net income.............................................. $ 7,953 $ 5,079 $ 2,610 $ 4,957 $ 6,455
---------- ---------- --------- --------- ---------
Net income applicable to common shares.................. $ 7,953 $ 5,079 $ 2,251 $ 4,957 $ 6,455
---------- ---------- --------- --------- ---------
Earnings per common share:
Income before extraordinary items..................... 1.97 1.30 1.31 1.23 1.60
Extraordinary items................................... -- (0.04) (0.63) -- --
---------- ---------- --------- --------- ---------
Net income............................................ $ 1.97 $ 1.26 $ 0.68 $ 1.23 $ 1.60
---------- ---------- --------- --------- ---------
Weighted average number of common shares outstanding.... 4,033 4,021 3,323 4,035 4,033
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
SPECIALITY PAPERBOARD, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED STOCKHOLDERS'
COMMON STOCK PAID-IN UNEARNED EARNINGS EQUITY
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) (DEFICIT)
------------ ----------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992............... 213,696 $ 1 $ 860 $ (482) $ (19,144) $ (18,765)
Issuance of common stock................... 2,500,000 2 28,438 28,440
Conversion of Class A, B, C and D
preferred stock into
common shares............................ 1,180,150 1 15,343 15,344
Exercise of warrants....................... 125,118
Amortization of unearned compensation...... 120 120
Increase in preferred stock redemption
value.................................... (359) (359)
Net income................................. 2,610 2,610
------------ --- ----------- ----- ------------ ------------
Balance at December 31, 1993............... 4,018,964 4 44,641 (362) (16,893) 27,390
Exercise of Stock Options.................. 14,468 72 72
Amortization of unearned compensation...... 121 121
Net income................................. 5,079 5,079
------------ --- ----------- ----- ------------ ------------
Balance at December 31, 1994............... 4,033,432 4 44,713 (241) (11,814) 32,662
Amortization of unearned compensation...... 120 120
Net income................................. 7,953 7,953
------------ --- ----------- ----- ------------ ------------
Balance at December 31, 1995............... 4,033,432 4 44,713 (121) (3,861) 40,735
Exercise of Stock Options.................. 2,445 20 20
Amortization of unearned compensation...... 95 95
Net income................................. 4,957 4,957
------------ --- ----------- ----- ------------ ------------
Balance at September 30, 1996.............. 4,035,877 $ 4 $ 44,733 $ (26) $ 1,096 $ 45,807
------------ --- ----------- ----- ------------ ------------
------------ --- ----------- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
SPECIALTY PAPERBOARD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ----------------------
1995 1994 1993 1996 1995
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 7,953 $ 5,079 $ 2,610 $ 4,957 $ 6,455
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 3,342 4,006 3,681 2,389 2,680
Amortization of deferred gain............................... (1,718) (1,146) -- (1,289) (1,287)
Write off deferred debt costs and other deferred charges.... 27 248 943 -- --
Amortization of unearned compensation....................... 120 121 120 80 90
Loss on sale of assets...................................... 8,302 -- -- 12 8,159
Gain on sale of property, plant and equipment............... (8) -- -- -- --
Increase in payment-in-kind notes........................... -- -- 848 -- --
Write-off of original issue discount........................ -- -- 1,276 -- --
Collar fee termination payment.............................. -- -- 1,299 -- --
Cogeneration income......................................... (6,512) -- (4,404) -- (6,512)
Changes in operating assets and liabilities:
Accounts receivable......................................... 1,821 (1,833) 1,615 (1,872) 1,683
Inventories................................................. (301) (3,192) 1,294 454 (1,744)
Other....................................................... 1,983 (2,812) 524 1,932 (2,065)
Accounts payable............................................ (3,262) 3,907 (2,657) (547) (3,474)
Accrued compensation and benefits and other liabilities..... 96 651 (103) 2,629 (235)
Deferred taxes.............................................. (3,724) (862) 458 -- (3,000)
--------- --------- --------- ---------- ----------
Net cash provided by operating activities............... 8,119 4,167 7,504 8,745 750
Cash flows used for investing activities:
Cogeneration receipt............................................ 3,000 -- 4,404 2,000 3,000
Cogeneration expense paid....................................... -- (27) -- -- --
Additions to property, plant, and equipment..................... (4,865) (1,603) (900) (4,298) (2,303)
Kobayashi payments.............................................. (5,000) -- -- -- --
Additions to organization and financing costs................... (741) -- -- -- --
Net proceeds from sale of property, plant and equipment......... 17 -- 11 -- 12,933
Acquisition of Endura Products Division......................... -- (27,400) -- -- --
Net proceeds from sale of assets (Note 10)...................... 12,933 -- -- -- --
Expenses paid in connection with sale of assets................. (1,744) -- -- -- (1,546)
--------- --------- --------- ---------- ----------
Net cash provided by (used in) investing activities..... 3,600 (29,030) 3,515 (2,298) 12,084
Cash flows from financing activities:
Proceeds from initial public offering........................... -- -- 30,225 -- --
Stock offering expenses paid.................................... -- -- (1,107) -- --
Proceeds from sale-leaseback agreement.......................... 5,000 25,000 -- -- --
Repayment of senior subordinated debt........................... -- -- (23,000) -- --
Redemption of preferred E stock................................. -- -- (500) -- --
Preferred dividends paid........................................ -- -- (53) -- --
Exercise of stock options....................................... -- 72 -- 35 --
Collar fee termination payment.................................. -- -- (1,299) -- --
Increase in revolving credit line............................... 133,466 97,861 85,900 64,092 104,385
Payments on revolving credit line............................... (140,759) (97,522) (88,763) (63,530) (108,539)
Repayment of senior subordinated note........................... -- -- (4,940) --
Repayment of senior term debt................................... (9,275) (15,038) (7,312) (5,030) (8,900)
Borrowing of senior term debt................................... -- 17,000 -- --
Refinancing expenses paid....................................... -- (1,581) (50) (358) --
--------- --------- --------- ---------- ----------
Net cash (used in) provided by financing activities..... (11,568) 25,792 (10,899) (4,791) (13,054)
Net increase in cash.............................................. 151 929 120 1,656 (220)
Cash at beginning of period....................................... 1,367 438 318 1,518 1,367
--------- --------- --------- ---------- ----------
Cash at end of period............................................. $ 1,518 $ 1,367 $ 438 $ 3,174 $ 1,147
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The Company operates in a single segment, which is specialty paper products.
The Company produces a wide variety of paper and latex-reinforced materials,
which are then sold directly to converters who manufacture end-use products such
as office products, specialty tape and book covers.
Approximately 47%, 47%, and 56% of the Company's total 1995, 1994 and 1993
sales, respectively, were concentrated in five customers. In 1995, 1994 and 1993
revenue from a single customer was $18,933,000 (16% of total sales), $18,905,000
(18% of total sales), and $15,811,000 (20% of total sales), respectively. Sales
to a second customer accounted for 10%, 11%, and 11% of total sales in 1995,
1994 and 1993, respectively.
Approximately 13%, 11%, and 7% of the Company's products were sold to
foreign customers (excluding Canada) in 1995, 1994 and 1993, respectively. The
principal international markets served by the Company include Asia/Pacific Rim,
Latin America, Mexico and Europe.
2. SIGNIFICANT ACCOUNTING POLICES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Specialty
Paperboard, Inc. and its wholly owned subsidiary, the Endura Products Division,
beginning July 1994. All significant intercompany transactions and accounts have
been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market determined on an
average cost basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation for
financial reporting purposes is provided using the straight line method based
upon the useful lives of the assets, generally estimated as 3-30 years. When
assets are sold or retired, the cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in income. Improvements are
capitalized and included in property, plant and equipment while expenditures for
maintenance and repairs are charged to expense.
AMORTIZATION OF ORGANIZATION AND FINANCING COSTS
The organization and financing costs are being amortized on a straight-line
basis over 60-120 months. Goodwill is being amortized on a straight-line basis
over 30 years.
DEFERRED GAIN
The deferred gain incurred in connection with the sale leaseback transaction
is being amortized on a straight-line basis over 120 months.
F-8
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICES: (CONTINUED)
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as incurred. The costs
amounted to $1.0 million, $1.1 million, and $0.6 million for the years ended
December 31, 1995, 1994 and 1993.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. As permitted under
SFAS No. 109, prior year financial statements have not been restated. The
adoption of SFAS No. 109 had no effect on the Company's financial position or
statement of income.
Prior to 1993, the provision for income taxes was based on income and
expenses included in the accompanying statements of income. Differences between
taxes so computed and taxes payable under applicable statutes and regulations
were classified as deferred taxes arising from timing differences.
NET EARNINGS PER SHARE
The net earnings per share is computed by dividing earnings available for
common shares by the weighted average number of common shares outstanding during
each year. Earnings available for common shares includes accretion of preferred
stock dividends. Common stock equivalent shares are not included in the per
share calculations where the effect of their inclusion would be antidilutive.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), will require the Company to either
elect expense recognition or the disclosure-only alternative for stock-based
compensation. SFAS 123 must be adopted in the Company's 1996 financial
statements with comparable disclosures for the prior year. The company has not
yet determined whether it will elect the expense recognition or disclosure-only
alternative permitted under SFAS 123 and therefore has not yet determined the
impact of such adoption on the consolidated results of operations.
F-9
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES:
Inventories consist of the following at December 31, ($000):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Raw materials........................................................... $ 7,269 $ 7,710
Work in process......................................................... 4,650 2,792
Finished goods.......................................................... 4,937 6,053
--------- ---------
$ 16,856 $ 16,555
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
($000):
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Land and improvements.................................................. $ 1,694 $ 1,692
Buildings and improvements............................................. 9,245 11,095
Machinery and equipment................................................ 28,208 50,522
Construction in progress............................................... 2,620 969
--------- ----------
41,767 64,278
Less accumulated depreciation.......................................... (8,216) (12,228)
--------- ----------
$ 33,551 $ 52,050
--------- ----------
--------- ----------
</TABLE>
Depreciation expense was $2,766,000, $3,294,000, and $3,179,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
5. DEBT
The Company's long-term debt is summarized as follows at December 31,
($000):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Senior term debt from the CIT Group, Inc. ("CIT")
(prime plus 1.25% or LIBOR plus 3.0%) interest at 9.0% at December 31,
1995, due from 1996-2000............................................. $ 6,313 $ 16,150
Revolving credit line, CIT
$15,000 maximum available (prime plus 1.25% or LIBOR plus 3.0%) due
June 30, 2001........................................................ -- 6,731
--------- ---------
6,313 22,881
Less current portion..................................................... 1,688 1,800
--------- ---------
$ 4,625 $ 21,081
--------- ---------
--------- ---------
</TABLE>
The borrowings of the Company are collateralized by all tangible and
intangible assets of the Company.
F-10
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
The following is the five-year schedule of debt maturity ($000):
<TABLE>
<CAPTION>
SENIOR TERM DEBT
-----------------
<S> <C>
1996........................................................................ $ 1,688
1997........................................................................ 1,218
1998........................................................................ 1,467
1999........................................................................ 1,940
2000........................................................................ --
</TABLE>
The Senior Term Debt contains various covenants including limitations on
payment of cash dividends, reacquisition of shares, borrowings and investments
and requires maintenance of profitability levels and liquidity ratios.
In 1995, the Company incurred interest expense of $892,000, net of interest
capitalized of $262,000.
Approximately $1,362,000, $1,060,000 and $7,017,0000 of interest was paid
during the years ended December 31, 1995, 1994 and 1993, respectively.
The Revolving Credit Line is subject to a commitment fee payable at the rate
of 1/2 of 1% per annum on the daily average unused portion of this line. This
fee is payable on a quarterly basis. In addition, the Company is required to pay
an annual Collateral Management Fee of $35,000 in connection with periodic
examinations, analyzing and evaluating the collateral.
In April 1994, the Company expensed $248,000 of deferred debt financing
costs, upon early retirement of the Senior Term Debt. This amount has been
treated as an extraordinary item in the consolidated statement of income for the
year ended December 31, 1994.
The Company entered into a collar agreement from December 19, 1989 through
June 30, 1994 with Wells Fargo Bank (the "Bank") in order to reduce the impact
of changes in interest rates on its debt. The collar agreement required the
Company to make payments to the Bank in the event that interest at 90-day LIBOR
was less than interest at the floor rate of 7.75%. Conversely, the Bank agreed
to make payments to the Company in the event that 90-day LIBOR exceeded the cap
rate of 10.50%. During 1993, the Company paid $0 related to the collar
agreement. No amounts were remitted to the Company from the Bank during 1993.
This agreement was terminated in March 1993 for a fee amounting to $1,299,000.
In March 1993, upon early repayment of the Company's subordinated debt, the
Company expensed $943,000 of deferred debt financing costs and $1,276,000 of
unamortized original issue discount. These amounts, in addition to the interest
rate collar termination payment, have been treated as an extraordinary item in
the consolidated statement of income for the year ended December 31, 1993.
6. DEFERRED GAIN AND SALE-LEASEBACK:
In April 1994, the Company entered into a sale-leaseback transaction with
The CIT Group, Inc. ("CIT"). The Company sold CIT $7,813,000 in net fixed assets
for a purchase price of $25,000,000. Accordingly, the Company recorded a
deferred gain of $17,187,000 which will be amortized on a straight-line basis
over the life of the ten-year lease. In 1995 and 1994, the Company amortized
$1,718,000 and $1,146,000, respectively, of the deferred gain into income. At
December 31, 1995, accumulated amortization of the deferred gain totaled
$2,864,000.
F-11
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEFERRED GAIN AND SALE-LEASEBACK: (CONTINUED)
In connection with the sale-leaseback transaction, CIT leased back the fixed
assets mentioned above to the Company utilizing a ten-year operating lease. The
lease requires quarterly payments of $843,000 for the first five-years of the
lease and quarterly payments of $693,000 for the remaining five years of the
lease.
Rental expense was $3,066,585 and $2,044,390 for the year ended December 31,
1995 and 1994, respectively.
In December 1995, the Company amended the above sale-leaseback transaction
whereby the Company sold their newly constructed wet end machine ("Kobayashi")
for $10.0 million. No gain or loss was recorded with this transaction. The
Company received $5.0 million of the purchase price from CIT in December 1995.
The remaining $5.0 million was placed in escrow and will be paid to the general
contractor when all specifications have been met.
CIT leased back the Kobayashi machine to the Company utilizing the remaining
8.5 years of the operating lease discussed above. The amended lease requires
additional quarterly payments of $339,901 for the next 33 quarters.
7. INITIAL PUBLIC OFFERING ("IPO"):
On March 17, 1993, 2,500,000 shares of the Company's common stock were sold
in an IPO at $13.00 per share, resulting in proceeds net of underwriting
commissions of $30,225,000. The Company also incurred $1,784,000 of offering
expenses in connection with the IPO. In addition, upon the closing of the IPO,
all outstanding shares of Class A, B, C and D redeemable preferred stock were
automatically converted into 1,180,150 shares of common stock; all outstanding
shares of Class E preferred stock were redeemed for a cash payment of $500,000.
159,696 shares of common stock Class A and 54,000 shares of common stock Class B
were converted into an equal number of shares of common stock and 125,129 shares
of common stock were issued upon the net exercise of warrants outstanding. The
proceeds from the IPO were used to repay all of the Company's outstanding
subordinated debt, the redemption of the Company's Class E preferred stock as
discussed above, and a payment of $1,299,000 in connection with the early
termination of the Company's interest rate collar agreement.
8. PREFERRED STOCK:
At December 31, 1995 and 1994, the Company had 2,000,000 shares of preferred
stock authorized with none issued. The Company, without stockholder approval,
can issue preferred stock with voting conversion, and other rights.
9. ACQUISITION:
On June 30, 1994, the Company acquired through its wholly owned
subsidiaries, substantially all of the assets and liabilities of the Endura
Products Division of W.R. Grace ("Endura"). Endura is engaged in the
manufacture, conversion, saturation and coating of specialty papers at
facilities located in Quakertown, Pennsylvania and Owensboro, Kentucky. The
results of operations for Endura have been included in the consolidated results
of operation since the acquisition date. Under the terms of the purchase
agreement, the total purchase price was approximately $26,400,000, plus
$1,000,000 of acquisition expenses paid. A portion of the purchase price was
financed by CIT pursuant to a $17,000,000 term loan. The balance of the purchase
price was paid using $3,000,000 provided by CIT to the Company under a revolving
line of credit and using cash reserves of the Company. Approximately $1,750,000
of the purchase price was placed in
F-12
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITION: (CONTINUED)
escrow, which funds shall be released to the Company if it makes certain capital
expenditures related to acquired facilities, or released to W.R. Grace & Co. if
such expenditures are not made. In December 1995, the Company recorded
$1,750,000 as a receivable, and correspondingly reduced fixed assets, as the
required capital expenditures have been made. Receipt of the escrow funds are
expected by the first quarter of 1996. The acquisition was accounted for using
the purchase method. Accordingly, the purchase price was allocated to the net
assets acquired based on the fair values resulting in goodwill of approximately
$526,000 which will be amortized over 30 years.
The following summarized unaudited pro forma results of operations for the
years ended December 31, 1994 and 1993, assume the acquisition occurred as of
the beginning of the respective periods (dollars in thousands except per share
amounts):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
(UNAUDITED)
Net sales............................................................. $ 124,656 $ 113,874
Net income............................................................ 5,510 4,964
Net income per common share........................................... 1.37 1.49
</TABLE>
The unaudited pro forma results are not necessarily indicative of actual
results of operations that would have occurred had the acquisition been
consummated as of the above dates, nor are they necessarily indicative of future
operating results.
10. SALE OF ASSETS:
On March 22, 1995, the Company sold the assets of its Lewis mill and the
Company's gasket business to Armstrong World Industries Inc. ("Armstrong") for
$12,933,000 (the "Sale"). As part of the sale, inventory in the amount of
$1,080,000 was sold at book value to Armstrong. The net book value of the assets
sold was $19,311,000 and total expenses relating to the sale are estimated at
$1,924,000. At December 31, 1995, $1,744,000 of these expenses had been paid;
the remaining expenses were accrued. This transaction has resulted in a loss of
$8,302,000 before taxes. Approximately $160,000 of the purchase price was held
by Armstrong pending the receipt of a New York State tax clearance certificate.
This payment was received by the Company in May 1995. The Lewis mill was part of
a two-mill division located at the Company's Latex Fiber Products Division in
Beaver Falls, New York.
11. RELATED PARTY TRANSACTIONS:
Pursuant to an agreement with Boise Cascade Corporation ("BCC"), the Company
paid $409,000 and $500,000 for the years ended December 31, 1993 and 1992,
respectively, for the operation of a hydroelectric plant. Such amounts were paid
in a combination of cash and promissory notes. On September 9, 1993, BCC sold
this hydroelectric plant, at which time this agreement was terminated.
The Company paid a management fee of $250,000, $250,000, and $264,000 for
the years ended December 31, 1995, 1994 and 1993, respectively, to an equity
owner, MDC Management Company ("MDC"). The Company has a management agreement
with MDC which calls for an annual fee of $250,000 through 1995.
F-13
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RETIREMENT PLANS:
The Company has a defined contribution plan (salaried and hourly) and a
defined benefit (hourly) retirement plan.
DEFINED CONTRIBUTION PLAN
The defined contribution plan is a 401(k) ERISA and IRS-qualified plan
covering substantially all employees that permits employee salary deferrals up
to 16% of salary with the Company matching 50% of the first 6%. Defined
contribution expense for the Company was $193,000, $163,000, and $134,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
DEFINED BENEFIT PLAN
The defined benefit plan is an ERISA and IRS-qualified plan based upon the
negotiated benefit and years of service in the collective bargaining agreement
between the Unions and the Company. Plan assets are invested in an insurance
company general account. The Company annually contributes at least the minimum
amount as required by ERISA.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1994
--------- ---------
<CAPTION>
($000)
<S> <C> <C>
Actuarial present value of accumulated and projected benefit obligations:
Vested................................................................... $ (1,127) $ (714)
Nonvested................................................................ (219) (95)
--------- ---------
(1,346) (809)
Plan assets at fair value.................................................. 869 755
--------- ---------
Projected benefit obligation in excess of plan assets...................... (477) (54)
Unrecognized net loss...................................................... 49 88
Unrecognized transition obligation......................................... 24 27
Unrecognized prior service costs........................................... 96 18
Adjustment required to recognize minimum liability......................... (169) (133)
--------- ---------
Accrued pension cost....................................................... $ (477) $ (54)
--------- ---------
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1994
--------- ---------
<CAPTION>
($000)
<S> <C> <C>
Total pension expense includes the following components:
Service cost - benefits earned during the period......................... $ 111 $ 123
Interest cost on projected benefit obligation............................ 86 53
Actual return on plan assets............................................. (103) 8
Net amortization and deferral............................................ 40 (68)
--------- ---------
Net periodic pension expense............................................... $ 134 $ 116
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RETIREMENT PLANS: (CONTINUED)
Pension expense was approximately $122,000 for the year ended December 31,
1993. The benefit obligations as of December 31, 1995 and 1994 were calculated
using an average discount rate of 7.0% and 8.0%, respectively. A long-term rate
of return of 9% was used to calculate the 1995 and 1994 net periodic pension
expense.
13. INCOME TAXES:
The components of the provision for income taxes for the year ended December
31, 1995, 1994 and 1993 are as follows ($000):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current income taxes
Federal.................................................... $ 2,557 $ 2,742 $ 785
State...................................................... 743 890 215
--------- --------- ---------
3,300 3,632 1,000
Deferred income taxes
Federal.................................................... (3,165) (734) 775
State...................................................... (559) (130) 146
--------- --------- ---------
(3,724) (864) 921
$ (424) $ 2,768 $ 1,921
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary book and tax
differences which include the deferred gain on the sale-leaseback transaction,
depreciation and timing of Cogeneration income.
The components of the deferred tax assets and liabilities at December 31,
1995 are as follows ($000):
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------- -------------
<S> <C> <C>
Inventory....................................................... $ 214 --
Depreciation.................................................... -- $ 1,180
Vacation accrual................................................ 306 --
Reserves........................................................ 234 --
Organization costs.............................................. -- 185
Miscellaneous................................................... 80 --
Net operating loss carryforwards................................ 335 --
Deferred gain................................................... 5,729 --
Cogeneration income............................................. -- 1,405
------ ------
$ 6,898 $ 2,770
------ ------
------ ------
</TABLE>
F-15
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
The components of the deferred tax assets and liabilities at December 31,
1994 are as follows ($000):
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------- -------------
<S> <C> <C>
Inventory......................................................... $ 160 --
Depreciation...................................................... -- $ 4,793
Vacation accrual.................................................. 402 --
Reserves.......................................................... 156 --
Organization costs................................................ -- 164
Miscellaneous..................................................... 44 --
Net operating loss carryforwards.................................. 2,192 --
Deferred gain..................................................... 6,417 --
------ ------
9,371 4,957
Valuation allowance............................................... 4,010 --
------ ------
$ 5,361 $ 4,957
------ ------
</TABLE>
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. For the year ended
December 31, 1995, the Company reduced the valuation allowance to $0. The
Company believes a valuation allowance is not required due to the tax benefit of
the deferred gain and the net operating losses being ultimately realized.
A reconciliation of income taxes from continuing operations at the United
States statutory rate to the effective rate for the years ended December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
U.S. federal rate................................... 34.0% 34.0% 34.0%
<S> <C> <C> <C>
Decrease in valuation allowance..................... (49.9%) (7.2%) (9.3%)
State taxes net of federal benefit.................. 5.9% 6.9% 4.3%
Other............................................... 4.4% 0.9% --
--------- --------- ---------
Effective tax rate.................................. (5.6%) 34.6% 29.0%
--------- --------- ---------
</TABLE>
As of December 31, 1995, the Company has net operating loss carryforwards of
approximately $880,000, for federal tax purposes, expiring at various times
through the end of 2007.
Income taxes paid during 1995, 1994 and 1993 were $3,130,000, $1,728,000,
and $103,000, respectively.
14. COGENERATION PROJECT:
The Company has entered into agreements with Kamine/Besicorp Beaver Falls
L.P. ("Kamine") pursuant to which the Company's Latex Fiber Products Division
will be the host for a gas-fired, 79-megawatt combined-cycle cogeneration
facility developed by Kamine in Beaver Falls, New York. Construction of the
facility has been completed. The Company received $4.4 million in cash in 1993.
The Company has a firm contract with the Kamine to receive a series of cash
payments totaling $7.0 million between May 1995 and May 1997. The present value
of these cash payments, in the amount of $6.5, was recorded as income in the
first quarter 1995. A cash payment of $3.0 million was received in May 1995.
F-16
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES:
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
requirements, particularly relating to air and water quality. The Company and
its predecessors have spent substantial sums for pollution control facilities to
comply with existing regulations. While the Company believes it has made
sufficient capital expenditures to maintain compliance with existing laws and
regulations, any failure by the Company to comply with present and future
regulations could subject it to future liability or require the suspension of
operations.
OTHER MATTERS
The Company is involved in various legal proceedings in the ordinary course
of business. Management believes that the outcome of these proceedings will not
have a material adverse effect on the Company's financial condition.
16. STOCK OPTION AND BONUS PLANS:
The Company has reserved 200,948 shares of common stock pursuant to its 1992
Amended and Restated Stock Option Plan ("1992 Option Plan"), for issuance upon
exercise of options granted to officers, employees and directors of the Company.
Shares granted under the 1992 Option Plan shall typically become exercisable at
a rate of 20% per year. Options granted under the 1992 Option Plan are
exercisable for a period of ten years from the date of grant.
The Company has reserved 200,000 shares of common stock pursuant to its 1994
Stock Option Plan ("1994 Option Plan"), for issuance upon exercise of options
granted to selected officers and employees of the Company. Shares granted under
the 1994 Option Plan to date shall become exercisable at a rate of 20% per year
commencing on the one year anniversary of the grant date, and 1.66% at the end
of each month thereafter. Options granted under the 1994 Option Plan are
exercisable for a period of ten years from the date of grant.
The Company has also reserved 50,000 shares of common stock pursuant to its
1994 Director Stock Option Plan ("Directors Option Plan"), for issuance upon
exercise of options granted to directors who are not otherwise full-time
employees of the Company. Twenty percent of the shares granted under the
Directors Option Plan shall become exercisable immediately. The remaining 80% of
the shares granted become exercisable in installments over a period of four
years from the date of grant at a rate of 20% per year. Options granted under
the Directors Option Plan are exercisable for a period of ten years from the
date of grant.
F-17
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCK OPTION AND BONUS PLANS: (CONTINUED)
The following table sets forth the stock option transactions for the three
years ended December 31, 1995:
<TABLE>
<CAPTION>
OPTION PRICE OPTION PRICE OPTION PRICE
1992 PLAN PER SHARE 1994 PLAN PER SHARE DIRECTORS PLAN PER SHARE
----------- --------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,
1992........................... 200,948 $ 5.00
Granted, exercised or canceled... --
-----------
Outstanding at December 31,
1993........................... 200,948 $ 5.00
Granted.......................... 40,000 $ 9.50 35,000 $ 8.50
Exercised........................ (14,468) $ 5.00 -- --
----------- ----------- ------
Outstanding at December 31,
1994........................... 186,480 $ 5.00 40,000 $ 9.50 35,000 $ 8.50
Granted.......................... 44,100 $11.75 -- --
Forfeited........................ (24,918) $ 5.00 (5,400) $ 9.50 -- --
----------- ----------- ------------
Outstanding at December 31,
1995........................... 161,562 $ 5.00 78,700 $9.50-$11.75 35,000 $ 8.50
----------- ----- ----------- ------------ ------ -----
</TABLE>
Options to purchase 153,197 shares of common stock were exercisable at
December 31, 1995.
Compensation for the options granted at $5.00 per share was measured as of
the grant date based upon a fair market value of $8.00 per share as determined
by the Board of Directors and is being recognized as expense over the vesting
period. All other options were granted at fair market value at the date of
grant.
Effective January 1, 1994, the Compensation Committee adopted the Executive
Bonus Plan, which provides for bonus payments of a percentage of base salary
based upon achievement by the Company of certain levels of earnings per share.
The Executive Bonus Plan utilizes a sliding scale so that the percentage of base
salary paid as bonus compensation increases as the earnings per share of the
Company increase. The Executive Bonus Plan is designed to directly align the
interests of the executive officers and the stockholders. Although the Executive
Bonus Plan is subject to annual review by the Committee, the Committee expects
it to remain in place for a five-year term.
F-18
<PAGE>
SPECIALTY PAPERBOARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED QUARTERLY SUMMARY INFORMATION:
The following is a summary of unaudited quarterly summary information for
the years ended December 31, 1995 and 1994 ($000 except per share data).
<TABLE>
<CAPTION>
NET EARNINGS
GROSS ----------------------
1995 QUARTERS NET SALES PROFIT INCOME PER SHARE
- ------------------------------------------------------------------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
First(1)........................................................... $ 35,198 $ 4,837 $ 465 $ 0.12
Second............................................................. 31,879 4,369 1,572 0.39
Third(2)........................................................... 24,480 3,750 4,418 1.10
Fourth............................................................. 25,959 4,454 1,498 0.36
---------- ----------- --------- -----
Total.............................................................. $ 117,516 $ 17,410 $ 7,953 $ 1.97
---------- ----------- --------- -----
<CAPTION>
NET EARNINGS
GROSS ----------------------
1994 QUARTERS NET SALES PROFIT INCOME PER SHARE
- ------------------------------------------------------------------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
First.............................................................. $ 21,967 $ 4,139 $ 1,131 $ 0.28
Second(3).......................................................... 21,797 3,919 1,280 0.32
Third(4)........................................................... 29,978 4,289 1,106 0.28
Fourth(4).......................................................... 31,674 4,931 1,562 0.38
---------- ----------- --------- -----
Total.............................................................. $ 105,416 $ 17,278 $ 5,079 $ 1.26
---------- ----------- --------- -----
</TABLE>
- ------------------------
(1) The first quarter of 1995 includes the present value of the Cogeneration
receivable of $6,512,000 booked as other income and a net book loss of
$8,159,000 resulting from the sale of the Lewis mill. An additional loss of
$143,000 was booked in the fourth quarter of 1995.
(2) In the third quarter of 1995, the Company recognized a tax benefit related
to the release of tax valuation allowances.
(3) The second quarter of 1994 includes a $149,000 extraordinary loss related to
the early extinguishment of debt.
(4) The third and fourth quarters of 1994 include the results of operations of
the Endura Products Division.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CPG Investors Inc.:
We have audited the accompanying consolidated balance sheet of CPG Investors
Inc. and subsidiaries (the "Company") as of October 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
ten months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CPG
Investors Inc. and subsidiaries as of October 31, 1996, and the consolidated
results of their operations and their cash flows for the ten months then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Richmond, Virginia
December 31, 1996
F-20
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 146
Accounts receivable, less allowances of $397..................................... 11,328
Inventories...................................................................... 8,604
Income taxes receivable.......................................................... 562
Prepaid expenses................................................................. 269
Deferred income taxes............................................................ 1,194
---------
Total current assets......................................................... 22,103
---------
Property, plant and equipment, net................................................. 20,168
Other assets....................................................................... 1,068
---------
$ 43,339
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 5,085
Current portion of long-term debt................................................ 1,750
Accrued liabilities.............................................................. 6,420
---------
Total current liabilities.................................................... 13,255
---------
Long-term debt, less current portion............................................... 8,030
---------
Other liabilities.................................................................. 4,152
---------
Deferred income taxes.............................................................. 559
---------
Total liabilities............................................................ 25,996
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Class A, nonvoting, 462,814 shares authorized, 460,171 shares outstanding.... 5
Class B, voting, 10,101 shares authorized and outstanding.................... --
Class C, nonvoting, 104,286 shares authorized and outstanding................ 1
Additional paid-in capital....................................................... 6,547
Retained earnings................................................................ 10,790
---------
Total stockholders' equity................................................... 17,343
---------
$ 43,339
---------
---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $ 78,875
Costs and expenses:
Cost of goods sold............................................................... 65,662
Selling and administrative expenses.............................................. 5,125
---------
Income from operations......................................................... 8,088
Interest expense................................................................... 891
---------
Income before income taxes..................................................... 7,197
Income tax expense................................................................. 2,873
---------
Net income....................................................................... $ 4,324
---------
---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
--------------- -------------- --------------- PAID-IN RETAINED MINIMUM PENSION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LIABILITY ADJUSTMENT TOTAL
------- ------ ------ ------ ------- ------ ---------- -------- -------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ 405,671 $ 4 10,101 $-- 104,286 $ 1 $4,565 $ 6,466 $(156) $10,880
Net income........ -- -- -- -- -- -- -- 4,324 -- 4,324
Exercise of stock
options......... 54,500 1 -- -- -- -- 558 -- -- 559
Tax benefit of
option
exercise........ -- -- -- -- -- -- 1,424 -- -- 1,424
Minimum pension
liability
adjustment...... -- -- -- -- -- -- -- -- 156 156
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
Balance, October
31, 1996........ 460,171 $ 5 10,101 $-- 104,286 $ 1 $6,547 $ 10,790 $ -- $17,343
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
Cash provided by (used in) operating activities:
Net income....................................................................... $ 4,324
Items not affecting cash:
Depreciation................................................................... 1,265
Amortization................................................................... 188
Deferred income taxes.......................................................... 176
Postretirement benefits........................................................ 181
Changes in operating assets and liabilities:
Accounts receivable............................................................ (2,137)
Inventories.................................................................... (371)
Income taxes receivable........................................................ (360)
Prepaid expenses............................................................... 134
Accounts payable............................................................... (413)
Accrued liabilities............................................................ 2,640
Other, net..................................................................... (355)
---------
Cash provided by operating activities........................................ 5,272
---------
Cash used in investing activities -- expenditures for property, plant and
equipment........................................................................ (4,150)
---------
Cash provided by (used in) financing activities:
Proceeds from exercise of stock options........................................ 559
Net reduction in revolving debt................................................ (1,365)
Payments on term debt.......................................................... (750)
---------
Cash used in financing activities............................................ (1,556)
---------
Decrease in cash and cash equivalents.............................................. (434)
Cash and cash equivalents, beginning of period..................................... 580
---------
Cash and cash equivalents, end of period........................................... $ 146
---------
---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
1. ORGANIZATION AND ACQUISITION:
On November 5, 1993, CPG Investors Inc. ("CPG"), through its wholly owned
subsidiary, CPG Holdings Inc. ("Holdings"), acquired selected net operating
assets of Custom Papers Group Inc. and its subsidiaries from Rexam Inc.
("Rexam"), a wholly owned subsidiary of Rexam plc (the "Acquisition").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CPG and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
ACCOUNTING PERIOD: The accompanying consolidated financial statements are
as of and for the ten-month period ended October 31, 1996, when all of the
issued and outstanding common stock of the Company was purchased by Specialty
Paperboard, Inc. (See note 13.) No adjustments related to this transaction have
been reflected in these consolidated financial statements.
CASH AND CASH EQUIVALENTS: Cash equivalents consists of cash which is
temporarily invested in U.S. Government securities with original maturities not
exceeding three months as part of the Company's management of day-to-day
operating cash receipts and disbursements.
INVENTORIES: Inventory values include all costs directly associated with
making products: materials, labor and manufacturing overhead including certain
general and administrative costs at mill locations. Inventory values are
presented at the lower of cost or market, with the cost of substantially all
inventories determined by the last-in, first-out ("LIFO") cost flow assumption.
(See Note 3.)
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost, less accumulated depreciation. Plant and equipment are depreciated over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repair costs are charged to expense as incurred, and
expenditures that increase the capacity, efficiency or useful lives of existing
assets are capitalized. When assets are sold or retired, their cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.
REVENUE RECOGNITION: The Company recognizes revenue from product sales at
the time of shipment to the customer.
INTEREST EXPENSE: The Company capitalizes interest expense as part of the
cost of constructing certain facilities and equipment. No interest expense was
capitalized in 1996. Interest paid during the ten months ended October 31, 1996
totaled $727,166.
INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-25
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses, which
are expensed as incurred, were $1,423,803 for the ten months ended October 31,
1996.
DEFERRED FINANCING COSTS: The Company capitalized the costs associated with
obtaining the necessary financing for its 1993 acquisition. These costs, which
totaled $195,371 at October 31, 1996, net of $565,698 of accumulated
amortization, are included in other assets on the consolidated balance sheet and
are being amortized on a straight-line basis over the terms of the loan
commitments provided in the credit agreement.
BUSINESS SEGMENT INFORMATION: The Company's operations involve a single
industry segment--the manufacture and sale of specialty paper products. All
operations are located within the United States. Export sales are not
significant. Sales to one customer amounted to $11,046,392 (14.0% of net sales)
for the ten months ended October 31, 1996. No other individual customer
accounted for more than 10% of the Company's net sales during this period.
RISKS AND UNCERTAINTIES: The Company operates five paper mills--four in the
eastern United States and one in the midwest--producing a diversity of specialty
paper products. The Company is not dependent on any single customer, group of
customers, market, geographic area or supplier of materials, labor or services.
The consolidated financial statements include, where necessary, amounts based on
judgments of management. These estimates include allowances for doubtful
accounts and customer returns, accruals for self-insured medical benefits and
workers' compensation insurance, environmental compliance costs, income taxes
and determinations of discount and other rate assumptions for pensions and
postretirement benefits expenses. Actual results could differ from these
estimates.
STOCK OPTION PLAN: Prior to January 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. As this statement only
applies to options granted subsequent to December 31, 1994, adoption of this
statement did not have a material impact on the Company's consolidated financial
statements.
3. INVENTORIES:
The Company uses the LIFO method of determining the cost of substantially
all of its inventories. Under the LIFO method, the most recent additions to
inventory are assumed to be the first items of inventory used in production or
sold to customers. The Company uses the LIFO method in order to more properly
match current costs against current revenues. If inventories were valued using
the first-in, first-out method, the inventory amounts would have been
approximately $1,306,000 higher than those reported at October 31, 1996. If the
FIFO method of inventory valuation had been utilized, reported net income would
have been approximately $705,742 lower for the ten months ended October 31,
1996.
F-26
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
3. INVENTORIES: (CONTINUED)
Inventories by major category were (in thousands):
<TABLE>
<S> <C>
Raw materials...................................................... $ 3,514
Work-in-process.................................................... 1,421
Finished goods..................................................... 4,347
Operating supplies................................................. 628
---------
9,910
Subtraction to state inventories at LIFO cost...................... (1,306)
---------
$ 8,604
---------
---------
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
<TABLE>
<S> <C>
Revolving loans.................................................... $ 1,530
Term loans......................................................... 8,250
---------
9,780
Less current portion............................................... (1,750)
---------
$ 8,030
---------
---------
</TABLE>
Scheduled maturities for the term loans in the four years after October 31,
1997 are as follows: 1998-- $2,000,000; 1999--$2,000,000; 2000--$2,000,000; and
2001--$500,000.
Holdings has a credit agreement with two banks which provides for borrowings
of up to $13,000,000 under a revolving loan commitment and $8,250,000 under a
term loan commitment. Substantially all of the Company's assets are pledged as
collateral for borrowings under the credit agreement. The terms of the credit
agreement include various covenants which require, among other things, the
maintenance of certain financial ratios and a certain minimum net worth, as
defined in the agreement. Holdings is not permitted to pay dividends to CPG
until its debt to total capital, as defined in the agreement, is reduced to 50%
and maintained after any dividend is declared.
The maximum outstanding borrowings for the ten months ended October 31, 1996
were $13,600,000. The average outstanding borrowings were approximately
$11,626,400 for the ten months ended October 31, 1996 and the weighted average
interest rate, excluding commitment fees, was 6.75%. Borrowings bear interest
which is payable monthly at a defined base rate or LIBOR (5.5% at October 31,
1996), plus 1%, at the Company's option. At October 31, 1996, the weighted
average interest rate was 6.73%. There are annual commitment fees of % on the
aggregate loan commitment. The revolving loan commitment is available through
November 5, 1998. The term loan commitment requires quarterly principal payments
of $250,000 through December 31, 1996 and quarterly principal payments of
$500,000 commencing March 31, 1997, with the final payment due December 31,
2000.
The recorded value of the Company's long-term debt at October 31, 1996
approximates its fair value due to the variable nature of this debt.
F-27
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
4. LONG-TERM DEBT: (CONTINUED)
In 1994, in order to reduce its exposure to fluctuations in interest rates
on its long term debt, the Company purchased an interest rate collar contract
from a bank. The collar contract covered $10,000,000 of the Company's bank debt
in 1996. The amount of bank debt covered by the collar contract is reduced to
$8,000,000 in 1997 and $6,000,000 in 1998. Pursuant to the agreement, the
Company will receive quarterly payments in 1997 and 1998 equal to the amount of
debt covered times the amount by which LIBOR exceeds 6.5%. Should LIBOR be less
than 4.5% in 1997 and 1998, the Company is obligated to make quarterly payments
equal to the amount of debt covered times the amount that LIBOR is less than
4.5%. As LIBOR, for the ten months ended October 31, 1996, ranged from 5.2% to
5.6%, this contract had no impact on the accompanying consolidated statement of
income.
The cost of this contract, totaling $79,404 at October 31, 1996, net of
accumulated amortization of $72,596, is included in other assets on the
consolidated balance sheet. It is being amortized on a straight-line basis over
the life of the contract. The estimated fair value of the collar contract at
October 31, 1996 was $27,967 and is based on a market quote obtained from a
broker. The Company believes that the risk of loss due to nonperformance by the
counterparty to this contract is not significant.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION:
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<S> <C>
Land............................................................... $ 2,093
Buildings.......................................................... 2,444
Machinery and equipment............................................ 15,392
Construction-in-process............................................ 3,754
---------
23,683
Less accumulated depreciation...................................... 3,515
---------
$ 20,168
---------
---------
</TABLE>
Accrued liabilities consisted of (in thousands):
<TABLE>
<S> <C>
Compensation........................................................ $ 4,045
Utilities........................................................... 911
Employee benefits................................................... 436
Customer volume discounts........................................... 377
Interest payable.................................................... 75
Other............................................................... 576
---------
$ 6,420
---------
---------
</TABLE>
F-28
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
6. INCOME TAXES:
The components of the provision for income taxes were (in thousands):
<TABLE>
<S> <C>
Current income tax provision:
Federal........................................................... $ 2,127
State............................................................. 570
---------
2,697
Deferred income tax provision
Federal........................................................... 141
State............................................................. 35
---------
176
$ 2,873
---------
---------
</TABLE>
A reconciliation of income tax expense using the statutory federal income
tax rate of 34% compared to the Company's actual income tax expense follows (in
thousands):
<TABLE>
<S> <C>
Income tax expense at federal statutory rate........................ $ 2,447
Increase resulting from:
State, net of federal income tax benefit.......................... 376
Other, net........................................................ 50
---------
Income tax expense.............................................. $ 2,873
---------
---------
</TABLE>
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities are presented below (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Postretirement benefits........................................... $ 889
Pension benefits.................................................. 406
Other employee benefits........................................... 1,099
Other............................................................. 338
---------
2,732
---------
Deferred tax liabilities:
Property, plant and equipment..................................... 2,097
---------
Net deferred tax assets......................................... $ 635
---------
---------
</TABLE>
The net current and noncurrent components of the deferred income taxes
recognized on the consolidated balance sheet are as follows (in thousands):
<TABLE>
<S> <C>
Net current assets.................................................. $ 1,194
Net noncurrent...................................................... (559)
---------
$ 635
---------
---------
</TABLE>
F-29
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
6. INCOME TAXES: (CONTINUED)
The Company has determined, based on the predecessor company's operating
earnings, CPG's operating earnings since its inception and CPG's expectations
for the future, that future taxable income of the Company will more likely than
not be sufficient to recognize fully these net deferred tax assets. Accordingly,
the Company has not recorded a valuation allowance for the net deferred tax
assets at October 31, 1996.
The Company made income tax payments of $1,788,701 for the ten months ended
October 31, 1996.
7. RETIREMENT PLANS:
The Company has a noncontributory defined benefit pension plan for hourly
employees covered by collective bargaining agreements. Benefits are based on
stated amounts for each year of credited service. The Company's funding policy
is consistent with the funding requirements of the Employee Retirement Income
Security Act of 1974, as amended. The plan's assets consist principally of
equity securities, government and corporate debt securities and other fixed
income obligations.
Net periodic pension cost for the ten months ended October 31, 1996 included
the following components (in thousands):
<TABLE>
<S> <C>
Service cost......................................................... $ 211
Interest cost on projected benefit obligation........................ 416
Actual return on plan assets......................................... (287)
Net amortization and deferral........................................ (41)
---------
Net periodic pension cost........................................ $ 299
---------
---------
</TABLE>
Pension expense is determined using assumptions as of the beginning of each
period. The funded status of the pension plan is determined using assumptions as
of the end of each period.
The following table presents the funded status of the Company's pension plan
and the net pension liability included in the consolidated balance sheet (in
thousands):
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits.................................................. $ (6,552)
Nonvested benefits............................................... (494)
---------
Projected benefit obligation................................... (7,046)
Fair value of plan assets.......................................... 5,505
---------
Funded status.................................................. (1,541)
Unrecognized net gain.............................................. (110)
Unrecognized prior service cost.................................... 630
Additional minimum liability....................................... (520)
---------
Net pension liability.......................................... $ (1,541)
---------
---------
</TABLE>
F-30
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
7. RETIREMENT PLANS: (CONTINUED)
The assumptions used in accounting for pension cost and the funded status of
the plan were as follows:
<TABLE>
<CAPTION>
1995 1996
----- ---------
<S> <C> <C>
Discount rate................................................................... 7.4% 7.75%
Expected long-term return on plan assets........................................ 9.0% 9.0%
</TABLE>
Pension expense is determined using assumptions as of the beginning of each
period. The funded status of the pension plan is determined using assumptions as
of the end of each period.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Company recorded in other
liabilities an additional minimum pension liability adjustment of approximately
$520,000 as of October 31, 1996, representing the amount by which the projected
benefit obligation exceeded the fair value of plan assets plus accrued amounts
previously recorded. The additional liability has been offset by an intangible
asset to the extent of previously unrecognized prior service cost.
The Company also sponsors qualified defined contribution plans for its
salaried and hourly employees. Participation in these plans is voluntary;
however, the Company encourages participation by matching 50% of a portion of
each employee's voluntary contribution. The Company's expense for the ten months
ended October 31, 1996 totaled $118,423.
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company has benefit plans which provide certain health care and life
insurance benefits to eligible employees when they retire. Salaried employees
generally become eligible for retiree medical benefits after reaching age 62
with 15 years of service or after reaching age 65. The medical plan for salaried
employees provides for an allowance, which must be used towards the purchase of
a Medicare supplemental insurance policy, based on a retiree's length of
service. The allowance may be adjusted to reflect annual changes in the Consumer
Price Index ("CPI"); however, once the initial allowance has doubled, there will
be no further increases. Salaried employees hired after January 1, 1993 are not
eligible to participate in this retiree medical plan. Upon satisfying certain
eligibility requirements, approximately 45% of the hourly employees are eligible
upon retirement to receive a medical benefit, which is an allowance to be used
toward the purchase of a Medicare supplemental insurance policy and cannot
exceed a specified annual amount. The postretirement benefit obligations related
to employees who retired prior to the Acquisition were not assumed by the
Company and remain the responsibility of Rexam.
Net periodic postretirement benefits cost for the ten months ended October
31, 1996 included the following components (in thousands):
<TABLE>
<S> <C>
Service cost......................................................... $ 71
Interest cost on accumulated postretirement benefit obligation....... 113
Net amortizations and deferral....................................... (2)
---------
Postretirement benefits cost....................................... $ 182
---------
---------
</TABLE>
F-31
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
The following table sets forth the accumulated postretirement benefit
obligation included in other liabilities on the Company's consolidated balance
sheet (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Fully eligible participants...................................... $ (225)
Retirees......................................................... (190)
Other active plan participants................................... (1,496)
---------
Accumulated postretirement benefit obligation...................... (1,911)
Unrecognized net gain............................................ (325)
---------
Accrued postretirement benefit liability........................... $ (2,236)
---------
---------
</TABLE>
The assumed health care cost trend rate used in measuring future benefit
costs was 9%, gradually declining to 6% by 1999 and remaining at that level
thereafter. A 1% increase in this annual trend rate would increase the
accumulated postretirement benefit obligation at October 31, 1996 by $81,368 and
the postretirement benefits expense for the ten months ended October 31, 1996 by
less than $11,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.4% in 1995 and 7.75% in 1996. The
assumed annual increase in the CPI was 3%. Post retirement benefits expense is
determined using assumptions as of the beginning of each period. The funded
status of the post retirement benefit plan is determined using assumptions as of
the end of each period.
9. COMMON STOCK:
In connection with its organization and the acquisition of its business in
1993, the Company issued 400,000 shares of its Class A common stock for an
aggregate consideration of $4,000,000 and 10,000 shares of its Class B common
stock for an aggregate consideration of $1,000. In addition, the Company issued
104,286 shares of its Class C common stock to two founders for nominal
consideration. In 1994, the Company sold 5,671 shares of Class A common stock
and 101 shares of Class B common stock to two customers for an aggregate
consideration of $577,190.
The Class A stockholders have preference over the Class B and Class C
stockholders for dividends and other distributions until the Class A
stockholders have received distributions aggregating $10 per share. Thereafter,
Class B and Class C stockholders are entitled to such distributions until each
Class B and Class C stockholder has received $10 per share and thereafter all
classes of common stock receive dividends and other distributions at the same
rate per share.
10. STOCK OPTION PLAN:
Certain employees have been granted options to purchase shares of the Class
A common stock under a nonqualified stock option plan adopted in December 1993.
The exercise price of options granted to employees is the estimated fair value
of the Company's Class A common stock at the dates of grant. Options become
partially exercisable on the date of the grant and vest ratably over the three
years thereafter and expire if not exercised in ten years.
The Company's stock option plan had 54,500 options outstanding on December
31, 1995 at a weighted average exercise price of $10.25 per option. All 54,500
options were exercised during the ten month period
F-32
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
10. STOCK OPTION PLAN: (CONTINUED)
ended October 31, 1996. The estimated fair value of the options at the time of
exercise was approximately $79.00 per option.
11. RELATED PARTY TRANSACTIONS:
Two of CPG's directors are the principal stockholders of SCI Investors Inc.,
a privately held corporation which provides management, consulting and financial
services to the Company. Payments and expenses for such services for the ten
months ended October 31, 1996 totaled $150,294.
Four of the Company's customers are owned by persons who are stockholders of
CPG and, in one case, a director of CPG. Sales to these customers aggregated
$4,912,133 for the ten months ended October 31, 1996. Accounts receivable from
these customers aggregated $675,549 at October 31, 1996.
In management's opinion, all related party transactions are conducted under
normal business conditions, with no preferential treatment given to related
parties.
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEASES: The Company has commitments under operating leases for certain
machinery, equipment and facilities used in various operations. Rental expense
was $760,988 for the ten months ended October 31, 1996. As of October 31, 1996,
obligations to make future minimum lease payments were as follows (in
thousands):
<TABLE>
<CAPTION>
PAYMENTS TO BE MADE IN THE YEARS ENDING OCTOBER 31:
- -------------------------------------------------------------------------------------
<S> <C>
1997................................................................................. $ 887
1998................................................................................. 735
1999................................................................................. 700
2000................................................................................. 509
2001................................................................................. 283
Thereafter........................................................................... 1,020
---------
$ 4,134
---------
---------
</TABLE>
LETTERS OF CREDIT: At October 31, 1996, the Company had outstanding letters
of credit of $1,108,000 as collateral for one of its insurance policies.
CONTINGENCIES: In the ordinary course of conducting business, the Company
becomes involved in various environmental issues, investigations and
administrative proceedings. While any such investigation or proceeding has an
element of uncertainty, the Company believes that the outcome of any pending or
threatened claim will not have a material adverse effect on its business or
financial condition.
13. SUBSEQUENT EVENT:
On October 31, 1996, Specialty Paperboard, Inc. ("SPI"), through a
subsidiary, purchased all of the issued and outstanding common stock of CPG for
approximately $44 million, subject to certain closing adjustments.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Officers and Directors of
CPG Investors Inc.:
We have audited the accompanying consolidated balance sheet of CPG Investors
Inc. and Subsidiaries (the "Company") as of December 31, 1994 and 1995, and the
related consolidated statements of income and retained earnings and cash flows
for the eight-week period from November 1, 1993 (commencement of operations) to
December 26, 1993, and for the years ended December 31, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CPG Investors
Inc. and Subsidiaries as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for the eight-week period ended
December 26, 1993, and for the years ended December 31, 1994 and 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for inventories in 1994.
COOPERS & LYBRAND L.L.P.
Richmond, Virginia
February 29, 1996,
except as to Note 13,
as to which the date is
August 28, 1996
F-34
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- SEPTEMBER 30,
1996
-----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3 $ 580 $ 3
Accounts receivable, less allowances of $492, $378 and $461............ 11,153 9,191 11,030
Inventories............................................................ 8,603 8,233 8,317
Prepaid expenses....................................................... 347 403 307
Deferred income taxes.................................................. 737 716 716
--------- --------- -------
Total current assets................................................. 20,843 19,123 20,373
--------- --------- -------
Property, plant and equipment, net....................................... 14,101 17,283 19,444
--------- --------- -------
Other assets............................................................. 708 626 1,279
Deferred income taxes.................................................... 502 191 135
--------- --------- -------
$ 36,154 $ 37,223 $ 41,231
--------- --------- -------
--------- --------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 4,520 $ 5,498 $ 4,520
Current portion of long-term debt...................................... 1,000 1,000 1,750
Accrued liabilities.................................................... 5,645 5,002 5,396
--------- --------- -------
Total current liabilities............................................ 11,165 11,500 11,666
--------- --------- -------
Long-term debt........................................................... 13,000 10,895 10,540
--------- --------- -------
Other liabilities........................................................ 3,832 3,948 4,380
--------- --------- -------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.01 par value:
Class A, nonvoting, 462,814 shares, authorized, 405,671
outstanding........................................................ 4 4 4
Class B, voting, 10,101 shares authorized and outstanding............ -- -- --
Class C, nonvoting, 104,286 shares authorized and outstanding........ 1 1 1
Additional paid-in capital............................................. 4,565 4,565 4,565
Retained earnings...................................................... 3,587 6,466 10,140
Minimum pension liability adjustment................................... -- (156) (65)
--------- --------- -------
8,157 10,880 14,645
--------- --------- -------
$ 36,154 $ 37,223 $ 41,231
--------- --------- -------
--------- --------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
EIGHT FOR THE YEARS ENDED FOR THE NINE MONTHS
WEEKS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 26, -------------------- --------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
UNAUDITED
Net sales.............................................. $ 13,323 $ 95,952 $ 95,795 $ 72,395 $ 69,719
Costs and expenses:
Cost of goods sold................................... 12,396 82,079 84,419 63,674 58,469
Selling and administrative expenses.................. 1,153 6,169 5,310 4,064 4,330
------------ --------- --------- --------- ---------
13,549 88,248 89,729 67,738 62,799
------------ --------- --------- --------- ---------
Income (loss) from operations...................... (226) 7,704 6,066 4,657 6,920
Interest expense....................................... (230) (1,440) (1,345) 1,037 797
------------ --------- --------- --------- ---------
Income (loss) before income taxes.................. (456) 6,264 4,721 3,620 6,123
Income tax benefit (expense)........................... 167 (2,388) (1,842) (1,376) (2,449)
------------ --------- --------- --------- ---------
Net income (loss).................................. (289) 3,876 2,879 $ 2,244 $ 3,674
Retained earnings (deficit), beginning of period....... -- (289) 3,587 3,587 6,466
------------ --------- --------- --------- ---------
Retained earnings (deficit), end of period....... $ (289) $ 3,587 $ 6,466 $ 5,831 $ 10,140
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
EIGHT WEEKS FOR THE NINE MONTHS
ENDED ENDED SEPTEMBER 30,
DECEMBER 26, --------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities:
Net income (loss)..................................... $ (289) $ 3,876 $ 2,879 $ 2,244 $ 3,674
Items not affecting cash:
Depreciation........................................ 144 949 1,184 984 1,303
Amortization........................................ 31 194 225 169 169
Deferred income taxes............................... (1,240) -- 428 -- --
Loss on shutdown of paper machine................... -- 701 -- -- --
Postretirement benefits............................. -- 210 181 -- --
Changes in operating assets and liabilities:
Accounts receivable................................. (575) (123) 1,962 936 (1,838)
Inventories......................................... 917 2,844 370 (89) (84)
Prepaid expenses.................................... (125) (45) (56) 76 96
Accounts payable.................................... 2,025 (847) 978 715 (978)
Accrued liabilities................................. 1,461 (317) (644) (1,210) 394
Other, net............................................ 74 71 (459) 263 (244)
------------ --------- --------- --------- ---------
Cash provided by operating activities............. 2,423 7,513 7,048 4,088 2,492
------------ --------- --------- --------- ---------
Cash used in investing activities:
Cash paid for certain assets of Custom Papers Group
Inc., net of liabilities assumed.................. (24,271) -- -- -- --
Expenditures for property, plant and equipment...... (431) (2,888) (4,366) (2,868) (3,464)
------------ --------- --------- --------- ---------
Cash used in investing activities..................... (24,702) (2,888) (4,366) (2,868) (3,464)
------------ --------- --------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from sale of common stock.................. 4,000 570 -- -- --
Proceeds from issuance of long-term debt, net....... 19,358 0 -- -- --
Net reduction in revolving debt..................... (1,063) (4,208) (1,105) (250) 1,145
Payments on term debt............................... (1,000) (1,000) (750) (750)
------------ --------- --------- --------- ---------
Cash used in financing activities................. 22,295 (4,638) (2,105) (1,000) 395
------------ --------- --------- --------- ---------
Increase (decrease) in cash....................... 16 (13) 577 220 (577)
Cash and cash equivalents, beginning of period.......... -- 16 3 3 580
------------ --------- --------- --------- ---------
Cash and cash equivalents, end of period............ $ 16 $ 3 $ 580 $ 223 $ 3
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITION:
On November 5, 1993, CPG Investors Inc. ("CPG"), through its wholly-owned
subsidiary, CPG Holdings Inc. ("Holdings"), acquired selected net operating
assets of Custom Papers Group Inc. and its subsidiaries from Rexam Inc.
("Rexam"), a wholly owned subsidiary of Rexam plc (the "Acquisition").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CPG and its wholly owned subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated.
ACCOUNTING PERIOD: In 1994, the Company changed its financial reporting
year from a fiscal year ending on the last Sunday in December to a calendar
year. The year ended December 31, 1994 consisted of 53 weeks.
CASH AND CASH EQUIVALENTS: Excess cash is temporarily invested in funds
with original maturities not exceeding three months as part of the Company's
management of day-to-day operating cash receipts and disbursements.
INVENTORIES: Inventory values include all costs directly associated with
making products: materials, labor and manufacturing overhead including certain
general and administrative costs at mill locations. Inventory values are
presented at the lower of cost or market, with the cost of substantially all
inventories determined by the last-in, first-out ("LIFO") cost flow assumption.
(See Note 3.)
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost, less accumulated depreciation. Plant and equipment are depreciated over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repair costs are charged to expense as incurred, and
expenditures that increase the capacity, efficiency or useful lives of existing
assets are capitalized. When assets are sold or retired, their cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.
INTEREST EXPENSE: The Company capitalizes interest expense as part of the
cost of constructing certain facilities and equipment. No interest expense was
capitalized in 1993, 1994 or 1995. Interest paid during 1993, 1994 and 1995
totaled $87,911, $1,262,590 and $1,163,774, respectively.
INCOME TAXES: Income tax expense is based on reported earnings before
income taxes. Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses, which
are expensed as incurred, were $94,070, $1,175,311 and $1,041,129 in 1993, 1994
and 1995, respectively.
DEFERRED FINANCING COSTS: The Company capitalized the costs associated with
obtaining the necessary financing for the Acquisition. These costs, which
amounted to $539,009, net of $222,060 of accumulated amortization at December
31, 1994, and $351,767, net of $409,302 of accumulated amortization at December
31, 1995, are included in other assets on the consolidated balance sheet and are
being amortized on a straight-line basis over the terms of the loan commitments
provided in the credit agreement.
F-38
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
BUSINESS SEGMENT INFORMATION: The Company's operations involve a single
industry segment--the manufacture and sale of specialty paper products. All
operations are located within the United States. Export sales are not
significant. Sales to one customer amounted to $10,224,409 (10.7% of net sales)
in 1994 and $11,560,950 (12.1% of net sales) in 1995. No other individual
customer accounted for more than 10% of the Company's net sales in 1993, 1994 or
1995.
RISKS AND UNCERTAINTIES: The Company operates five paper mills--four in the
eastern United States and one in the midwest--producing a diversity of specialty
paper products. The Company is not dependent on any single customer, group of
customers, market, geographic area or supplier of materials, labor or services.
The financial statements include, where necessary, amounts based on judgments of
management. These estimates include allowances for doubtful accounts and
customer returns, accruals for self-insured medical benefits and workers'
compensation insurance, environmental compliance costs, income taxes and
determinations of discount and other rate assumptions for pensions and
postretirement benefits expenses.
3. INVENTORIES:
In 1994, the Company adopted the LIFO method of determining the cost of
substantially all of its inventories. Under the LIFO method the most recent
additions to inventory are assumed to be the first items of inventory used in
production or sold to customers. The Company uses the LIFO method in order to
more properly match current costs against current revenues. If inventories were
valued at current costs, the inventory amounts would have been $1,210,642 higher
than those reported at December 31, 1994, and $2,482,885 higher than those
reported at December 31, 1995. If the FIFO method of inventory valuation had
been utilized, reported net income would have been $750,598 higher in 1994 and
$788,790 higher in 1995.
Inventories by major category were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
-------------------- ------------------
<S> <C> <C> <C>
1994 1995 (UNAUDITED)
--------- --------- ------------------
Raw materials....................................... $ 3,312 $ 4,518 $ 3,253
Work-in-process..................................... 1,678 2,057 1,328
Finished goods...................................... 4,098 3,570 4,550
Operating supplies.................................. 726 571 601
--------- --------- -------
9,814 10,716 9,732
Subtraction to state inventories at LIFO cost....... (1,211) (2,483) (1,415)
--------- --------- -------
$ 8,603 $ 8,233 $ 8,317
--------- --------- -------
--------- --------- -------
</TABLE>
F-39
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Revolving loans......................................................... $ 4,000 $ 2,895
Term loans.............................................................. 10,000 9,000
--------- ---------
14,000 11,895
Less current portion.................................................... (1,000) (1,000)
--------- ---------
$ 13,000 $ 10,895
--------- ---------
--------- ---------
</TABLE>
F-40
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
Scheduled maturities for the term loans in the four years after 1996 are as
follows: 1997--$2,000,000, 1998--$2,000,000; 1999--$2,000,000; and
2000--$2,000,000.
Holdings has a credit agreement with two banks which provides for borrowings
of up to $13,000,000 under a revolving loan commitment and $9,000,000 under a
term loan commitment. Substantially all of the Company's assets are pledged as
collateral for borrowings under the credit agreement. The terms of the credit
agreement include various covenants which require, among other things, the
maintenance of certain financial ratios and a certain minimum net worth, as
defined in the agreement. Holdings is not permitted to pay dividends to CPG
until its debt to total capital, as defined in the agreement, is reduced to 50%
and maintained after any dividend is declared.
The maximum outstanding borrowings during 1993, 1994 and 1995 were
$20,975,000, $19,491,000 and $15,075,000, respectively. The weighted average
outstanding borrowings were $19,758,000 in 1993 $15,158,000 in 1994 and
$13,455,000 in 1995 and the weighted average interest rate, excluding commitment
fees, was 6.28% in 1993, 7.23% in 1994 and 7.56% in 1995. Borrowings bear
interest which is payable monthly at a defined base rate or LIBOR, plus 1%, at
the Company's option. At December 26, 1993, the weighted average interest rate
was 6.35% , at December 31, 1994 and 1995, the weighted average interest rate
was 8.29% and 7.06%, respectively. There are annual commitment fees of 3/16% on
the aggregate loan commitment. The revolving loan commitment is available
through November 5, 1998. The term loan commitment requires quarterly principal
payments of $250,000 through December 31, 1996 and quarterly principal payments
of $500,000 commencing March 31, 1997, with the final payment due December 31,
2000.
The recorded value of the Company's long-term debt at December 31, 1995
approximates its fair value.
In 1994, in order to reduce its exposure to fluctuations in interest rates,
the Company purchased an interest rate collar contract. The collar contract
covered $12,000,000 of the Company's bank debt in 1995. The amount of bank debt
covered by the collar contract is reduced to $10,000,000 in 1996, $8,000,000 in
1997 and $6,000,000 in 1998. During 1995, pursuant to the agreement, the Company
received quarterly payments equal to the amount of debt covered times the amount
by which LIBOR exceeded 6.0%. The Company will receive similar payments in 1996
should LIBOR exceed 6% and in 1997 and 1998 if LIBOR exceeds 6.5%. Should LIBOR
be less than 4.0% in 1996 or 4.5% in 1997 and 1998, the Company is obligated to
make quarterly payments equal to the amount of debt covered times the amount
that LIBOR is less than the specified rate. The cost of this financial
instrument, which is included in other assets, was $152,000 and, beginning in
1995, is being amortized over a four-year period. The estimated fair value of
the collar contract at December 31, 1995 was $42,347. The Company believes that
the risk of loss due to nonperformance by the counterparty to this contract is
not significant.
F-41
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUPPLEMENTAL BALANCE SHEET INFORMATION:
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
-------------------- ------------------
<S> <C> <C> <C>
1994 1995 (UNAUDITED)
--------- --------- ------------------
Land................................................ $ 1,963 $ 2,000 $ 2,038
Buildings........................................... 1,814 2,272 2,393
Machinery and equipment............................. 11,113 14,265 15,106
Construction-in-process............................. 277 996 3,460
--------- --------- -------
15,167 19,533 22,997
Less accumulated depreciation....................... 1,066 2,250 3,553
--------- --------- -------
$ 14,101 $ 17,283 $ 19,444
--------- --------- -------
--------- --------- -------
</TABLE>
Accrued liabilities consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Compensation............................................................... $ 2,990 $ 2,224
Employee benefits.......................................................... 873 1,084
Utilities.................................................................. 767 770
Customer volume discounts.................................................. 628 537
Interest payable........................................................... 115 94
Other...................................................................... 272 293
--------- ---------
$ 5,645 $ 5,002
--------- ---------
--------- ---------
</TABLE>
6. INCOME TAXES:
The components of the provision for income taxes were (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
------------- --------- ---------
<S> <C> <C> <C>
Current income tax provision:
Federal................................................... $ 906 $ 2,042 $ 1,108
State..................................................... 167 346 306
------ --------- ---------
1,073 2,388 1,414
Deferred income tax (benefit) provision..................... (1,240) -- 428
------ --------- ---------
$ (167) $ 2,388 $ 1,842
------ --------- ---------
------ --------- ---------
</TABLE>
F-42
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Deferred tax assets:
Postretirement benefits.................................................. $ 718 $ 782
Pension benefits......................................................... 507 556
Other employee benefits.................................................. 704 742
Other.................................................................... 425 497
--------- ---------
2,354 2,577
--------- ---------
Deferred tax liabilities:
Property, plant and equipment............................................ 1,115 1,670
--------- ---------
Net deferred tax assets................................................ $ 1,239 $ 907
--------- ---------
--------- ---------
</TABLE>
The net current and noncurrent current components of the deferred income
taxes recognized in the balance sheet are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Net current assets........................................................... $ 737 $ 716
Net noncurrent assets........................................................ 502 191
--------- ---------
$ 1,239 $ 907
--------- ---------
</TABLE>
The Company has determined, based on the predecessor company's operating
earnings, CPG's operating earnings in 1994 and 1995 and CPG's expectations for
the future, that operating income of the Company will likely be sufficient to
recognize fully these net deferred tax assets. Accordingly, the Company has not
recorded a valuation allowance for the net deferred tax assets.
The Company made income tax payments of none in 1993, $3,699,838 in 1994 and
$1,410,073 in 1995.
A reconciliation of income tax expense using the statutory federal income
tax rate of 34% compared to the Company's actual income tax expense follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE EIGHT FOR THE YEARS ENDED
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate..................... $ (155) $ 2,130 $ 1,605
Increase resulting from:
State.................................................................... (18) 228 229
Other, net............................................................... 6 30 8
----- --------- ---------
Income tax expense (benefit)............................................. $ (167) $ 2,388 $ 1,842
----- --------- ---------
----- --------- ---------
</TABLE>
F-43
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RETIREMENT PLANS:
The Company has a noncontributory defined benefit pension plan for hourly
employees covered by collective bargaining agreements. Benefits are based on
stated amounts for each year of credited service. The Company's funding policy
is consistent with the funding requirements of ERISA. The plan's assets consist
principally of equity securities, government and corporate debt securities and
other fixed income obligations.
Net periodic pension cost included the following components (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Service cost.............................................. $ 44 $ 259 $ 231
Interest cost on projected benefit obligation............. 65 352 407
Actual return on plan assets.............................. (12) 88 (701)
Net amortization and deferral............................. (52) (435) 320
--- --------- ---------
Net periodic pension cost............................. $ 45 $ 264 $ 257
--- --------- ---------
--- --------- ---------
</TABLE>
The assumptions used in accounting for pension cost and the funded status of
the plan were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate............................................................ 7.0% 8.0% 7.4%
Expected long-term return on plan assets................................. 9.0% 9.0% 9.0%
</TABLE>
Pension expense is determined using assumptions as of the beginning of each
year. The funded status of the pension plan is determined using assumptions as
of the end of each year. The projected benefit obligation increased by $709,911
as a result of the reduction of the discount rate assumption in 1995.
The following table presents the funded status of the Company's pension plan
and the net pension liability included in the accompanying consolidated balance
sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Actuarial present value of benefit obligations:
Vested benefits........................................................ $ (4,287) $ (5,649)
Nonvested benefits..................................................... (572) (759)
Projected benefit obligation......................................... (4,859) (6,408)
Fair value of plan assets................................................ 3,784 4,808
--------- ---------
Funded status........................................................ (1,075) (1,600)
Unrecognized net loss (gain)............................................. (312) 252
Unrecognized prior service cost.......................................... 52 139
Additional minimum liability............................................. -- (391)
--------- ---------
Net pension liability................................................ $ (1,335) $ (1,600)
--------- ---------
--------- ---------
</TABLE>
F-44
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RETIREMENT PLANS: (CONTINUED)
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Company recorded in other
liabilities an additional minimum pension liability adjustment of $390,771 as of
December 31, 1995, representing the amount by which the projected benefit
obligation exceeded the fair value of plan assets plus accrued amounts
previously recorded. The additional liability has been offset by an intangible
asset to the extent of previously unrecognized prior service cost. The amount in
excess of previously unrecognized prior service cost is recorded as a reduction
of stockholders' equity in the amount of $156,203, representing the after-tax
impact.
The Company also sponsors qualified defined contribution plans for its
salaried and hourly employees. Participation in these plans is voluntary;
however, the Company encourages participation by matching 50% of a portion of
each employee's voluntary contribution. The Company's expense in 1993, 1994 and
1995 totaled $47,674, $271,647 and $276,638, respectively.
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company has plans which provide certain health care and life insurance
benefits to eligible employees when they retire. Salaried employees generally
become eligible for retiree medical benefits after reaching age 62 with 15 years
of service or after reaching age 65. The medical plan for salaried employees
provides for an allowance, which must be used toward the purchase of a Medicare
supplemental insurance policy, based on a retiree's length of service. The
allowance may be adjusted to reflect annual changes in the Consumer Price Index
("CPI"); however, once the initial allowance has doubled, there will be no
further increases. Salaried employees hired after January 1, 1993 are not
eligible to participate in this retiree medical plan. Upon satisfying certain
eligibility requirements, approximately 45% of the hourly employees are eligible
upon retirement to receive a medical benefit, which is an allowance to be used
toward the purchase of a Medicare supplemental insurance policy and cannot
exceed a specified annual amount. The postretirement benefit obligations related
to employees who retired prior to the Acquisition were not assumed by the
Company and remain the responsibility of Rexam.
Postretirement benefits expense included the following components (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Service cost............................................... $ 10 $ 92 $ 75
Interest cost on accumulated postretirement benefit
obligation............................................... 20 118 124
Net amortizations and deferral............................. -- -- (18)
Postretirement benefits expense.......................... $ 30 $ 210 $ 181
--- --------- ---------
--- --------- ---------
</TABLE>
F-45
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
The following table sets forth the accumulated postretirement benefit
obligation included in other liabilities in the Company's consolidated balance
sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Accumulated postretirement benefit obligation:
Fully eligible participants............................................ $ (131) $ (224)
Retirees............................................................... -- (152)
Other active plan participants......................................... (1,305) (1,533)
--------- ---------
Accumulated postretirement benefit obligation............................ (1,436) (1,909)
Unrecognized net gain................................................ (453) (148)
--------- ---------
Accrued postretirement benefit liability........................... $ (1,889) $ (2,057)
--------- ---------
--------- ---------
</TABLE>
The assumed health care cost trend rate used in measuring future benefit
costs was 9%, gradually declining to 6% by 1999 and remaining at that level
thereafter. A 1% increase in this annual trend rate would increase the
accumulated postretirement benefit obligation at December 31, 1995 by $119,000
and the 1995 postretirement benefits expense by less than $19,000. The assumed
discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% in 1993, 8% in 1994 and 7.4% in 1995. The assumed annual
increase in the CPI was 3%.
9. COMMON STOCK:
In connection with its organization and the acquisition of its business in
1993, the Company issued 400,000 shares of its Class A common stock for an
aggregate consideration of $4,000,000 and 10,000 shares of its Class B common
stock for an aggregate consideration of $1,000. In addition, the Company issued
104,286 shares of its Class C common stock to two founders for nominal
consideration. In 1994, the Company sold 5,671 shares of Class A common stock
and 101 shares of Class B common stock to two customers for an aggregate
consideration of $577,190.
The Class A stockholders have preference over the Class B and Class C
stockholders for dividends and other distributions until the Class A
stockholders have received distributions aggregating $10 per share. Thereafter,
Class B and Class C stockholders are entitled to such distributions until each
Class B and Class C stockholder has received $10 per share and thereafter all
classes of common stock receive dividends and other distributions at the same
rate per share.
10. STOCK OPTION PLAN:
Certain employees have been granted options to purchase shares of Class A
common stock under a nonqualified stock option plan adopted in December 1993.
The exercise price of options granted to employees is the fair value of the
Company's Class A common stock at the dates of grant. Options become partially
exercisable on the date of the grant and vest ratably over the three years
thereafter and expire if not exercised in ten years.
F-46
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
The following table is a summary of the option plan:
<TABLE>
<CAPTION>
EXERCISE PRICE
PER
NUMBER OF OPTIONS OPTION
------------------- ----------------
<S> <C> <C>
Outstanding on November 1, 1993........................ --
Granted.............................................. 57,000 $ 10.00
------
Outstanding on December 26, 1993....................... 57,000
Granted.............................................. 1,000 15.00
Exercised............................................ --
Canceled............................................. (1,000) 10.00
------
Outstanding on December 31, 1994....................... 57,000
Granted.............................................. 1,500 17.50
Exercised............................................ --
Canceled............................................. (4,000) 10.00-15.00
------
Outstanding on December 31, 1995....................... 54,500
------
------
</TABLE>
At December 31, 1995, options for 40,000 shares were exercisable and options
for 2,643 shares were available for future awards.
11. RELATED-PARTY TRANSACTIONS:
Two of CPG's directors are the principal stockholders of SCI Investors Inc.,
a privately held corporation which provides management consulting and financial
services to the Company. Payments and expenses for such services during 1993,
1994 and 1995 totaled $16,000, $102,859 and $141,397, respectively. In addition,
the Company paid fees of $350,000 to SCI Investors Inc. for its services in
negotiating the acquisition of its business and arranging the financing for the
acquisition. This fee was allocated to the purchase price of the acquisition and
to deferred financing costs.
Four of the Company's customers are owned by persons who are stockholders of
CPG and, in one case, a director of CPG. Sales to these customers aggregated
$869,989, $5,006,607 and $4,894,577 in 1993, 1994 and 1995, respectively.
Accounts receivable from these customers aggregated $729,633 at December 31,
1994 and $645,372 at December 31, 1995.
12. COMMITMENTS AND OTHER MATTERS:
LEASES: The Company has commitments under operating leases for certain
machinery, equipment and facilities used in various operations. Rental expense
was $146,000 in 1993, $870,377 in 1994 and $922,298 in
F-47
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND OTHER MATTERS: (CONTINUED)
1995. As of December 31, 1995, obligations to make future minimum lease payments
were as follows (in thousands):
<TABLE>
<CAPTION>
PAYMENTS TO BE MADE IN:
- ----------------------------------------------
<S> <C>
1996........................................ $ 937
1997........................................ 906
1998........................................ 754
1999........................................ 720
2000........................................ 308
Thereafter.................................. 1,294
------
$ 4,919
------
------
</TABLE>
UNUSUAL ITEM: In September 1994, the Company idled one of its paper
machines and recorded a provision of $714,869 to adjust the carrying values of
the paper machine and related equipment to net realizable values and to
recognize the outstanding commitments associated with a lease of certain process
control equipment.
LETTER OF CREDIT: At December 31, 1995, the Company had outstanding letters
of credit of $1,108,000 as collateral for one of its insurance policies.
CONTINGENCIES: In the ordinary course of conducting business, the Company
becomes involved in various environmental issues, investigations and
administrative proceedings. While any such investigation or proceeding has an
element of uncertainty, the Company believes that the outcome of any pending or
threatened claim will not have a material adverse effect on its business or
financial condition.
13. SUBSEQUENT EVENTS:
On August 28, 1996, CPG entered into a merger agreement with Specialty
Paperboard, Inc. ("SPI") pursuant to which SPI, through a subsidiary, would
purchase all of the issued and outstanding common stock of CPG. In connection
with this proposed merger, SPI has performed environmental reviews of each of
the Company's operations and, as a result, the Company and SPI are evaluating
certain matters of concern to SPI. The Company does not believe the results of
these evaluations will have a material adverse effect on its business or
financial condition.
F-48
<PAGE>
ARCON HOLDINGS CORP.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Arcon Holdings Corp.:
We have audited the accompanying consolidated balance sheet of Arcon Holdings
Corp. and subsidiary (the Company) as of October 31, 1996, and the related
consolidated statements of income and retained earnings and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in notes 1(a) and 14 of the accompanying notes to the consolidated
financial statements, on October 31, 1996, the Company was acquired by Specialty
Paperboard, Inc. The accompanying consolidated financial statements reflect the
financial position, results of operations and cash flows of the Company
immediately prior to the acquisition.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arcon Holdings Corp.
and subsidiary as of October 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
December 20, 1996
F-49
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash......................................................................... $1,382,207
Accounts receivable, net of allowance for doubtful accounts of $53,000....... 2,227,859
Inventories, net............................................................. 2,766,820
Prepaid expenses and other................................................... 74,068
Deferred income taxes........................................................ 93,215
----------
Total current assets..................................................... 6,544,169
Property, plant and equipment, net............................................. 1,188,558
Deferred financing costs, net of accumulated amortization of $443,108.......... 386,609
Goodwill, net of accumulated amortization of $2,086,078........................ 10,153,906
Deferred income taxes.......................................................... 67,948
----------
Total assets............................................................. $18,341,190
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Account payable and accrued expenses......................................... 1,179,289
Accrued interest payable..................................................... 74,165
Current portion of long-term debt............................................ 1,937,500
Income taxes payable......................................................... 433,542
----------
Total current liabilities................................................ 3,624,496
Long-term debt................................................................. 6,134,855
Warrants....................................................................... 1,750,000
Deferred compensation.......................................................... 258,582
----------
Total liabilities........................................................ 11,767,933
Series A preferred stock, $.01 par value, 32,000 shares authorized, 31,945
shares issued and outstanding................................................ 5,204,774
Series B preferred stock, $.01 par value, 6,500 shares authorized, 6,255 shares
issued and outstanding....................................................... 1,019,122
Stockholders' equity:
Common stock, $.01 par value, 1,600,000 shares authorized, 41,175 shares
issued and outstanding..................................................... 412
Paid-in capital.............................................................. 179,588
Retained earnings............................................................ 169,361
----------
Total stockholders' equity............................................... 6,573,257
----------
Commitments
Total liabilities and stockholders' equity............................... $18,341,190
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED OCTOBER 31, 1996
<TABLE>
<S> <C>
Net sales...................................................................... $28,627,690
Cost of goods sold............................................................. 20,521,631
----------
Gross profit........................................................... 8,106,059
Selling, general and administrative expenses................................... 2,038,666
Interest expense............................................................... 1,108,648
Accretion of warrants to fair market value..................................... 1,108,500
Amortization of goodwill and deferred financing costs.......................... 992,496
Depreciation and amortization of property, plant and equipment................. 255,996
Management fees................................................................ 100,000
----------
Total expenses......................................................... 5,604,306
----------
Income before provision for income taxes............................... 2,501,753
Provision for income taxes..................................................... 1,314,108
----------
Net income............................................................. 1,187,645
Retained earnings, beginning of year........................................... 508,811
Accretion of excess of redemption value of preferred stock over fair value at
issuance date................................................................ (1,527,095)
----------
Retained earnings, end of year................................................. $ 169,361
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $1,187,645
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,248,492
Increase in warrant value................................................... 1,108,500
Deferred compensation....................................................... 51,149
Recovery of doubtful accounts............................................... (25,915)
Deferred income taxes....................................................... (50,786)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (266,403)
Inventories, net.......................................................... (45,272)
Prepaid expenses and other................................................ 337
Accounts payable and accrued expenses..................................... (523,381)
Accrued interest.......................................................... (25,278)
Income taxes payable...................................................... 524,342
---------
Net cash provided by operating activities............................. 3,183,430
---------
Cash flows from investing activities:
Capital expenditures.......................................................... (105,888)
---------
Net cash used in investing activities................................. (105,888)
---------
Cash flows from financing activities:
Repayment of long-term debt................................................... (3,042,068)
Proceeds from borrowing....................................................... 1,050,000
---------
Net cash used in financing activities................................. (1,992,068)
---------
Net increase in cash............................................................ 1,085,474
Cash at beginning of year....................................................... 296,733
---------
Cash at end of year............................................................. $1,382,207
---------
---------
Supplemental disclosure of cash flow information:
Interest paid................................................................. $1,032,231
---------
---------
Income taxes paid............................................................. $ 927,131
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
Arcon Holdings Corp. (Arcon Holdings) and its wholly-owned subsidiary, Arcon
Coating Mills, Inc. (Arcon Coating Mills or the Subsidiary), (collectively the
Company) is a leading producer of tapes and edge covering materials which are
used to bind, reinforce, protect and decorate office and school supply products
as well as checkbooks and hard and soft cover books. The Company maintains
operating facilities in Oceanside, New York and Springfield, Ohio.
Arcon Holdings was incorporated on March 17, 1994 for the purpose of
acquiring Arcon Coating Mills, Inc. On April 14, 1994, 100% of Arcon Coating
Mill's common stock was purchased by Arcon Acquisition Corp., a wholly-owned
subsidiary of Arcon Holdings, for a purchase price of $17,349,000. The purchase
price exceeded the fair value of the net assets acquired of $4,340,799 by
$13,008,201 (as adjusted) and, accordingly, goodwill and certain intangible
assets were recorded as of the acquisition date.
Pursuant to the Stock Purchase Agreement (the Agreement) dated August 28,
1996 by and among Specialty Paperboard Inc. (SPI) and the stockholders of Arcon
Holdings, SPI acquired all the outstanding stock of Arcon Holdings as of October
31, 1996 (the Acquisition). The Acquisition is further described in note 14. The
accompanying consolidated financial statements of the Company have been prepared
immediately prior to the Acquisition and therefore do not reflect the effect of
the Acquisition.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(C) INVENTORIES
Inventories are reported at the lower of cost or market value, with cost
determined using the first-in, first-out, (FIFO) method.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over estimated useful lives of assets as follows:
automobiles--5 years; furniture and fixtures--7 years; machinery and
equipment--7 years; and building--15 years. Leasehold improvements are amortized
over the shorter of the life of the improvement or the lease term.
(E) GOODWILL AND DEFERRED FINANCING COSTS
Goodwill arising from the April 14, 1994 acquisition described in note 1(a)
is being amortized over 15 years on a straight-line basis.
Deferred financing costs arising from the acquisition debt are amortized,
using the straight-line method, over the life of the underlying indebtedness.
F-53
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(G) USE OF ESTIMATES
The accompanying financial statements were prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments classified as a current asset or
current liability are deemed to approximate fair value because of the short
maturity of these instruments. The carrying amounts of the Company's long-term
financial instruments (namely long-term debt and warrants) at October 31, 1996
represent the amounts they were redeemed at as a result of the Acquisition
described in note 14 and are therefore indicative of their fair values of such
instruments.
(3) INVENTORIES
Inventories consist of the following at October 31, 1996:
<TABLE>
<S> <C>
Raw materials................................... $1,120,845
Work-in-process................................. 1,529,515
Finished goods.................................. 116,460
---------
$2,766,820
---------
---------
</TABLE>
F-54
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at October 31, 1996:
<TABLE>
<S> <C>
Land and building............................... $ 117,433
Machinery and equipment......................... 1,323,909
Leasehold improvements.......................... 163,348
Automobiles..................................... 113,527
Furniture and fixtures.......................... 78,977
---------
1,797,194
Less accumulated depreciation and
amortization.................................. 608,636
---------
$1,188,558
---------
---------
</TABLE>
(5) DEBT
Long-term debt consists of the following at October 31, 1996:
<TABLE>
<S> <C>
Term loan A..................................... $5,312,500
Term loan B..................................... 2,758,150
Revolving line of credit........................ 1,705
---------
8,072,355
Less current portion............................ 1,937,500
---------
$6,134,855
---------
---------
</TABLE>
TERM LOAN A
The term loan A principal is due and payable on the last day in January,
April, July and October of each year through January 31, 2000. The quarterly
payments are $387,500 through October 31, 1999 with a final payment of $275,000
on January 31, 2000. The note bears interest at the higher of the prime rate or
the federal funds effective rate, plus 2%. Such rate was 10.25% at October 31,
1996. Interest is payable on the first day of each month.
The Company did not make its October 31, 1996 payment of $387,500 in
anticipation of the Acquisition described in note 14. The amount of the payment
is included in the current portion of long-term debt on the accompanying balance
sheet.
TERM LOAN B
The term loan B principal is due and payable in the amount of $750,000 on
July 31, 2000, October 31, 2000, January 31, 2001 and April 30, 2001,
respectively. Interest accrues at a fixed rate of 11.5% and is payable on the
first day of each month.
Term loan B was issued with detachable warrants (note 9) and recorded net of
a discount which represented the original fair value of the warrants. The
discount is being amortized over the life of the loan.
F-55
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(5) DEBT (CONTINUED)
The term loans are collateralized by substantially all assets of the
Company.
REVOLVING LINE OF CREDIT
The Company entered into a revolving credit agreement which expires on April
30, 2001. The maximum amount that can be borrowed under this agreement is the
lesser of $3,000,000 or 85% of eligible accounts receivable plus 50% of eligible
inventory. The line bears interest at the higher of the prime rate or the
federal funds effective rate, plus 2%, payable on the first day of each month.
In addition, the Company pays commitment fees of .5% on the average daily unused
balance. The unused balance under the revolving credit agreement was
approximately $3.0 million at October 31, 1996. Borrowing under the revolving
credit agreement are collateralized by accounts receivable and inventory.
The loan agreements contain certain affirmative and negative covenants which
include requirements that the Company maintain certain financial ratios and that
excess cash flows from operating and other activities, as defined in the
agreements, be remitted to the lender.
The Company has reduced its exposure to changes in the cost of its variable
rate borrowing through the use of a base rate cap agreement. This instrument
provides, for a three-year period beginning in July 1994, a 10% ceiling on the
base interest rate used to calculate interest payments on the first $4.5 million
of the Company's term loan A. At October 31, 1996, $11,968 net of accumulated
amortization of $49,532 was recorded in deferred financing costs.
The following is a schedule of aggregate annual principal payments for each
of the fiscal years ending October 31:
<TABLE>
<S> <C>
1997....................... $1,937,500
1998....................... 1,550,000
1999....................... 1,550,000
2000....................... 1,775,000
2001 and thereafter........ 1,501,705
---------
8,314,205
Less unamortized (241,850)
discount..................
---------
$8,072,355
---------
---------
</TABLE>
F-56
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(6) INCOME TAXES
The provision (benefit) for income taxes for the fiscal year ended October
31, 1996 consists of the following:
<TABLE>
<S> <C>
Current:
Federal..................................... $1,140,700
State....................................... 224,194
---------
1,364,894
---------
Deferred:
Federal..................................... (41,581)
State....................................... (9,205)
---------
(50,786)
---------
$1,314,108
---------
---------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate to pretax
income principally as a result of state income taxes and the increase in the
warrant value which is not deductible for income tax purposes.
Deferred tax assets (liabilities) are comprised of the following at October
31, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory reserves.................................................... $ 25,023
Accounts receivable allowances........................................ 20,547
Inventory uniform capitalization adjustment........................... 20,409
Accruals and deferred compensation.................................... 127,100
---------
Gross deferred tax asset.......................................... 193,079
Deferred tax liabilities:
Fixed asset book basis in excess of tax basis......................... (31,916)
---------
Net deferred tax asset............................................ $ 161,163
---------
---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management believes it is
more likely than not the Company will realize the benefits of these deductible
difference.
(7) PREFERRED STOCK
At the time of its acquisition of Arcon Coating Mills, Arcon Holdings sold
31,945, 6,255 and 41,175 shares of Series A preferred stock, Series B preferred
stock and Series A common stock, respectively, for $3,194,475, $625,525 and
$180,000, respectively.
F-57
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(7) PREFERRED STOCK (CONTINUED)
Both the Series A preferred stock, which is non-voting, and the Series B
preferred stock, which has voting rights, are mandatorily redeemable on April
30, 2001. Such redemption may also occur at the option of the stockholders
beginning on October 31, 2000. The redemption price will be determined on the
redemption date based on a multiple of adjusted earnings during the Company's
preceding fiscal year, and further adjusted based on the Company's cash and debt
balances as of the end of the preceding fiscal year.
The excess of the estimated redemption value over the carrying value of the
preferred stock is being accreted by periodic charges to retained earnings
through October 31, 2000. During the fiscal year ended October 31, 1996, the
carrying value of the Series A and Series B preferred stock was increased by
$1,527,095, based upon the present value of the redemption price, as defined in
the April 14, 1994 acquisition agreement.
Holders of both series of preferred stock receive preferential treatment in
the case of the dissolution of the Company, with the stock to be purchased by
the Company at $100 per share. In addition, no dividends will be paid to the
holders of common stock without the affirmative vote of the holders of the
Series B preferred stock. No provision for mandatory dividends exists.
The Series B preferred stock is convertible into common stock, at the option
of the holder, at a rate of approximately 23 shares of common stock for each
share of preferred stock submitted for conversion. The holders of Series A
preferred stock may convert their shares to common stock upon the occurrence of
a "conversion event" including the transfer or sale of substantially all of the
assets or shares of the Company to an unrelated party.
(8) STOCK OPTIONS
The Company adopted a stock option plan (the Stock Option Plan) in 1994
which provides that the Company may grant, to certain key employees, incentive
stock options or non-qualified stock options at the discretion of the Board of
Directors. The Stock Option Plan provides that the aggregate number of shares of
common stock issuable pursuant to these options may not exceed 111,000 shares.
These options, which are exercisable during the period beginning one year from
the date at the grant and ending ten years from the grant date, are exercisable
at a price to be determined by the Board of Directors of the Company.
In April 1994, pursuant to the Stock Option Plan, the Company granted
non-qualified stock options to two employees to purchase an aggregate of 72,223
shares of common stock at $.44 per share. Of this amount, 20% of the options
vest at the date of grant, 20% vest upon the subsequent three anniversaries of
the grant date and 20% vests on October 31, 1997. No options were exercised as
of October 31, 1996. Deferred compensation expense of $51,149 was recorded in
the fiscal year ended October 31, 1996, based upon the difference between the
exercise price and the fair market value, as determined by an independent
valuation, of the common stock at the date of grant the number of options vested
as of each balance sheet date.
The conversion rate, dissolution amounts and the number of shares reserved
for the Stock Option Plan are subject to change in the event of a stock split,
stock dividend or other such dilative occurrence.
F-58
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(9) WARRANTS
On April 14, 1994, the Company entered into a warrant agreement with the
Company's lender whereby the lender could purchase up to 8-12% of the
outstanding stock of Arcon Holdings (note 5) for $.01 per share (par value). The
warrants expire on April 14, 2004. For a five-year period commencing on April
14, 1999 the lender may also require the Company to purchase the warrants
described above at its fair market value on the date of the put. The estimated
fair value of the warrants was $1,750,000 at October 31, 1996, based on the
amounts that were repurchased as a result of the Acquisition described in note
14.
(10) RELATED PARTY TRANSACTIONS
The Company paid management fees of $100,000 during the fiscal year ended
October 31, 1996, for services provided by a major shareholder of Arcon
Holdings.
(11) PROFIT SHARING PLAN
The Company makes discretionary contributions to the Arcon Profit Sharing
Benefit Plan (the Plan), a defined contribution plan. This Plan covers all
employees, over the age of 20-1/2, who have completed at least six months of
service. Such contributions have been funded to the Plan. Total contributions to
the Plan which have been charged to operations were $116,043 for the fiscal year
ended October 31, 996.
(12) LEASE COMMITMENTS
The Company leases an office and manufacturing facility located in
Oceanside, New York. The facility lease expires in fiscal 1998 and is renewable
thereafter. Total rent expense under this lease was $249,530 for the fiscal year
ended October 31, 1996.
Minimum annual rentals under the facility lease and operating leases for
automobiles and equipment for each of the years ending October 31, are as
follows:
<TABLE>
<S> <C>
1997........................ $ 274,758
1998........................ 160,392
1999........................ 8,644
2000........................ 8,644
2001........................ 5,043
---------
---------
</TABLE>
(13) SIGNIFICANT BUSINESS CONCENTRATIONS
The Company's principal raw material, Tyvek-Registered Trademark-, is
proprietary to a single vendor. Tyvek-Registered Trademark- purchases
represented approximately 53% of total raw material purchases of the Company for
the fiscal year ended October 31, 1996.
The Company had sales to one customer which represented approximately 24.5%
of total sales for the fiscal year ended October 31, 1996. At October 31, 1996,
this customer represented 15% of the total outstanding accounts receivable.
F-59
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(14) SUBSEQUENT EVENT
Pursuant to the Agreement dated August 28, 1996 by and among SPI and the
stockholders of Arcon Holdings, SPI acquired all the outstanding stock of Arcon
Holdings as of October 31, 1996 for a purchase price of $32,000,000. Pursuant to
the Agreement and immediately prior to the Acquisition, the non-qualified stock
options granted as described in note 8 were vested and exercised. The remaining
options issuable under the Stock Option Plan were canceled. Concurrently with
the transfer of the purchase price to the stockholders of the Company, the
stockholders agreed to repay all amounts owed under the Company's revolver and
term loan A and B debt and repurchase and cancel the warrants, as described in
notes 5 and 9, respectively. Upon completion of such events, SPI will own all of
the outstanding shares and rights to acquire shares of stock of the company.
Also concurrent with the Acquisition, SPI has agreed to sell the assets and
the liabilities of Thomas Tape, a division of the Company, on November 1, 1996
for a $300,000 promissory note to a company formed by the previous general
manager of the Thomas Tape division. The carrying value of the division's assets
and liabilities have not been adjusted for this sale in the accompanying
consolidated financial statements.
The accompanying consolidated financial statements of the Company have been
prepared immediately prior to the Acquisition and, therefore, do not reflect the
Acquisition, the exercise of the non-qualified stock options, the related
repayment of debt, the repurchase and cancellation of warrants, and an
allocation of the purchase price, including acquisition costs, to the net assets
of the Company in accordance with Opinion No. 16 of the Accounting Principles
Board.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Arcon Holdings Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings (deficit) and of cash
flows present fairly, in all material respects, the financial position of Arcon
Holdings Corp. and its subsidiary (the "Company") at October 31, 1995 and 1994,
and the results of its operations and its cash flows for the year ended October
31, 1995 and for the period April 14, 1994 (Inception) through October 31, 1994
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Jericho, New York
November 28, 1995 except for Note 14, which is as of August 28, 1996
F-61
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------- SEPTEMBER 30,
1995 1994 1996
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash.............................................................. $ 296,733 $ 255,232 $ 1,825,096
Accounts receivable, net of allowance for doubtful accounts of
$78,915 and $56,202 at October 31, 1995 and 1994, respectively,
and $52,311 at September 30, 1996............................... 1,935,541 2,015,029 1,964,232
Inventories....................................................... 2,721,548 1,907,504 2,694,534
Prepaid expenses and other........................................ 74,405 58,954 180,117
Income tax receivable............................................. 90,800 --
Deferred income taxes............................................. 94,948 67,651 114,000
------------- ------------- -------------
Total current assets.......................................... 5,213,975 4,304,370 6,777,979
Property, plant and equipment, net.................................. 1,338,666 1,404,554 1,209,190
Deferred financing costs, net of accumulated amortization of
$266,612 and $92,185 at October 31, 1995 and 1994, respectively,
and $428,400 at September 30, 1996................................ 563,105 739,987 401,317
Goodwill, net of accumulated amortization of $1,270,078 and $448,078
at October 31, 1995 and 1994, respectively, and $2,018,079 at
September 30, 1996................................................ 10,969,906 11,791,906 10,221,905
Deferred income taxes............................................... 15,429 18,091 15,429
------------- ------------- -------------
Total assets.................................................. $ 18,101,081 $ 18,258,908 18,625,820
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................. $ 1,702,670 $ 1,572,188 $ 1,699,573
Accrued interest.................................................. 99,443 108,621 145,000
Current portion of long-term debt................................. 1,425,000 1,650,000 1,550,000
Income taxes payable.............................................. 177,587 635,538
------------- ------------- -------------
Total current liabilities..................................... 3,227,113 3,508,396 4,030,111
Long-term debt...................................................... 8,639,423 9,950,632 6,477,027
Warrants............................................................ 641,500 379,710 1,752,000
Deferred compensation............................................... 207,433 56,831 284,156
------------- ------------- -------------
Total liabilities............................................. 12,715,469 13,895,569 12,543,294
Stockholders' equity
Series A Preferred Stock, $.01 par value, 32,000 shares
authorized, 31,945 shares issued and outstanding................ 3,927,700 3,194,475 5,173,560
Series B Preferred Stock, $.01 par value, 6,500 shares authorized,
6,255 shares issued and outstanding............................. 769,101 625,525 1,013,058
Common stock, $.01 par value, 1,600,000 shares authorized, 41,175
shares issued and outstanding................................... 412 412 412
Paid in capital................................................... 179,588 179,588 179,588
Retained earnings (deficit)....................................... 508,811 363,339 (284,092)
------------- ------------- -------------
Total stockholders' equity.................................... 5,385,612 4,363,339 6,082,526
------------- ------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity.................... $ 18,101,081 $ 18,258,908 $ 18,625,820
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 14,
1994
(INCEPTION) 11 MONTH 11 MONTH
YEAR ENDED THROUGH PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1996 1995
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net sales.......................................... $ 25,788,864 $ 12,172,916 $ 25,984,254 $ 23,532,386
Cost of goods sold................................. 18,652,559 9,029,333 18,590,000 17,096,783
------------- --------------- ------------- -------------
Gross profit................................... 7,136,305 3,143,583 7,394,254 6,435,603
Selling, general and administrative expenses....... 2,313,310 1,114,145 1,874,548 2,124,061
Interest expense................................... 1,314,618 732,187 1,077,649 1,230,677
Accretion of warrants to fair market value......... 261,790 -- 1,110,208 262,000
Amortization of intangible assets.................. 996,600 531,550 891,000 894,762
Depreciation and amortization of property, plant
and equipment.................................... 240,232 121,891 234,934 220,000
Management fees.................................... 100,000 54,165 90,000 91,667
------------- --------------- ------------- -------------
Total other expenses........................... 5,226,550 2,553,938 5,278,339 4,823,167
------------- --------------- ------------- -------------
Income before provision for income taxes....... 1,909,755 589,645 2,115,915 1,612,436
Provision for income taxes......................... 887,482 226,306 1,419,000 831,000
------------- --------------- ------------- -------------
Net income..................................... 1,022,273 363,339 696,915 781,436
Retained earning, beginning of period.............. 363,339 -- 508,811 363,339
Accretion of excess of redemption value of
preferred stock over fair value at issuance
date............................................. (876,801) -- (1,489,818) (876,801)
------------- --------------- ------------- -------------
Retained earnings (deficit), end of period......... $ 508,811 $ 363,339 $ (284,092) $ 267,974
------------- --------------- ------------- -------------
------------- --------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 14,
1994 11 MONTH 11 MONTH
YEAR ENDED (INCEPTION) PERIOD ENDED PERIOD ENDED
OCTOBER 31, THROUGH OCTOBER SEPTEMBER 30, SEPTEMBER 30,
1995 31, 1994 1996 1995
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income.......................................... $1,022,273 $ 363,339 $ 696,915 $ 781,436
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................. 1,236,832 661,420 1,146,996 1,013,052
Loss on sale of property, plant and
equipment................................... 14,780 -- -- --
Increase in warrant value..................... 261,790 -- 1,110,500 262,000
Deferred compensation......................... 150,602 56,831 76,723 150,602
Allowance for doubtful accounts............... 22,713 20,336 (26,604) 54,459
Deferred income taxes......................... (24,635) (85,742) (19,052) --
Changes in operating assets and liabilities
Accounts receivable........................... 56,775 (7,699) (2,087) (111,459)
Inventories................................... (814,044) 216,176 27,014 (685,391)
Prepaid expenses and other.................... (15,451) 25,858 (105,712) 23,000
Accounts payable.............................. 130,482 292,248 3,097 (540,000)
Accrued interest.............................. (9,178) 108,621 45,557 402,000
Income taxes payable.......................... (268,387) -- 626,807 41,336
----------- --------------- ------------- -------------
Net cash provided by operating
activities.............................. 1,764,552 1,651,388 3,580,154 1,391,035
----------- --------------- ------------- -------------
Cash flows from investing activities
Capital expenditures.............................. (186,842) (24,996) (103,524) (147,000)
Cash paid for acquisition, net of cash acquired... (17,252,596) -- --
----------- --------------- ------------- -------------
Net cash used in investing activities..... (186,842) (17,277,592) (103,524) (147,000)
----------- --------------- ------------- -------------
Cash flows from financing activities
Repayment of long-term debt....................... (3,720,628) (3,559,446) (1,948,267) (1,746,000)
Proceeds from borrowing........................... 2,184,419 2,152,786 -- --
Proceeds from acquisition debt financing.......... 13,349,596 -- --
Proceeds from sale of preferred and common
stock.......................................... 4,000,000 -- --
Purchase of interest rate cap..................... (61,500) -- --
----------- --------------- ------------- -------------
Net cash (used in) provided by financing
activities.............................. (1,536,209) 15,881,436 (1,948,267) (1,746,000)
----------- --------------- ------------- -------------
Net increase (decrease) in cash................... 41,501 255,232 1,528,363 (501,965)
Cash at beginning of period....................... 255,232 0 296,733 255,232
----------- --------------- ------------- -------------
Cash at end of period............................. $ 296,733 $ 255,232 $ 1,825,096 $ (246,733)
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
Supplemental disclosure of cash flow information:
Interest paid..................................... $1,476,076 $ 602,786 $ 1,077,649 $ 1,230,677
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
Income taxes paid................................. $1,179,270 $ 134,461 $ 794,806 $ 1,826,213
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Arcon Holdings Corp. and its wholly-owned subsidiary, Arcon Coating Mills,
Inc. ("Arcon Coating Mills" or the "Subsidiary"), (collectively the "Company")
is a leading producer of tapes and edge covering materials which are used to
bind, reinforce, protect and decorate office and school supply products as well
as checkbooks and hard and soft cover books. The Company maintains operating
facilities in Oceanside, New York, and Springfield, Ohio.
The Company was incorporated on March 17, 1994 for the purpose of acquiring
Arcon Coating Mills, Inc. As discussed in Note 2, Arcon Coating Mills, Inc. was
acquired by Arcon Acquisition Corp. (a wholly-owned subsidiary of the Company)
on April 14, 1994 and, accordingly, the results of operations and cash flows of
the Subsidiary for the period ended October 31, 1994 are presented from the date
of acquisition. Concurrent with the acquisition, Arcon Acquisition Corp. was
merged into Arcon Coating Mills, Inc.
USE OF ESTIMATES
The accompanying financial statements were prepared in conformity with
generally accepted accounting principles which require management to make
estimates, and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
INVENTORIES
Inventories are reported at the lower of cost or market value, with cost
determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over estimated useful lives of assets as follows:
automobiles - 5 years; furniture and fixtures - 7 years; machinery and equipment
- -7 years; and buildings - 15 years. Leasehold improvements are amortized over
the shorter of the life of the improvement or the lease term.
INTANGIBLE ASSETS
Deferred financing costs arising from the acquisition debt are charged to
operations as additional interest expense, using the straight-line method, over
the life of the underlying indebtedness. Goodwill arising from the acquisition
described in Note 2 is being amortized over 15 years on a straight-line basis.
F-65
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes have been provided for in conformity with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This statement requires recognition of deferred income taxes utilizing a
liability based approach.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is believed
to approximate their carrying amounts.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet at September 30, 1996, the consolidated
statement of income and retained earnings (deficit) and the consolidated
statement of the cash flows for the eleven-month interim periods ended September
30, 1996 and September 30, 1995 have been prepared by the Company without audit.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the interim financial
information, have been made. The results of operations of interim periods are
not necessarily indicative of the operating results of a full year or of future
years.
2. ACQUISITION
On April 14, 1994 (the "acquisition date"), 100% of Arcon Coating Mill's
common stock was purchased by Arcon Acquisition Corp. a wholly-owned subsidiary
of the Company, for a purchase price of $17,349,000. The purchase price,
including acquisition costs, was allocated to the net assets of the Company in
accordance with Opinion No. 16 of the Accounting Principles Board. The purchase
price exceeded the fair value of the net assets acquired of $4,340,799 by
$13,008,201 (as adjusted) and, accordingly, goodwill and certain intangible
assets were recorded as of the acquisition date.
The acquisition was accounted for as a purchase and, therefore, the results
of operations of Arcon Coating Mills are included in the consolidated financial
statements for periods subsequent to the date of acquisition.
3. INVENTORIES
Net inventories consist of the following at:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.......................................................... $ 1,477,689 $ 929,993 $ 1,308,145
Work-in-process........................................................ 1,108,664 910,936 1,231,711
Finished goods......................................................... 135,195 66,575 154,678
------------ ------------ -------------
2,721,548 1,907,504 2,694,534
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-66
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Land and building...................................................... $ 115,932 $ 115,932 $ 117,433
Machinery and equipment................................................ 1,219,415 1,102,823 1,323,209
Leasehold improvements................................................. 158,690 157,790 163,348
Automobiles............................................................ 118,292 85,750 113,526
Furniture and fixtures................................................. 78,977 63,416 78,977
------------ ------------ -------------
$ 1,691,306 $ 1,525,711 $ 1,796,493
Less--Accumulated depreciation and amortization.................... 352,640 121,157 587,303
------------ ------------ -------------
$ 1,338,666 $ 1,404,554 $ 1,209,190
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
5. DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Term loan A............................................................ $ 6,350,000 $ 7,500,000 $ 5,312,500
Term loan B............................................................ 2,680,527 2,641,155 2,714,527
Revolving line of credit............................................... 1,033,896 1,459,477 2,245
------------ ------------ -------------
10,064,423 11,600,632 8,029,272
Less--Current portion.............................................. 1,425,000 1,650,000 1,550,000
------------ ------------ -------------
$ 8,639,423 $ 9,950,632 $ 6,479,272
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
TERM LOAN A
The term loan A principal is due and payable on the last day in January,
April, July and October of each year through January 31, 2000. The quarterly
payments are $387,500 through October 31, 1999 with a final payment of $275,000
on January 31, 2000. The note bears interest at the higher of the prime rate or
the Federal funds effective rate, plus 2%. Such rate was 10.75% and 10.25% at
October 31, 1995 and September 30, 1996, respectively. Interest is payable on
the first day of each month.
TERM LOAN B
The term loan B principal is due and payable in the amount of $750,000 on
July 31, 2000, October 31, 2000, January 31, 2001 and April 30, 2001,
respectively. Interest accrues at a fixed rate of 11.5% and is payable on the
first day of each month. During the fiscal year ended October 31, 1995 and the
period ended September 30, 1996, the note has been recorded net of unamortized
discount of $319,473 and $286,473, respectively, which is being amortized over
the life of the indebtedness.
F-67
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
REVOLVING LINE OF CREDIT
Concurrent with the acquisition, the Company entered into a revolving credit
agreement which expires on April 30, 2001. Based upon management's intention to
continually refinance outstanding borrowings under this long-term agreement, the
outstanding amount has been classified as a non-current liability. The maximum
amount that can be borrowed under this agreement is the lesser of $3,000,000 or
85% of eligible accounts receivable plus 50% of eligible inventory. Such
eligible amounts were greater than $3,000,000 at October 31, 1995. The line
bears interest at the higher of the prime rate or the Federal funds effective
rate, plus 2%, payable on the first day of each month. In addition, the Company
pays commitment fees of .5% on the average daily unused balance. The unused
balance under the revolving credit agreement was approximately $2.0 million and
$3.0 million at October 31, 1995 and September 30, 1996, respectively.
Borrowings under the revolving credit agreement are collateralized by
accounts receivable and inventory. The term notes are collateralized by
substantially all assets of the Company.
The loan agreements contain certain affirmative and negative covenants which
include requirements that the Company maintain certain financial ratios and that
excess cash flows from operating and other activities, as defined in the
agreements, be remitted to the lender. The term loan A balances at October 31,
1995 reflect the acceleration of $500,000 of debt payments made during the year
related to such excess cash flows.
The Company has reduced its exposure to changes in the cost of its variable
rate borrowings through the use of a base rate cap agreement. This instrument
provides, for a three year period beginning in July 1994, a 10% ceiling on the
base interest rate used to calculate interest payments on the first $4.5 million
of the Company's term loan A. At October 31, 1995, $32,464, net of accumulated
amortization of $29,036, was recorded in deferred financing costs. At September
30, 1996, $13,676, net of accumulated amortization of $47,824, was recorded in
deferred financing costs.
The following is a schedule of aggregate annual principal payments for each
of the fiscal years ending October 31:
<TABLE>
<S> <C>
1996........................................................ $1,425,000
1997........................................................ 1,550,000
1998........................................................ 1,550,000
1999........................................................ 1,550,000
2000........................................................ 1,775,000
2001 and thereafter......................................... 2,533,896
----------
10,383,896
Less--Unamortized discount.................................. (319,473)
----------
$10,064,423
----------
----------
</TABLE>
6. INCOME TAXES
The Company accounts for income taxes under the requirements of SFAS 109.
SFAS 109 utilizes an asset and liability approach to measuring income tax
expense. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future consequences of temporary
F-68
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
differences between the financial statement carrying amounts and the tax basis
of certain assets and liabilities.
Deferred tax assets (liabilities) are comprised of the following at October
31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred tax assets
Inventory reserves....................................................................... $ 38,154 $ 27,808
Accounts receivable allowances........................................................... 30,477 21,705
Inventory uniform capitalization adjustment.............................................. 24,755 10,427
Accruals and deferred compensation....................................................... 81,632 30,443
---------- ---------
Gross deferred tax asset............................................................... $ 175,018 $ 90,383
Deferred tax liabilities
Fixed asset book basis in excess of tax basis............................................ $ (64,641) $ (4,641)
---------- ---------
Net deferred tax asset................................................................. $ 110,377 $ 85,742
---------- ---------
---------- ---------
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE ELEVEN MONTH
FOR THE YEAR ENDED PERIOD ENDING SEPTEMBER
OCTOBER 31, 30,
---------------------- ------------------------
1995 1994 1996 1995
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Current
Federal...................................................... $ 744,751 $ 255,488 $ 1,269,903 $ 694,730
State........................................................ 167,366 56,560 172,557 93,722
---------- ---------- ------------ ----------
912,117 312,048 1,442,460 788,452
---------- ---------- ------------ ----------
Deferred:
Federal...................................................... (21,669) (70,070) (21,142) 37,458
State........................................................ (2,966) (15,672) (2,318) 5,090
---------- ---------- ------------ ----------
(24,635) (85,742) (23,460) 42,548
---------- ---------- ------------ ----------
$ 887,482 $ 226,306 $ 1,419,000 $ 831,000
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory Federal income tax rate to pretax
income principally as a result of state income taxes and the increase in the
warrant value which is not deductible for income tax purposes.
7. STOCKHOLDERS' EQUITY
At the time of the formation of the Company and the acquisition of Arcon
Coating Mills, the Company sold 31,945, 6,255 and 41,175 shares of Series A
Preferred Stock, Series B Preferred Stock and Series A Common Stock,
respectively, for $3,194,475, $625,525 and $180,000, respectively.
Both the Series A Preferred Stock, which is non-voting, and the Series B
Preferred Stock, which has voting rights, are mandatorily redeemable on April
30, 2001. Such redemption may also occur at the option of the stockholders
beginning on October 31, 2000. The redemption price will be determined on the
F-69
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
redemption date based on a multiple of adjusted earnings during the Company's
preceding fiscal year, and as further adjusted based on the Company's cash and
debt balances as of the end of the preceding fiscal year.
The excess of the estimated redemption value over the carrying value of the
preferred stock is being accreted by periodic charges to retained earnings
through October 31, 2000. During the fiscal year ended October 31, 1995 and the
period ended September 30, 1996, the carrying value of the Series A and Series B
Preferred Stock was increased by $876,801 and $993,708, respectively.
Holders of both series of preferred stock receive preferential treatment in
the case of the dissolution of the Company, with stock to be purchased by the
Company at $100 per share. In addition, no dividends will be paid to the holders
of common stock without the affirmative vote of the holders of the Series B
Preferred Stock. No provision for mandatory dividends exists.
The Series B Preferred Stock is convertible into common stock, at the option
of the holder, at a rate of approximately 23 shares of common stock for each
share of preferred stock submitted for conversion. The holders of Series A
Preferred stock may convert their shares to common stock upon the occurrence of
a "conversion event" including the transfer or sale of substantially all of the
assets or shares of the Company to an unrelated party.
The Company adopted a stock option plan (the "Stock Option Plan") in 1994
which provides that the Company may grant, to certain key employees, Incentive
Stock Options or Non-qualified Stock Options at the discretion of the Board of
Directors. The Stock Option Plan provides that the aggregate number of shares of
common stock issuable pursuant to these options may not exceed 111,000 shares.
These options, which are exercisable during the period beginning one year from
the date at the grant and ending ten years from the grant date, are exercisable
at a price to be determined by the Board of Directors of the Company.
Pursuant to the Stock Option Plan, in April 1994, the Company granted
non-qualified stock options to two employees to purchase an aggregate of 72,223
shares of common stock at $.44 per share. Of this amount, 20% of the options
vest at the date of grant, 20% vest upon the subsequent three anniversaries of
the grant date and 20% vests on October 31, 1997. Deferred compensation expense
of $150,602, $56,831 and $76,723 was recorded for the year ended October 31,
1995 and the period ended October 31, 1994 and the period ended September 30,
1996, respectively, based upon the difference between the exercise price and the
fair market value of the common stock at the date of grant and the number of
options vested as of each balance sheet date.
The conversion rate, dissolution amounts and the number of shares reserved
for the Stock Option Plan are subject to change in the event of a stock split,
stock dividend or other such dilutive occurrence.
8. WARRANTS
Concurrent with the acquisition, the Company and Arcon Holdings Corp.,
entered into a warrant agreement with the Company's lender whereby the lender
could purchase up to 8 1/2% of the outstanding stock of Arcon Holdings Corp. for
$.01 per share (par value). The warrant expires on April 14, 2004. For a five
year period commencing on April 14, 1999 the lender may also require the Company
to purchase the warrant described above at its fair market value on the date of
the put. The estimated fair value of the warrant was $641,500 and $379,710 at
October 31, 1995 and 1994, respectively and $1,752,000 at September 30, 1996.
F-70
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company paid management fees of $100,000 and $54,165 for the year ended
October 31, 1995 and the period ended October 31, 1994, respectively, and
$90,000 for the period ended September 30, 1996 for services provided by a major
shareholder of Arcon Holdings Corp.
10. PROFIT SHARING PLAN
During 1995, the Company made contributions to the Arcon Profit Sharing
Benefit Plan. This plan, which is a defined contribution plan, covers all
employees, over the age of 20 1/2, who have completed at least six months of
service. The costs of the plan are funded currently. Total expenses charged to
operations were $254,150 and $110,908 at October 31, 1995 and 1994,
respectively, and $129,421 at September 30, 1996.
11. LEASE COMMITMENTS
The Company leases an office and manufacturing facility located in
Oceanside, New York. The lease expires in fiscal 1998 and is renewable
thereafter. Total rent expense under this lease was $243,664 and $131,316 for
the year ended October 31, 1995 and the period ended October 31, 1994,
respectively, and $228,051 for the period ended September 30, 1996.
Minimum annual rentals under all of the Company's operating leases for each
of the years ending October 31, are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 247,725
1997........................................................... 253,411
1998........................................................... 147,823
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company's principal raw material, Tyvek-Registered Trademark-, is
proprietary to a single vendor. Tyvek-Registered Trademark- purchases
represented approximately 53%, 50% and 60% of total raw material purchases of
the Company for the year ended October 31, 1995, the period ended October 31,
1994 and the period ended September 30, 1996, respectively.
13. MAJOR CUSTOMER
The Company had sales to one customer which represented approximately 20%
and 23% of total sales for the year ended October 31, 1995 and the period ended
September 30, 1996, respectively. At October 31, 1995 and September 30, 1996,
this customer represented 12% and 12%, respectively, of the total outstanding
accounts receivable.
14. SUBSEQUENT EVENT
Pursuant to a Stock Purchase Agreement dated as of August 28, 1996,
Specialty Paperboard, Inc. has agreed to purchase all of the issued and
outstanding capital stock of the Company.
F-71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Arcon Coating Mills, Inc.
In our opinion, the accompanying statements of income and accumulated
deficit and of cash flows presents fairly, in all material respects, the results
of operations of Arcon Coating Mills, Inc. (the "Company") and its cash flows
for the period November 1, 1993 to April 14, 1994 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Jericho, New York
August 28, 1996
F-72
<PAGE>
ARCON COATING MILLS, INC.
STATEMENT OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
NOVEMBER 1, 1993
TO APRIL 14,
1994
----------------
<S> <C>
Net sales....................................................................................... $ 9,112,477
Cost of goods sold.............................................................................. 6,943,801
----------------
Gross profit............................................................................ 2,168,676
Selling, and administrative expenses............................................................ 904,768
----------------
1,263,908
Other expenses (income)
Interest expense.............................................................................. 585,726
Interest income............................................................................... (6,568)
Amortization expense.......................................................................... 87,456
----------------
Total other expenses.................................................................... 666,614
----------------
Income before provision for income taxes................................................ 597,294
Provision for income taxes...................................................................... (270,226)
----------------
Net income.............................................................................. $ 327,068
Accumulated deficit, beginning of period........................................................ (360,070)
----------------
Accumulated deficit, end of period.............................................................. $ (33,002)
----------------
----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
ARCON COATING MILLS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
NOVEMBER 1, 1993
TO APRIL 14,
1994
----------------
<S> <C>
Cash flows from operating activities
Net income.................................................................................... $ 327,068
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization............................................................... 173,992
Amortization of prepaid interest............................................................ 64,568
(Increase) decrease in assets
Accounts receivable......................................................................... 226,338
Due from FSE Holdings, Inc.................................................................. 365,361
Inventories................................................................................. (438,994)
Prepaid expenses and other.................................................................. (10,633)
Increase (decrease) in liabilities
Accounts payable............................................................................ 641,264
Accrued expenses............................................................................ (276,119)
----------------
Net cash provided by operating activities............................................... 1,072,845
----------------
Cash flows from investing activities
Capital expenditures.......................................................................... (155,876)
----------------
Net cash used in investing activities................................................... (155,876)
----------------
Cash flows from financing activities
Due from FSE Holdings, Inc.................................................................... 727,031
Repayments of long-term debt.................................................................. (3,130,457)
Proceeds from long-term debt.................................................................. 1,408,059
----------------
Net cash used in financing activities................................................... (995,367)
----------------
Net decrease in cash and cash equivalents....................................................... (78,398)
----------------
Cash and cash equivalents at beginning of period................................................ 1,486,457
----------------
Cash and cash equivalents at end of period...................................................... $ 1,408,059
----------------
----------------
Supplemental disclosure of cash flow information:
Interest paid................................................................................. $ 728,460
----------------
----------------
Income taxes paid............................................................................. $ 22,557
----------------
----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
ARCON COATING MILLS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND BASIS OF PRESENTATION
Arcon Coating Mills, Inc. (the "Company") is a leading producer of tapes and
edge covering materials which are used to bind, reinforce, protect and decorate
office and school supply products as well as checkbooks and hard and soft cover
books. Prior to the close of business on April 14, 1994, the Company was a
wholly-owned subsidiary of FSE Holdings, Inc. ("FSE"). At the close of business
on April 14, 1994 (the "Acquisition Date"), FSE assumed the Company's
intercompany balance (including those related to income taxes) and long-term
debt, net of cash on hand, and sold the outstanding stock of the Company to
Arcon Holdings Corp. The accompanying consolidated financial statements do not
reflect adjustments which resulted from the subsequent purchase transaction.
INVENTORIES
Approximately 31% of the Company's inventories are priced at the lower of
cost, determined by the last-in, first-out (LIFO) method, or market. The
remaining inventories are priced at the lower of cost determined by first-in,
first-out (FIFO) method, or market.
INCOME TAXES
Prior to the Acquisition Date, the Company filed a consolidated Federal
income tax return with FSE. Its liability or benefit related to Federal income
taxes has been computed on a separate company basis and is payable to or
receivable from FSE, subject to limitations based on the consolidated Federal
return.
Income taxes have been provided for in conformity with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes"
(SFAS 109). This statement requires recognition of deferred income taxes
utilizing a liability based approach.
PROPERTY AND DEPRECIATION
Depreciation is provided over the estimated useful lives of the applicable
assets using the straight-line method. The depreciable lives used are:
<TABLE>
<S> <C>
Machinery and equipment.......................................... 5 years
Leasehold improvements........................................... 10 years
Furniture and fixtures........................................... 5 years
Automobiles...................................................... 3 years
31.5
Building......................................................... years
</TABLE>
Property and equipment includes the cost of additions and those improvements
which increase the capacity or lengthen the useful lives of the assets. Repair
and maintenance costs are expensed as incurred.
OTHER ASSETS
Amortization of goodwill is being charged to operations on a straight-line
basis over 40 years. Amortization of deferred financing costs is being charged
to operations over the term of the related debt.
F-75
<PAGE>
ARCON COATING MILLS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
In October 1993, FSE contributed additional intercompany notes due from an
affiliate in the amount of $1,258,706 to the Company. The total intercompany
notes receivable at November 1, 1993 were $1,629,300. In December 1993,
approximately $1,550,000 of these notes were repaid.
In December 1993, the Company borrowed $414,341 from FSE under a $1,000,000
revolving credit agreement. The principal amount was due to be repaid in
November 1995 with interest payable annually at 3.83%. The proceeds were used to
repay long-term debt.
3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 90,623
State........................................................... 29,474
---------
120,097
---------
---------
Deferred:
Federal......................................................... $ 118,650
State........................................................... 31,479
---------
150,129
---------
$ 270,226
---------
---------
</TABLE>
The tax provision recorded on the Company's net income is higher than
Federal and State statutory rates due primarily to $79,965 of non-deductible
amortization of goodwill. The main components of deferred tax expense relate to
the reversal of temporary differences related to a non-compete covenant and
bonus and other compensation accruals.
4. EMPLOYEE BENEFIT PLANS
Effective November 1, 1993, the Company's eligible employees participated in
the Arcon Profit Sharing Plan and Trust which covers all employees with at least
six months of service and having attained the age of 20 1/2 years. The costs of
the plan are funded currently. Total costs charged to operations for the period
were approximately $21,983.
F-76
<PAGE>
ARCON COATING MILLS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. LEASE COMMITMENTS
The Company leases an office and manufacturing facility located in
Oceanside, New York, from a partnership owned by the estate of a stockholder of
FSE. The lease expires in fiscal 1998 and is renewable thereafter. Rent expense
under this lease was $104,749 during the period.
Minimum annual rentals under all of the Company's operating leases are as
follows:
<TABLE>
<S> <C>
April 14 to October 31, 1994...................................... $ 118,307
Fiscal year ended October 31, 1995................................ 223,056
Fiscal year ended October 31, 1996................................ 223,056
Fiscal year ended October 31, 1997................................ 223,056
Fiscal year ended October 31, 1998................................ 130,116
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company's principal raw material, Tyvek-Registered Trademark-, is
proprietary to a single vendor. For the period November 1, 1993 to April 14,
1994, Tyvek-Registered Trademark- purchases represented approximately 50% of
total raw material purchases. Another vendor accounted for 12% of total raw
material purchases for the same period.
7. SUBSEQUENT EVENTS
At the close of business on April 14, 1994, 100% of the Company's common
stock was purchased by Arcon Holding Corp. for a purchase price of $17,349,000.
Pursuant to a Stock Purchase Agreement dated as of August 28, 1996,
Specialty Paperboard, Inc. has agreed to purchase all of the issued and
outstanding capital stock of Arcon Holdings Corp.
F-77
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY SPI. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SPI SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information......................... ii
Prospectus Summary............................ 1
Risk Factors.................................. 9
The Acquisitions.............................. 13
Use of Proceeds of the New Notes.............. 13
The Exchange Offer............................ 14
Capitalization................................ 22
Unaudited Pro Forma Consolidated Financial
Data........................................ 23
Selected Historical Consolidated Financial
Data--Specialty Paperboard, Inc............. 33
Selected Historical Consolidated Financial
Data--CPG Investors Inc..................... 35
Selected Historical Consolidated Financial
Data--Arcon Holdings Corp................... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 39
Business...................................... 47
Management.................................... 62
Executive Compensation and Other
Information................................. 64
Security Ownership of Certain Beneficial
Owners and Management....................... 69
Certain Relationships and Related
Transactions................................ 72
Description of Financing Arrangements......... 72
Description of the Notes...................... 74
Old Notes Registration Rights................. 97
Certain U.S. Federal Income Tax
Consequences................................ 98
Plan of Distribution.......................... 100
Book-Entry; Delivery and Form................. 101
Experts....................................... 103
Legal Matters................................. 103
Index to Financial Statements................. F-1
</TABLE>
--------------------------
PROSPECTUS
------------------
SPECIALTY PAPERBOARD, INC.
OFFER TO EXCHANGE
9 3/8% SENIOR NOTES DUE 2006,
SERIES B FOR ALL OUTSTANDING
9 3/8% SENIOR NOTES DUE 2006, SERIES A
FEBRUARY 11, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of SPI provides that directors of SPI
shall, to the full extent not prohibited by the General Corporation Law of the
State of Delaware (the "DGCL"), not be liable to SPI or its stockholders for
monetary damages for breach of such director's fiduciary duty as a director.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation, a "derivative action") if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlememt of such actions, and the
statute requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's bylaws, disinterested director vote, stockholder
vote, agreement or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------
<C> <S>
* 1. Note Purchase Agreement dated as of October 4, 1996 among SPI, Specialty Paperboard/Endura, Inc.
("Endura"), CPG Acquisition Co. ("Acquisition") and BT Securities Corporation ("BT Securities").
* 2.1 Merger Agreement dated as of August 28, 1996 by and among SPI, Acquisition and CPG Investors Inc.
("Investors").
* 2.2 Stock Purchase Agreement dated as of August 28, 1996 by and among SPI, Arcon Coating Mills, Inc.
("Arcon Mills"), Arcon Holdings Corp. ("Holdings"), the Stockholders of Holdings and various
other parties.
* 2.3 Certificate of Merger merging Acquisition with and into Investors filed with the Secretary of
State of Delaware on October 31, 1996
* 3.1(1) Restated Certificate of Incorporation of SPI, as amended to date, filed with the Secretary of
State of Delaware on March 19, 1993.
* 3.2(1) Restated By-laws of SPI.
* 4.1(1) Reference is made to Exhibits 3.1 and 3.2.
* 4.2(1) Specimen stock certificate.
* 4.3 Indenture dated as of October 15, 1996 (the "Indenture") among SPI, Acquisition, Endura and
Wilmington Trust Company.
* 4.4 Specimen Certificate of 9 3/8% Series A Senior Note due 2006 (included in Exhibit 4.3 hereof).
* 4.5 Specimen Certificate of 9 3/8% Series B Senior Note due 2006 (included in Exhibit 4.3 hereof).
</TABLE>
- ------------------------
* Previously filed.
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------
* 4.6 Form of Guarantee of Senior Notes issued pursuant to the Indenture (included in Exhibit 4.3
hereof).
<C> <S>
* 4.7 Registration Rights Agreement dated as of October 16, 1996 among SPI, Endura, Acquisition and BT
Securities.
* 5.1 Opinion of White & Case re legality of the New Notes.
* 8.1 Opinion of White & Case re tax matters.
* 10.1(5) Lease Agreement dated April 29, 1994, between CIT Group/Equipment Financing Inc. ("CIT/Financing")
and SPI.
* 10.2(5) Security Agreement dated April 29, 1994, between CIT/Financing and SPI.
* 10.3(5) Grant of Security Interest in Patents, Trademarks and Leases dated April 29, 1994, between SPI and
CIT/Financing.
* 10.4(5) Bill of Sale dated April 29, 1994, to CIT/Financing.
10.5 Amended and Restated Financing Agreement dated December , 1996, between The CIT Group/Business
Credit, Inc. ("CIT/Credit") and SPI.
* 10.6(6) Endura Sale Agreement, by and among W.R. Grace & Co.-Conn., W.R. Grace (Hong Kong) Limited, Grace
Japan Kabushiki Kaisha (collectively, the "Sellers"), the Company, Spatulate Paperboard (Hong
Kong Limited) and Specialty Paperboard Japan Kabushiki Kaisha (collectively the "Buyers"), dated
May 10, 1994.
* 10.7(6) Amendment No. 1 to the Endura Sale Agreement, by and among the Buyers, Endura and the Sellers,
dated June 30, 1994.
* 10.8(1)(3) Form of Indemnity Agreement entered into between SPI and its directors and executive officers.
* 10.9(1)(3) SPI's 1992 Amended and Restated Stock Option Plan and related form of Option Agreement.
* 10.10(1) Paper Procurement Agreement, between SPI and Acco-U.S.A.
* 10.11(8) Paper Procurement Agreement, between SPI and Pajco/Holliston, dated February 23, 1995.
* 10.12(1) Energy Service Agreement (Lewis mill), dated as of November 19, 1992, between Kamine/Besicorp
Beaver Falls L.P. ("Kamine") and SPI.
* 10.13(1) Energy Service Agreement (Latex mill), dated as of November 19, 1992, between Kamine and SPI.
* 10.14(1) Restated Ground Lease, dated as of November 19, 1992, between Kamine and SPI.
* 10.15(1) Beaver Falls Cogeneration Buyout Agreement, dated as of November 20, 1992, between Kamine, Kamine
Beaver Falls Cogen. Co., Inc. and SPI.
* 10.16(2) Amendment No. 1 to the Energy Service Agreement (Lewis mill), dated as of May 7, 1993, between
Kamine and SPI.
* 10.17(2) Amendment No. 1 to the Energy Service Agreement (Latex mill), dated as of May 7, 1993, between
Kamine and SPI.
* 10.18(2) Consent and Agreement (Energy Services Agreement), dated as of May 7, 1993, by SPI.
* 10.19(2) First Amendment of Restated Ground Lease, dated as of May 7, 1993, between Kamine and SPI.
* 10.20(2) Memorandum of Lease, dated as of May 7, 1993, between Kamine and SPI.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------
* 10.21(2) Lessor Consent and Estoppel Certificate, dated as of May 7, 1993, between SPI and Deutsche Bank
AG, New York Branch, Ansaldo Industria of America, Inc. and SV Beavers Falls, Inc.
<C> <S>
* 10.22(3)(7) SPI's 1994 Stock Option Plan and related forms of Option Agreements.
* 10.23(3)(7) SPI's 1994 Directors Stock Option Plan and related form of Option Agreement.
* 10.24 Amendment to SPI's 1994 Directors Stock Option Plan.
* 10.25(3)(4) SPI's Executive Bonus Plan.
* 10.26 Deed of Lease between James River Paper Company, Inc. and CPG-Virginia Inc. dated as of October
31, 1993.
* 10.27 Amended and Restated Agreement of Lease between Arnold Barsky doing business as A&C Realty and
Arcon Coating Mills, Inc. dated June 1, 1988.
* 10.28 Lease Agreement dated November 15, 1995 between IFA Incorporated and Custom Papers Group Inc.
* 10.29 Master Lease Agreement dated January 1, 1994 between Meridian Leasing Corp. and Custom Papers
Group Inc.
* 10.30 Master Equipment Lease Agreement dated February 3, 1995 between Siemens Credit Corp. and CPG
Holdings Inc.
12.1 Statement re computation of ratios.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Intentionally omitted
* 23.6 Consent of White & Case (contained in the opinion filed as Exhibit 5.1 hereto).
* 23.7 Consent of White & Case (contained in the opinion filed as Exhibit 8.1 hereto).
23.8 Consent of KPMG Peat Marwick LLP
23.9 Consent of KPMG Peat Marwick LLP
* 24.1 Power of Attorney (see pages II-5 -- II-12).
* 25.1 Statement of Eligibility of Trustee.
99.1 Form of Letter of Transmittal for New Notes.
99.2 Form of Notice of Guaranteed Delivery for New Notes.
99.3 Letter to Brokers.
99.4 Letter to Clients.
99.5 Instruction to Registered Holder and/or Book Entry Transfer Participant from Beneficial Owner.
99.6 Guidelines for Certificate of Taxpayer Identification Number on substitute Form W-9.
</TABLE>
- ------------------------
(1) Incorporated by reference to exhibits filed with SPI's Registration
Statement on Form S-1 (No. 33-47954), as amended, which became effective
March 10, 1993.
(2) Incorporated by reference to exhibits filed with SPI's report on Form 10-Q
for the quarter ended June 30, 1993, filed August 13, 1993.
II-3
<PAGE>
(3) Indicates management contracts or compensatory arrangements filed pursuant
to Item 601(b)(10) of Regulation S-K.
(4) Incorporated by reference to exhibits filed with SPI's report on Form 10K
for the year ended December 31, 1993 (No. 0-20231).
(5) Incorporated by reference to exhibits filed with SPI's report on Form 10-Q
for the quarter ended March 31, 1994, filed May 14, 1994.
(6) Incorporated by reference to exhibits filed with SPI's report on Form 8- K,
filed July 14, 1994.
(7) Incorporated by reference to exhibits filed with SPI's Registration
Statement on Form S-8 filed July 18, 1994.
(8) Incorporated by reference to exhibits filed with SPI's report on Form 10-K
for the year ended December 13, 1994 (No. 0-20231).
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "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 Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
SPECIALTY PAPERBOARD, INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director, President and Chief Executive Officer
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
K. Peter Norrie Director
*
--------------------------------------------
Brian C. Kerester Director
*
--------------------------------------------
George E. McCown Director
*
--------------------------------------------
Glenn S. McKenzie Director
*
--------------------------------------------
Jon H. Miller Director
*
--------------------------------------------
Wayne T. Stephens Director
*
--------------------------------------------
Fred P. Thompson, Jr. Director
*
--------------------------------------------
John D. Weil Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
SPECIALTY PAPERBOARD/ENDURA, INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
CPG INVESTORS INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
CPG HOLDINGS INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
CPG-WARREN GLEN INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
CUSTOM PAPERS GROUP INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
ARCON HOLDINGS CORP.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Brattleboro, State of Vermont, on February 7, 1997.
ARCON COATING MILLS, INC.
By: /s/ ALEX KWADER
------------------------------------
Alex Kwader
President
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this registration statement has been signed by the following persons in the
capacities indicated on February 7, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ALEX KWADER
--------------------------------------------
Alex Kwader Director and President
(Principal Executive Officer)
/S/ BRUCE P. MOORE
--------------------------------------------
Bruce P. Moore Director, Vice President and Chief
Financial Offficer
(Principal Financial and Accounting Officer)
*
--------------------------------------------
Glenn S. McKenzie Director
*By: /S/ BRUCE P. MOORE
---------------------------------------
Bruce P. Moore
Attorney-in-fact
</TABLE>
II-12
<PAGE>
EXECUTION COPY
SECOND AMENDED AND RESTATED
FINANCING AGREEMENT AND GUARANTY
among
Specialty Paperboard, Inc.
(as Borrower)
Specialty Paperboard/Endura, Inc.,
CPG Investors Inc.,
CPG Holdings, Inc.,
CPG-Warren Glen Inc.,
Custom Papers Group Inc.,
Arcon Holdings Corp.
and
Arcon Coating Mills Inc.
(as Guarantors)
The CIT Group/Business Credit, Inc.
Such other Lenders that may become
signatory hereto
(as Lenders)
and
The CIT Group/Business Credit, Inc.
(as Agent for the Lenders)
Dated as of December 31, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. DEFINITIONS, ACCOUNTING TERMS AND RULES OF
CONSTRUCTION 2
SECTION 1.01. Defined Terms..................................... 2
SECTION 1.02. Computation of Time
Periods..................................................... 25
SECTION 1.03. Accounting Principles and
Terms....................................................... 25
SECTION 1.04. Rules of
Construction................................................ 25
ARTICLE 2. CONDITIONS
PRECEDENT.............................................. 26
SECTION 2.01. Conditions Precedent to Initial Revolving Credit
Loan.............................................. 26
SECTION 2.02. Conditions Precedent to Each Revolving Credit
Loan.............................................. 30
SECTION 2.03. Deemed
Representation.............................................. 31
ARTICLE 3. AMOUNT AND TERMS OF THE REVOLVING CREDIT
LOANS.................................................. 31
SECTION 3.01. Revolving Credit
Loans....................................................... 31
SECTION 3.02. Revolving Credit
Note........................................................ 31
SECTION 3.03.
Overadvances................................................ 32
SECTION 3.04. Information Relating to
Accounts.................................................... 32
SECTION 3.05. Representations Relating to
Accounts.................................................... 32
SECTION 3.06. Collection of
Accounts.................................................... 33
SECTION 3.07. Notice Regarding
Accounts.................................................... 34
SECTION 3.08. Borrower's
Account..................................................... 35
SECTION 3.09. Application of
Payments.................................................... 35
SECTION 3.10.
Prepayments................................................. 36
SECTION 3.11. Funding of Revolving Credit
Loans....................................................... 37
SECTION 3.12. Notice and Manner of
Borrowing................................................... 37
SECTION 3.13. Obligations of Agent and
Lenders..................................................... 38
SECTION 3.14. Minimum
Amounts..................................................... 39
SECTION 3.15. Use of
Proceeds.................................................... 39
SECTION 3.16. Taxes............................................. 39
SECTION 3.17. Additional
Costs....................................................... 41
SECTION 3.18. Limitation on Types of Revolving Credit
Loans............................................. 42
SECTION 3.19.
Illegality.................................................. 42
SECTION 3.20. Treatment of Affected
Loans....................................................... 42
SECTION 3.21.
Adequacy.................................................... 43
ARTICLE 4.
GUARANTY......................................................... 43
SECTION 4.01. Guaranty.......................................... 43
SECTION 4.02. Guarantors' Guaranty Obligations
Unconditional..................................... 44
SECTION 4.03.
Waivers..................................................... 45
i
<PAGE>
SECTION 4.04.
Subrogation................................................. 45
ARTICLE 5.
COLLATERAL....................................................... 45
SECTION 5.01. (a) Grant of a Security Interest by
Borrower..................................... 45
(b) Grant of a Security Interest by
Guarantors................................... 46
SECTION 5.02. Covenants Regarding
Inventory................................................... 47
SECTION 5.03. Covenants Regarding
Equipment................................................... 47
SECTION 5.04. Collateral
Covenant.................................................... 49
SECTION 5.05. Covenants Regarding
Accounts.................................................... 50
SECTION 5.06. Covenants Regarding Lease
Agreement................................................... 50
SECTION 5.07. Continuing Security
Interest.................................................... 50
SECTION 5.08. Actions by
Agent....................................................... 51
SECTION 5.09. Additional Collateral and Further
Assurances........................................ 51
SECTION 5.10. Additional
Information................................................. 52
SECTION 5.11. Compliance with Fair Labor Standards
Act............................................... 52
ARTICLE 6. INTEREST, FEES AND
EXPENSES......................................................... 52
SECTION 6.01. Method of Electing Interest
Rates....................................................... 52
SECTION 6.02.
Interest.................................................... 54
SECTION 6.03.
Fees........................................................ 55
SECTION 6.04. Payments and
Computations................................................ 55
SECTION 6.05. Certain
Compensation................................................ 56
ARTICLE 7.
POWERS........................................................... 57
SECTION 7.01.
Powers...................................................... 57
ARTICLE 8. REPRESENTATIONS AND
WARRANTIES....................................................... 57
SECTION 8.01. Incorporation, Good Standing and Due
Qualification..................................... 57
SECTION 8.02. Corporate Power and Authority; No
Conflicts......................................... 58
SECTION 8.03. Legally Enforceable
Agreements.................................................. 58
SECTION 8.04.
Litigation.................................................. 58
SECTION 8.05. Financial
Statements.................................................. 58
SECTION 8.06. Ownership and
Liens....................................................... 61
SECTION 8.07.
Taxes....................................................... 61
SECTION 8.08.
ERISA....................................................... 62
SECTION 8.09.
Subsidiaries................................................ 62
SECTION 8.10. Operation of
Business.................................................... 62
SECTION 8.11. No Default on Outstanding Judgments or
Orders...................................................... 62
SECTION 8.12. No Defaults on Other
Agreements.................................................. 63
SECTION 8.13. Labor Disputes and Acts of
God......................................................... 63
SECTION 8.14. Governmental
Regulation.................................................. 63
SECTION 8.15.
Partnerships................................................ 63
ii
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SECTION 8.16. Environmental
Protection.................................................. 63
SECTION 8.17.
Solvency.................................................... 64
SECTION 8.18. Arcon Purchase
Documents................................................... 64
SECTION 8.19. CPG Merger
Documents................................................... 65
SECTION 8.20. Intellectual
Property.................................................... 65
SECTION 8.21. License of Intellectual
Property.................................................... 65
ARTICLE 9. AFFIRMATIVE
COVENANTS........................................................ 65
SECTION 9.01. Reporting
Requirements................................................ 65
SECTION 9.02. Notices........................................... 67
SECTION 9.03. Payment of Taxes and
Claims...................................................... 70
SECTION 9.04. Maintenance of
Existence................................................... 70
SECTION 9.05. Conduct of
Business.................................................... 70
SECTION 9.06. Compliance with
Laws........................................................ 70
SECTION 9.07.
Insurance................................................... 70
SECTION 9.08. Books and Records;
Inspection.................................................. 74
SECTION 9.09. ERISA
Covenant.................................................... 75
SECTION 9.10. Intercompany Transfer of
Funds....................................................... 75
SECTION 9.11. Inventory and Accounts Receivable Analysis of Acquired
Entity...................................................... 76
ARTICLE 10. NEGATIVE COVENANTS...................................... 78
SECTION 10.01.
Debt........................................................ 78
SECTION 10.02.
Liens....................................................... 78
SECTION 10.03.
Guaranties.................................................. 78
SECTION 10.04. Sale of
Assets...................................................... 78
SECTION 10.05. Prohibition of Fundamental
Changes..................................................... 78
SECTION 10.06.
Investments................................................. 79
SECTION 10.07. Transaction with
Affiliates.................................................. 79
SECTION 10.08. Nature of
Business.................................................... 79
SECTION 10.09.
Dividends................................................... 80
SECTION 10.10.
Leases...................................................... 80
SECTION 10.11. Environmental
Compliance.................................................. 80
SECTION 10.12. Fiscal
Year........................................................ 80
SECTION 10.13. Subsidiary Stock
Issuance.................................................... 81
ARTICLE 11. Intentionally
Omitted.......................................................... 81
ARTICLE 12. EVENTS OF
DEFAULT.......................................................... 81
SECTION 12.01. Events of
Default..................................................... 81
SECTION 12.02. Acceleration of
Obligations................................................. 85
SECTION 12.03. Other
Remedies.................................................... 86
ARTICLE 13.
AGENCY........................................................... 87
SECTION 13.01. The
Agent....................................................... 87
SECTION 13.02. Delegation of
Duties...................................................... 87
SECTION 13.03. Exculpatory
Provisions.................................................. 88
SECTION 13.04. Reliance by
Agent....................................................... 88
SECTION 13.05. Notice of
Default..................................................... 89
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<PAGE>
SECTION 13.06. Non-Reliance on Agent and other
Lenders..................................................... 89
SECTION 13.07.
Indemnification............................................. 89
SECTION 13.08. The Agent in its Individual
Capacity.................................................... 90
SECTION 13.09. Successor
Agent....................................................... 90
SECTION 13.10. Arrangements Requiring Consent of
Lenders..................................................... 90
SECTION 13.11. Recapture of
Payments.................................................... 92
ARTICLE 14. RIGHTS AND OBLIGATIONS OF THE LENDERS AND THE
AGENT.................................................. 92
SECTION 14.01. Adjustments Among
Lenders..................................................... 92
SECTION 14.02. Sharing of
Payments.................................................... 93
SECTION 14.03. Sale of
Participations.............................................. 93
SECTION 14.04. Nature of Revolving Credit
Commitments................................................. 94
SECTION 14.05. Sharing of Costs and
Expenses.................................................... 94
SECTION 14.06. Sharing of
Payments.................................................... 95
SECTION 14.07.
Assignments................................................. 95
SECTION 14.08. Acknowledgements by
Agent....................................................... 97
SECTION 14.09. Termination of Financing
Agreement................................................... 97
ARTICLE 15.
MISCELLANEOUS.................................................... 98
SECTION 15.01.
Waivers..................................................... 98
SECTION 15.02. Entire
Agreement................................................... 99
SECTION 15.03.
Usury....................................................... 99
SECTION 15.04. Payment of
Expenses.................................................... 99
SECTION 15.05.
Indemnity................................................... 100
SECTION 15.06.
Severability................................................ 100
SECTION 15.07. Waiver of Jury
Trial....................................................... 101
SECTION 15.08.
Notices..................................................... 101
SECTION 15.09. Governing
Law......................................................... 102
SECTION 15.10. Confidentiality................................... 102
Exhibits
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Revolving Credit Notice of Borrowing
Exhibit C - Form of Notice of Interest Rate Selection
Exhibit D - Form of Mortgage, Assignment of Leases and Rents
and Security Agreement (Brattleboro)
Exhibit E - Form of Solvency Certificate
Exhibit F - Form of Opinion of Counsel to Obligors
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Borrowing Base Certificate
Exhibit I - Form of Security Agreement
Schedules
Schedule 5.04 - List of Inventory and Equipment Locations
Schedule 5.04A - Real Estate
Schedule 8.04 - Litigation
Schedule 9.06 - Environmental Matters
iv
<PAGE>
SECOND AMENDED AND RESTATED FINANCING AGREEMENT AND GUARANTY dated as
of December 31, 1996, among Specialty Paperboard, Inc. ("Borrower"), a Delaware
corporation, Specialty Paperboard/Endura, Inc. ("Endura"), a Delaware
corporation and a wholly owned subsidiary of Borrower, CPG Investors Inc., a
Delaware corporation and a wholly owned subsidiary of Borrower ("CPG
Investors"), CPG Holdings, Inc., a Delaware corporation and a wholly owned
subsidiary of CPG Investors ("CPG Holdings"), CPG-Warren Glen Inc., a Virginia
corporation and a wholly owned subsidiary of CPG Holdings ("CPG-Warren"), Custom
Papers Group Inc., a Virginia corporation and a wholly owned subsidiary of CPG
Holdings ("Custom"), Arcon Holdings Corp., a Delaware corporation, and a wholly
owned subsidiary of Borrower ("Arcon Holdings"), and Arcon Coating Mills Inc., a
Delaware corporation and a wholly owned subsidiary of Arcon Holdings ("Arcon
Coating"), The CIT Group/Business Credit, Inc., a New York corporation ("CITBC")
with offices located at 1211 Avenue of the Americas, New York, New York, the
other lenders that may, subsequent to the date hereof, purchase from CITBC a
portion of its rights and obligations under this Second Amended and Restated
Financing Agreement and Guaranty pursuant to, and in accordance with, Section
14.07 hereof (CITBC and such other lenders each individually a "Lender" and
collectively the "Lenders"), and CITBC as agent for the Lenders (in such
capacity, together with its successors or assigns in such capacity, the
"Agent"). Endura, CPG Investors, CPG Holdings, CPG-Warren, Custom, Arcon
Holdings, Arcon Coating and each Acquired Entity are referred to herein as a
"Guarantor" and collectively as the "Guarantors". The Guarantors and the
Borrower are referred to herein collectively as the "Obligors".
PRELIMINARY STATEMENTS
1. Reference. Reference is made to (i) the Financing Agreement dated
April 29, 1994 among Borrower, each of the Lenders signatory thereto and the CIT
Group/Business Credit, Inc., as Agent for the Lenders and (ii) the Amended and
Restated Financing Agreement and Guaranty dated June 30, 1994 among Borrower,
Endura, CITBC, each of the other Lenders signatory thereto and CITBC, as Agent
for the Lenders (the "June 1994 Agreement").
2. Amendment and Restatement. To the extent this Second Amended and
Restated Financing Agreement and Guaranty amends the June 1994 Agreement, the
June 1994 Agreement is amended, and to the extent this Second Amended and
Restated Financing Agreement and Guaranty restates the June 1994 Agreement, the
June 1994 Agreement is restated.
The Borrower desires that the Lenders extend credit as provided herein
and the Lenders are prepared to extend such
<PAGE>
credit. Accordingly, the Borrower, the Guarantors, the Lenders and the Agent
agree as follows:
ARTICLE 1. DEFINITIONS, ACCOUNTING TERMS AND RULES OF CONSTRUCTION
SECTION 1.01. Defined Terms. As used in this Second Amended and
Restated Financing Agreement and Guaranty the following terms have the following
meanings (terms defined in the singular to have the same meanings when used in
the plural and vice versa):
Account Debtor means each Person obligated to pay on an Account
Receivable.
Accounts shall mean all of an Obligor's now existing and future: (a)
Accounts Receivable (whether or not specifically listed on schedules furnished
to the Agent), and any and all instruments, documents, contract rights, chattel
paper, general intangibles, including, without limitation, all accounts created
by or arising from all of the Obligor's sales of goods or rendition of services
to its customers, (b) unpaid seller's rights (including rescission, replevin,
reclamation and stoppage in transit) relating to the foregoing or arising
therefrom; (c) rights to any goods represented by any of the foregoing,
including rights to returned or repossessed goods; (d) reserves and credit
balances arising hereunder; (e) guarantees or collateral for any of the
foregoing; (f) insurance policies or rights relating to any of the foregoing;
and (g) cash and non-cash proceeds of any and all the foregoing.
Accounts Receivable means any right to payment for goods sold by or
services rendered by an Obligor, including all accounts arising from sales or
rendition of services made under any of the Obligor's trade names or styles, or
through any of the Obligor's divisions; regardless of how such right is
evidenced, whether secured or unsecured, or now existing or hereafter arising.
Acquired Entity shall mean (x) any Person acquired by the Borrower or
any Guarantor hereunder by way of (i) the purchase of stock or assets of such
Person and all or a portion of the consideration paid for such stock or assets
is paid directly or indirectly with the proceeds of the Revolving Credit Loans
or (ii) consolidation or merger of such Person with or into the Borrower or any
Guarantor or (y) any entity formed to acquire the assets or stock of another
Person and all or a portion of the consideration paid for such stock or assets
is paid directly or indirectly with the proceeds of the Revolving Credit Loans.
2
<PAGE>
Acquired Indebtedness means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary or at the
time it merges or consolidates with the Borrower or any of the Borrower's
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Subsidiary or such
acquisition, merger or consolidation.
Additional Costs shall have the meaning specified in Section 3.17.
Affected Loans shall have the meaning specified in Section 3.20.
Affiliate means with respect to any designated Person, any Person
which, directly or indirectly, controls or is controlled by or is under common
control with such designated Person. For purposes of this definition,
"control", "controlled by" and "under common control with", as used with respect
to any Person shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
Agent means The CIT Group/Business Credit, Inc., or any successor
thereof, acting as agent for Lenders pursuant to this Financing Agreement.
Anniversary Date shall mean the date occurring one (1) year from April
30, 1996 and the same date in every year thereafter.
Applicable Lending Office means, for each of the Lenders, the lending
office of such Lender (or of an Affiliate of such Lender) designated as such for
such Type of Loan on the signature page hereto or in the applicable Assignment
and Acceptance Agreement or such other office of such Lender (or of an Affiliate
of such Lender) as such Lender may from time to time specify to Agent and the
Borrower as the office by which its Revolving Credit Loans of such Type are to
be made and maintained.
Applicable Margin means (a) with respect to the Chase Manhattan Bank
Rate one half percent (0.50%); and (b) with respect to the Libor Rate two
percent (2.00%).
Approvals and Permits means any permits, variance, permission,
authorization, consent, approval, license, franchise, ruling, permit, tariff,
rate, certification, exemption, or registration issued by any Governmental
3
<PAGE>
Authority which is required to be obtained in accordance with applicable Law
in connection with the ownership, operation, construction, or maintenance of
its property.
Arcon Purchase Agreement means the Agreement dated as of August 28,
1996 among Borrower, Arcon Holdings and the other parties thereto pursuant to
which Borrower agrees to buy all of the outstanding capital stock of Arcon
Holdings.
Arcon Purchase Documents means the Arcon Purchase Agreement and all
other documents or agreements executed in connection with or pursuant to the
Arcon Purchase Agreement.
Arcon Stock Purchase means the purchase of all of the outstanding
capital stock of Arcon Holdings pursuant to the Arcon Purchase Agreement.
Assignment and Acceptance shall have the meaning ascribed to such term
in Section 14.07.
Assignment of Claims Act shall mean 31 United States Code Annotated
Section 3727 and all amendments and supplements thereto and all rules and
regulations promulgated thereof.
Availability shall mean the excess of
(a) the sum of
(i) eighty-five percent (85%) of the Eligible Accounts
Receivable of the Obligors (excluding Eligible Accounts
Receivable of CPG Investors until the Agent has performed its
analysis of the accounts receivable of CPG Investors), plus
(ii) fifty percent (50%) of the aggregate value of Eligible
Inventory of the Obligors (excluding Eligible Inventory of CPG
Investors until the Agent has performed its analysis of the
Inventory of CPG Inventory)
over
(b) the sum of
(i) the outstanding aggregate amount of all other
Obligations of the Borrower, and
(ii) the Availability Reserve, if any, with respect to the
Borrower.
Availability Reserve shall mean (a) $5,000,000 until such time as the
Borrower shall furnish to the Agent audited
4
<PAGE>
financial statements of the Borrower for the Fiscal Year ending on December
31, 1997, such financials indicate that no Default or Event of Default shall
have occurred or be continuing under this Financing Agreement and (b) any
reserve which the Agent and/or the Lenders may require from time to time
pursuant to this Financing Agreement if applicable.
Board of Directors shall mean, as to any Person, the board of
directors of such Person or any duly authorized committee thereof.
Board of Governors means the Board of Governors of the Federal Reserve
Bank or any entity succeeding to any or all of its functions.
Board Resolution shall mean, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Agent.
Borrower Obligations shall mean all loans and advances made or to be
made by the Lenders or by the Agent on behalf of the Lenders to the Borrower
or to others for the Borrower's account; any and all indebtedness and
obligations which may at any time be owing by the Borrower to the Agent or
the Lenders howsoever arising, whether now in existence or incurred by the
Borrower from time to time hereafter; whether secured by pledge, Lien upon or
security interest in any of the Borrower's assets or property or the assets
or property of any other person, firm, entity or corporation; whether such
indebtedness is absolute or contingent, joint or several, matured or
unmatured, direct or indirect and whether the Borrower is liable to the
Lenders and/or the Agent for such indebtedness as principal, surety,
endorser, guarantor or otherwise. Borrower Obligations shall also include
indebtedness owing to the Lenders and/or the Agent by the Borrower under this
Financing Agreement or under any other agreement or arrangement now or
hereafter entered into between the Borrower and the Lenders; indebtedness or
obligations incurred by, or imposed on, the Lenders and/or the Agent, as a
result of environmental claims (other than as a result of actions of the
Lenders or the Agent) arising out of any Obligor's operation, premises or
waste disposal practices or sites; such Obligor's liability to the Lenders
and/or the Agent as maker or endorser on any promissory note or other
instrument for the payment of money; such Obligor's liability to the Lenders
and/or the Agent under any instrument of guaranty or indemnity, or arising
under any guaranty, endorsement or undertaking which the Lenders and/or the
Agent may make or issue to others for such Obligor's account, including any
accommodation extended with respect to
5
<PAGE>
applications for letters of credit, the Lenders' and/or the Agent's
acceptance of drafts or the Lenders' and/or the Agent's endorsement of notes
or other instruments for such Obligor's account and benefit.
Borrowing Base means an amount equal to the sum of (a) eighty-five
percent (85%) of the Eligible Accounts Receivable, plus (b) fifty percent (50%)
of the aggregate value of Eligible Inventory.
Borrowing Base Certificate means a Certificate substantially in the
form of Exhibit H, certified by an officer of the Borrower, with respect to the
Borrowing Base.
Brattleboro Collateral shall mean all of Borrower's present and future
Equipment and Real Estate of Borrower whether now or hereafter owned by Borrower
and located on the Brattleboro, Vermont property owned by Borrower; and to the
extent not otherwise included, all proceeds and products of any and all of the
foregoing.
Business Day shall mean (a) for all purposes other than those covered
by clause (b) below, any day that CITBC and The Chase Manhattan Bank are open
for business excluding Saturday, Sunday and any day that either is a legal
holiday under the laws of the State of New York or is a day on which banking
institutions located in such state are closed and (b) with respect to all
notices, determinations, fundings and payments in connection with the Libor
Rate, any date that is a Business Day as described in clause (a) above that is
also a day for trading by and between banks in dollar deposits in the applicable
interbank Libor market.
Capital Lease means any lease of property (real or personal or mixed)
which, in accordance with GAAP, would be required to be capitalized on a balance
sheet of the lessee.
Capitalized Lease Obligations shall mean, 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 obligation at any date shall be capitalized
amount of such obligations at such date, determined in accordance with GAAP.
Chase Manhattan Bank Rate shall mean the rate of interest from time to
time announced by The Chase Manhattan Bank at its principal office in the City
of New York. (The prime rate is not intended to be the lowest rate of interest
charged by The Chase Manhattan Bank to its borrowers).
Chase Manhattan Bank Rate Loans shall mean all or any portion of the
Revolving Credit Loans for which the
6
<PAGE>
Borrower has elected to use the Chase Manhattan Bank Rate for interest rate
calculations.
CITEF means The CIT Group/Equipment Financing, Inc.
Closing Date means the date upon which the conditions set forth in
Section 2.01 shall have been fulfilled to the satisfaction of the Agent.
Code means The Internal Revenue Code of 1986, as thereafter amended.
Collateral shall mean with respect to an Obligor all of each Obligor's
present and future Accounts and Inventory of such Obligor whether now or
hereafter owned by such Obligor, and wherever located; and to the extent not
otherwise included, all proceeds and products of any and all of the foregoing,
including all rights under all permits granted in favor of the Borrower relating
to its facility in Brattleboro, Vermont. For purposes of this Agreement,
Collateral shall also include the Brattleboro Collateral.
Collateral Management Fee shall mean the sum of Thirty-Five Thousand
Dollars ($35,000) which shall be paid to the Agent for its own account in
accordance with Section 6.03 of this Financing Agreement to offset the expenses
and costs of the Agent in connection with record keeping, periodic examinations,
analyzing and evaluating the Collateral.
Consolidated EBITDA shall mean, for any period, the sum (without
duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated
Net Income has been reduced thereby, (A) all income taxes of the Borrower and
its Subsidiaries paid or accrued in accordance with GAAP for such period (other
than income taxes attributable to extraordinary, unusual or nonrecurring gains
or losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges less any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Borrower and its
Subsidiaries in accordance with GAAP.
Consolidated Fixed Charge Coverage Ratio shall mean the ratio of
Consolidated EBITDA during the four full fiscal quarters (the "Four Quarter
Period") ending on or prior to the date of the transaction giving rise to the
need to calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges for the Four Quarter
Period. In addition to and without limitation of the foregoing, for purposes
of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges"
shall be calculated after giving effect on a pro forma (including any pro
forma
7
<PAGE>
expense and cost reductions calculated on a basis consistent with Regulation
S-X under the Securities Act of 1933, as amended) basis for the period of
such calculation to (i) the incurrence or repayment of any Indebtedness of
the Borrower or any of its Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any incurrence
or repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the
Four Quarter Period and (ii) any Asset Sales (as defined in the Indenture) or
Asset Acquisitions (as defined in the Indenture) (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Borrower or one of its Subsidiaries (including
any Person who becomes an Acquired Entity as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during
the Four Quarter Period) occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date, as if such Asset Sale or Asset Acquisition (including
the incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Four Quarter Period. If the Borrower or any
of its Subsidiaries directly or indirectly guarantee Indebtedness of a third
Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Borrower or any such Subsidiary had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio", (1) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest in such Indebtedness in
effect on the Transaction Date; (2) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, an eurocurrency
interbank offered rate, or other rates, then the interest rate in effect on
the Transaction Date will be deemed to have been in effect during the Four
Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by
8
<PAGE>
agreements relating to Interest Swap Obligations, shall be deemed to accrue
at the rate per annum resulting after giving effect to the operation of such
agreements.
Consolidated Fixed Charges shall mean, with respect to the Borrower
for any period, the sum, without duplication, of (i) Consolidated Interest
Expense, plus (ii) the product of (x) the amount of all dividend payments on any
series of Preferred Stock (as defined in the Indenture) of the Borrower (other
than dividends paid in Qualified Capital Stock (as defined in the Indenture)
paid, accrued or scheduled to be paid or accrued during such period times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated federal, state and local tax rate
of such Person, expressed as a decimal.
Consolidated Interest Expense shall mean, with respect to the Borrower
for any period, the sum of, without duplication: (i) the aggregate of the
interest expense of the Borrower and its Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP, including without limitation,
(a) any amortization of debt discount, (b) the net costs under Interest Swap
Obligations, (c) the capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the
Borrower and its Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
Consolidated Net Income shall mean, with respect to the Borrower,
for any period, the aggregate net income (or loss) of the Borrower and its
Subsidiaries for such period on a consolidated basis, determined in
accordance with GAAP; provided that there shall be excluded therefrom (a)
after-tax gains or losses from Asset Sales or abandonments or reserves
relating thereto, (b) after-tax items classified as extraordinary or
nonrecurring gains or losses, (c) the net income (or loss) of any Person
acquired in a "pooling of interests" transaction accrued prior to the date it
becomes a Subsidiary or is merged or consolidated with the Borrower or any
Subsidiary, (d) the net income (but not loss) of any Subsidiary to the extent
that the declaration of dividends or similar distributions by that Subsidiary
of that income is restricted by a contract, operation of law or otherwise,
(e) the net income of any Person, other than a Subsidiary, except to the
extent of cash dividends or distributions paid to the Borrower or to a
Subsidiary by such Person, (f) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued and (g)
in the case of a successor to the Borrower by consolidation or merger or as a
transferee of the Borrower's assets, any net
9
<PAGE>
income of the successor corporation prior to such consolidation, merger or
transfer of assets.
Consolidated Non-cash Charges shall mean, with respect to the
Borrower, for any period, the aggregate depreciation, amortization and other
non-cash expenses of the Borrower and its Subsidiaries reducing Consolidated Net
Income of the Borrower for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an extraordinary
item or loss or any such charge which requires an accrual of or a reserve for
cash charges for any future period).
Continue, Continuation and Continued shall refer to the continuation
pursuant to Section 6.01 hereof of a Libor Rate Loan as a Libor Rate Loan from
one Libor Rate Period to the next Libor Rate Period.
Convert, Conversion and Converted shall refer to a conversion pursuant
to Section 6.01 hereof of Chase Manhattan Bank Rate Loans into Libor Rate Loans
or Libor Rate Loans into Chase Manhattan Bank Rate Loans, each of which may be
accompanied by the transfer by a Lender (at its sole discretion) of a Loan from
one Applicable Lending Office to another.
CPG Merger means the merger of a subsidiary of the Borrower with and
into CPG Investors.
CPG Merger Agreement means the Agreement dated as of August 28, 1996
among Borrower, CPG Investors and the other parties thereto.
CPG Merger Documents means the CPG Merger Agreement and all other
documents or agreements executed in connection with or pursuant to the CPG
Merger Agreement.
Customarily Permitted Liens shall mean:
(a) Liens of local, provincial, or state authorities for franchise or
other like taxes provided the aggregate amounts secured by such Liens shall not
exceed One Hundred Thousand Dollars ($100,000) in the aggregate outstanding at
any one time;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other like Liens imposed by Law, created in the
ordinary course of business and for amounts not yet due or which are the subject
of a Good Faith Contest;
(c) deposits made (and the Liens thereon) in the ordinary course of
business (including, without limitation,
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security deposits for leases, surety bonds and appeal bonds) in connection
with workers' compensation, unemployment insurance and other types of social
security benefits or to secure the performance of tenders, bids, contracts
(other than for the repayment or guarantee of Indebtedness), statutory
obligations and other similar obligations arising as a result of progress
payments under government contracts; and
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), encroachments, minor defects or
irregularities in title, variation and other restrictions, charges or
encumbrances (whether or not recorded) affecting the Real Estate and which are
listed in Schedule B of the title insurance policy delivered to the Agent
herewith; provided, however, that in no event shall any Environmental Lien be
deemed to be a Customarily Permitted Lien.
Default shall mean any event specified in Section 12.01 hereof,
whether or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition, event or act, has been satisfied.
Default Rate of Interest shall mean a rate of interest per annum equal
to the sum of: (a) four percent (4%) plus (b) the Chase Manhattan Bank Rate,
which the Agent shall be entitled to charge the Borrower on all Obligations due
the Lenders and not paid by the Borrower.
Depository Accounts shall mean those accounts owned by, and in the
name of, the Agent and designated by the Agent for the deposit of proceeds of
Collateral.
Documentation Fee shall mean (a) the sum intended to compensate the
Agent (for its own account) for the use of the Agent's internal or outside
counsel and facilities in documenting, in whole or in part, the initial
transaction solely on behalf of the Lenders, exclusive of Out-Of-Pocket
Expenses, which sum shall be included as part of the Loan Facility Fee due and
payable in accordance with Section 6.03 of this Financing Agreement, and (b) the
Agent's standard fees relating to any and all modifications, waivers, releases,
amendments or additional collateral with respect to this Financing Agreement,
the Collateral and/or the Obligations.
Dollars and $ means lawful money of the United States of America.
Eligible Accounts Receivable shall mean the gross amount of each
Obligor's Accounts Receivable that conform to the warranties contained herein
and at all times continue to be acceptable to the Agent in the exercise of its
reasonable business judgment, less, without duplication, the sum of:
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(a)any returns, discounts, claims, credits and allowances of any
nature (whether issued, owing, granted or outstanding); and
(b)reserves for:
(i)sales to the United States of America or to any agency,
department or division thereof except where assignment of all
resulting accounts receivable due or to become due under a particular
contract is made by any Obligor to the Agent and the Agent is
satisfied that all requirements for compliance with the Assignment of
Claims Act and/or other applicable statutes, rules, or regulations
have been fulfilled;
(ii)foreign sales other than sales (A) secured by stand-by
letters of credit (in form and substance satisfactory to the Agent)
issued or confirmed by, and payable at, banks having a place of
business in the United States of America and payable in United States
currency, (B) covered by policies of foreign credit insurance that are
in form and substance satisfactory to the Agent and are issued by one
or more insurance carriers that are fully acceptable to the Agent, and
are assigned to the Agent with the Agent named as loss payee
thereunder or (C) to customers residing in Canada provided such sales
otherwise comply with all of the other criteria for eligibility
hereunder, are payable in U.S. Dollars and all such sales do not
exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the
aggregate at any one time;
(iii)accounts that remain unpaid more than ninety (90) days from
invoice date;
(iv)contras;
(v)sales to any Affiliate of an Obligor;
(vi)bill and hold (deferred shipment) or consignment sales;
(vii)sales to any customer which is (w) insolvent, (x) the debtor
in any bankruptcy, insolvency, arrangement, reorganization,
receivership or similar proceedings under any federal or state law,
(y) negotiating, or has called a meeting of its creditors for purposes
of negotiating, a compromise of its debts or (z) in the Agent's
reasonable business judgment, financially
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<PAGE>
unacceptable to the Agent or has a credit rating unacceptable to the
Agent;
(viii)all sales to any customer if fifty percent (50%) or more of
either (x) all outstanding invoices or (y) the aggregate dollar amount
of all outstanding invoices, are unpaid more than ninety (90) days
from invoice date;
(ix)any other reasons deemed necessary by the Agent in its
reasonable business judgment and which are customary either in the
commercial finance industry or in the lending practices of the Agent
or the Lenders; and
(x)an amount representing, historically, returns, discounts,
claims, credits and allowances.
Eligible Inventory shall mean the gross amount of each Obligor's
Inventory that conforms to the warranties contained herein and which at all
times continues to be acceptable to the Agent in the exercise of its reasonable
business judgment less any work-in-process, supplies (other than raw material),
goods not present in the United States of America, goods returned or rejected by
the customers of such Obligor and other than goods that are undamaged and
resalable in the normal course of business, goods to be returned to the
suppliers of such Obligor, goods in transit to third parties (other than the
agents or warehouses of such Obligor) and less any reserves required by the
Agent in its reasonable discretion for special order goods, market value
declines and bill and hold (deferred shipment) or consignment sales.
Employee Benefit Plan means any plan, agreement, arrangement or
commitment which is an employee benefit plan, as defined in Section 3(3) of
ERISA, maintained by the Borrower, or any ERISA Affiliate or with respect to
which the Borrower, or any ERISA Affiliate at any relevant time has any
liability or obligation to contribute.
Environmental Discharge means any spill, emission, leaking, pumping,
injection, deposit, dispersal, leaching, migration, disposal, discharge or
release or threatened release of Hazardous Materials into the indoor or outdoor
environment or into or out of any property, including, without limitation, the
movement of Hazardous Materials through or in the air, soil, surface water or
groundwater.
Environmental Law means any applicable Law relating to human health
or safety or the environment and any terms and conditions of any Approvals or
Permits issued thereunder, including, without limitation, Laws relating to
noise or to Environmental Discharges or to the generation, manufacture,
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<PAGE>
processing, distribution, use, treatment, storage, disposal, transport,
handling or remediation of Hazardous Materials or to the transfer of
industrial or manufacturing facilities or property.
Environmental Lien means any Lien in favor of any Governmental
Authority for (a) any liability under Environmental Laws, or (b) damages arising
from, or costs incurred by, such Governmental Authority in response to, an
Environmental Discharge.
Environmental Notice means any written complaint, order, claim,
citation, letter, inquiry, notice or other written communication from any Person
(a) relating to the Borrower's compliance with or liability or potential
liability under any Environmental Law, (b) relating to the occurrence or
presence of or exposure to or possible or threatened or alleged occurrence or
presence of or exposure to Environmental Discharges or Hazardous Materials at,
to, or from any of Obligor's past, present or future locations or facilities or
Real Estate or at, to or from any other location or facility including, without
limitation: (i) the existence of any contamination or possible or threatened
contamination at any such location or facility or the Real Estate; and (ii)
Remedial Action in connection with any Environmental Discharge or Hazardous
Materials at any such location or facility or Real Estate or any part thereof;
or (c) relating to any violation or alleged violation of any Environmental Law
by any Obligor, the Real Estate, or any prior owner of operator of the Real
Estate.
Equipment shall mean all present and hereafter acquired machinery,
equipment, furnishings and fixtures, and all additions, substitutions and
replacements thereof, located at the Brattleboro, Vermont property owned by
Borrower, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto and all proceeds of whatever
sort.
ERISA means the Employee Retirement Income Security Act of 1974, as
thereafter amended.
ERISA Affiliate means any entity required to be aggregated with a
Borrower under Section 414(b), (c), (m) or (o) of the Code.
Event(s) of Default shall have the meaning provided for in Section
12.01 of this Financing Agreement.
Executive Officers shall mean the Chairman, President, Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Executive Vice
President(s), Senior Vice President(s), and Secretary of the Borrower.
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<PAGE>
Financing Agreement means this Second Amended and Restated Financing
Agreement and Guaranty.
Fiscal Year shall mean each period from January 1 to December 31.
GAAP shall mean generally accepted accounting principles in the United
States of America as in effect from time to time and for the period as to which
such accounting principles are to apply.
Good Faith Contest means the contest of an item if: (a) the item is
diligently contested in good faith by appropriate proceedings timely instituted;
(b) adequate reserves are established with respect to the contested item; (c)
during the period of such contest, the enforcement of the contested item is
effectively stayed; and (d) the failure to pay or comply with the contested item
during the period of such contest could not result in a Material Adverse Change.
Governmental Authority means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
Guarantors means all of Endura, CPG Investors, CPG Holdings,
CPG-Warren, Custom, Arcon Holdings, Arcon Coating and each Acquired Entity.
Guaranty Obligations shall mean, all obligations of any Guarantor as
guarantor of the obligations of the Borrower under this Financing Agreement.
Guarantor Obligations shall also include indebtedness owing to the Lenders
and/or the Agent by any Guarantor under this Financing Agreement or under any
other agreement or arrangement now or hereafter entered into between the
Guarantor and the Lenders.
Hazardous Materials means any pollutants, contaminants, toxic or
hazardous substances or wastes, chemicals, radioactive material, medical wastes
or special waste, including, without limitation, asbestos fibers and friable
asbestos, polychlorinated biphenyls, and petroleum or hydrocarbon-based
products, derivatives wastes, or breakdown, constituent or decomposition
products thereof.
Indebtedness shall mean at any date:
(a) indebtedness or liability for borrowed money, or for the deferred
purchase price of property or services (including trade obligations);
(b) obligations as lessee under Capital Leases;
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<PAGE>
(c) reimbursement obligations under letters of credit issued for the
account of any Person;
(d) all reimbursement obligations arising under bankers' or trade
acceptances;
(e) all guarantees, endorsements (other than for collection or deposit
in the ordinary course of business), and other contingent obligations to
purchase any of the items included in this definition, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss;
(f) all obligations secured by any Lien on property owned by such
Person, whether or not the obligations have been assumed; and
(g) all obligations under any agreement providing for a swap, ceiling
rates, ceiling and floor rates, contingent participation or other hedging
mechanisms with respect to interest payable on any of the items described in
this definition.
Indenture means the Indenture dated as of October 15, 1996 among the
Borrower, the Guarantors (as defined therein) and the Trustee (as defined
therein) pursuant to which the Senior Notes are issued.
Insolvency means, at any particular time, a Multiemployer Plan is
insolvent within the meaning of Section 4245 of ERISA.
Interest Swap Obligations means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
Inventory of an Obligor shall mean all of such Obligor's present and
hereafter acquired merchandise, inventory and goods held for sale or lease or to
be furnished under contracts of service, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging or shipping same; in all
stages of production- from raw materials through work-in-process to finished
goods - and all proceeds thereof of whatever sort.
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Law means any treaty, foreign, federal, state or local statute, law,
rule, regulation, ordinance, order, code, policy, or rule of common law, now or
hereafter in effect, and in each case as amended, and any judicial or
administrative interpretation thereof by a Governmental Authority or otherwise,
including any judicial or administrative order, consent decree or judgment.
Lease Agreement shall mean that certain Lease Agreement by and between
Borrower, as lessee and the CIT Group/Equipment Financing, Inc., as lessor,
dated as of April 29, 1994, as amended and supplemented by that certain First
Amendment to Lease Agreement dated as of September 29, 1995.
Lender(s) shall mean CITBC, each Assignee which becomes a Lender
pursuant to Section 14.07 hereof, and their respective successors.
Lender Loan Commitment shall mean, with respect to each Lender's
making of the Revolving Credit Loans, the obligation of such Lender to make
Revolving Credit Loans under this Financing Agreement up to the aggregate
principal amount outstanding at any time set forth below:
<TABLE>
<CAPTION>
Lender Pro Rata Share of Pro Rata Share of
Revolving Credit Amount of Revolving Overadvance Amount of Discretionary
Facility Credit Commitment Availability Overadvance Availability
----------------- ------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
CITBC 100% $20,000,000 100% $3,000,000
</TABLE>
Lender Party shall mean the Agent and each of the Lenders.
Libor Period shall mean a thirty (30) day, sixty (60) day, or ninety
(90) day interest period with respect to Libor Rate Loans, as selected by the
Borrower.
Libor Rate shall mean, at any time of determination, the then highest
prevailing London Interbank Offered Rate paid in London on thirty (30) day,
sixty (60) day, or ninety (90) day dollar deposits from other banks as published
two (2) days prior to the commencement of the applicable interest period, under
"Money Rate," in the New York City edition of The Wall Street Journal or if
there is no such publication or statement therein as to a Libor Rate, then in
any publication used in the New York City financial community which was
published two (2) days prior to the commencement of the applicable interest
period.
Libor Rate Loans shall mean all or an portion of the Revolving Credit
Loans for which the Borrower has elected to use the Libor Rate for the interest
rate calculations.
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Libor Rate Prepayment Premium shall mean, for any payment of principal
of any Libor Rate Loan prior to the end of an applicable interest period, an
amount computed pursuant to the following formula:
(R - T) x P x D
---------------
360
R = interest rate applicable to the Libor Rate Loan
T = effective interest rate per annum at which any readily marketable
bonds or other obligations of the United States, selected at the
Agent's sole discretion, maturing on or near the last day of the then
applicable interest period for such Libor Rate Loan and in
approximately the same principal amount as such Libor Rate Loan, can
be purchased by the Agent on the day of such prepayment of principal
P = the amount of principal prepaid
D = the number of days remaining in the Libor Period as of the date of
such prepayment
The Borrower shall pay such amount within five (5) business days of
presentation by CITBC to the Borrower of a statement setting forth the
amount and CITBC's calculation thereof pursuant hereto, which statement
shall be conclusive on the Borrower absent manifest error.
Lien means any mortgage, pledge, hypothecation, security interest,
collateral assignment, Lien (statutory or other), or other security interest or
encumbrance of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction (except any such filing that is expired or that relates to
an operating lease)).
Loan Documents shall mean each of this Financing Agreement, the
Revolving Credit Notes, and the Security Documents.
Loan Facility Fee shall mean the fee payable to the Agent for the
ratable benefit of the Lenders in accordance with, and pursuant to, the
provisions of Section 6.03 of this Financing Agreement.
Material Adverse Change means (a) a material adverse change in the
status of the business, results of operations, condition (financial or
otherwise), prospects, profitability,
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<PAGE>
assets, operations, or property of an Obligor, or (b) any event or occurrence
of whatever nature which could have a material adverse effect on an Obligor's
ability to perform its obligations under the Loan Documents.
Moody's means Moody's Investors Service, Inc. and any successor
thereto which provides credit ratings.
Mortgage (Brattleboro, Vermont) means an Amended and Restated
Mortgage, Assignment of Leases and Rents and Security Agreement dated as of
April 29, 1994 delivered by Borrower to CITBC, as amended by the Mortgage
Modification Agreement dated as of March 22, 1995, as further amended by the
Mortgage Modification Agreement dated as of December 31, 1996.
Mortgage Modification Agreement means the Mortgage Modification
Agreement dated as of March 22, 1995 by and between Borrower and CITBC.
Non-Brattleboro Equipment shall mean all present and hereafter
acquired machinery, equipment, furnishings and fixtures owned by any Obligor,
and all additions, substitutions and replacements thereof, wherever located
(other than at the Brattleboro, Vermont property owned by Borrower), together
with all attachments, components, parts, equipment and accessories installed
thereon or affixed thereto and all proceeds of whatever sort.
Non-Brattleboro Real Estate shall mean the fee and/or leasehold
interests in the real property of the Borrower or any Obligor (other than those
interests in the Brattleboro, Vermont property).
Non-Excluded Taxes shall have the meaning specified in Section 3.16.
Notice of Borrowing shall mean a Revolving Credit Notice of Borrowing.
Obligations shall mean collectively the Borrower Obligations and the
Guaranty Obligations.
Obligors means all of Borrower, Endura, CPG Investors, CPG Holdings,
CPG-Warren, Custom, Arcon Holdings, Arcon Coating and each Acquired Entity.
Officer's Certificate shall mean a certificate signed in the name of
the Borrower by its President, Vice President, Controller or Treasurer.
Operating Leases shall mean all leases of property (whether real,
personal or mixed) other than Capital Leases.
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<PAGE>
Other Taxes shall have the meaning specified in Section 3.16.
Out-of-Pocket Expenses shall mean all of the Lenders' and the Agent's
present and future expenses incurred relative to this Financing Agreement,
whether incurred heretofore or hereafter, which expenses shall include, without
being limited to, the cost of record searches, all costs and expenses incurred
by the Agent in opening bank accounts, depositing checks, receiving and
transferring funds, and any charges imposed on the Agent due to "insufficient
funds" of deposited checks and the Agent's standard fee relating thereto, local
counsel fees, title insurance premiums, real estate survey costs, fees and taxes
relative to the filing of financing statements, costs of preparing and recording
mortgages/deeds of trust against the Real Estate and all expenses, costs and
fees set forth in Section 3.18 of this Financing Agreement.
Overadvance shall have the meaning specified in Section 3.03.
Overadvance Availability has the meaning specified in Section 3.03.
PBGC means Pension Benefit Guaranty Corporation.
Pension Plan means any Employee Benefit Plan which is an employee
pension benefit plan as defined in Section 3(2) of ERISA.
Permitted Encumbrances shall mean:
(a) Liens expressly permitted, or consented to, by the Agent;
(b) Purchase Money Liens;
(c) Customarily Permitted Liens;
(d) Liens granted the Agent by the Borrower or a Guarantor;
(e) Liens of judgment creditors provided such Liens do not exceed, in
the aggregate, at any time, Two Hundred Fifty Thousand Dollars ($250,000) (other
than Liens bonded or insured to the reasonable satisfaction of the Agent);
(f) Liens for taxes not yet due and payable or which are the subject
of a Good Faith Contest and which Liens are not x) other than with respect to
Real Estate, senior to the Liens of the Agent or y) for taxes due the United
States of
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<PAGE>
America; provided, however, that in no event shall any Environmental Lien be
deemed to be a Permitted Encumbrance;
(g) Liens granted by Borrower to CITEF securing its obligations under
the Lease Agreement and Liens granted by each Guarantor securing such
Guarantor's guaranty of such obligations; and
(h) Liens granted by the Borrower or any Guarantor on any of its
assets other than (i) the Brattleboro Collateral, (ii) each Obligor's Accounts
and (iii) each Obligor's Inventory.
Permitted Indebtedness shall mean:
(a) Indebtedness incurred in the ordinary course of business for raw
materials, supplies, property, equipment, services, taxes or labor or otherwise;
(b) Indebtedness secured by Purchase Money Liens;
(c) Indebtedness of the Borrower which is subordinated to the prior
payment and satisfaction of the Borrower's Obligations to the Lenders by means
of a subordination agreement or similar instrument, in each case in form and
substance satisfactory to the Lenders;
(d) deferred taxes and other expenses incurred in the ordinary course
of business;
(e) Indebtedness existing on the date of execution of this Financing
Agreement and listed in the most recent financial statement delivered to the
Lenders or otherwise disclosed to the Lenders in writing on or prior to the date
of execution of this Financing Agreement; and
(f) the Senior Notes.
Permitted Investments means:
(a) direct obligations of the United States of America or any agency
thereof backed by the full faith and credit of the United States of America with
maturities of one (1) year or less from the date of acquisition;
(b) commercial paper with maturities of two hundred seventy (270) days
or less of (a) a Lender or any parent of a Lender, or (b) a domestic issuer
rated at least "P-1" by Moody's or "A-1" by S&P; and
(c) certificates of deposit with maturities of one (1) year or less
from the date of acquisition issued by (i) any Lender, or (ii) any commercial
bank operating within the
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<PAGE>
United States of America whose outstanding long-term debt is rated at least
"A" by Moody's or "A" by S&P.
Person means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
Prepayment Fee shall mean the fee payable to the Agent for the ratable
benefit of the Lenders in accordance with, and pursuant to, the provisions of
Section 6.03 of this Financing Agreement.
Pro Rata Share means, for purposes of this Financing Agreement and
with respect to each Lender, in the case of the Revolving Credit Loans and the
Unused Line Fees and the Overadvances, a fraction, the numerator of which is
such Lender's Revolving Credit Commitment and the denominator of which is the
total of all the Lenders' Revolving Credit Commitments.
Purchase Money Liens shall mean Liens on any item of equipment
acquired by an Obligor after the Closing Date, provided that (a) each such Lien
shall attach only to the property to be acquired, (b) a description of the
property so acquired is furnished to the Agent, and (c) the debt incurred in
connection with such acquisitions shall not exceed, in the aggregate for all
Obligations, Five Hundred Thousand Dollars ($500,000) in any Fiscal Year.
Quarterly Payment Date means each March 31, June 30, September 30 and
December 31.
Real Estate shall mean the fee and/or leasehold interests in the real
property of the Borrower located at Brattleboro, Vermont which has been
encumbered, mortgaged, pledged or assigned to the Agent or to the Agent's
designee for the ratable benefit of the Lenders, pursuant to the Mortgage
(Brattleboro, Vermont).
Regulatory Change means, with respect to any Lender, any change after
December 31, 1996 in United States federal, state, municipal or foreign Laws
(including Regulation D) or the adoption or making after such date of any
interpretations, directives or requests applying to a class of banks including
such Lender of or under any United States, federal, state, municipal or foreign
Laws or regulations (whether or not having the force of Law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
Remedial Action means action required to (a) clean up, remove, treat
or in any other way address Hazardous
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<PAGE>
Materials in the indoor or outdoor environment; (b) prevent an Environmental
Discharge or minimize any further Environmental Discharge; or (c) investigate
and determine if a remedial response is needed, design such a response or
conduct post-remedial investigation, monitoring operation, maintenance or
care.
Reorganization means with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of such term as
used in Section 4241 of ERISA.
Reportable Event means an event described in Section 4043(b) of ERISA
or in the regulations thereunder (other than those events as to which the thirty
(30) day notice period is waived under Subsections .13, .14, .15, .18, .19 or
.20 of PBGC Regulation Section 2615).
Required Lenders shall mean, on the date calculation of Required
Lenders is made, the Lenders having Revolving Credit Commitments to lend at
least sixty six and two thirds percent (66 2/3%) of the Revolving Credit Loans
hereunder.
Revolving Credit Commitment has the meaning specified in Section 3.01.
Revolving Credit Commitment Termination Date shall mean April 30,
2001; provided, however, the Borrower and the Lenders agree that such date shall
be automatically extended for an additional year on such date or on each
subsequent anniversary date thereof unless and until at least sixty (60) days
prior to any such date the Borrower or the Lenders shall have given the other
notice in writing that such date shall not be so extended.
Revolving Credit Facility means Twenty Million Dollars ($20,000,000).
Revolving Credit Loans shall have the meaning specified in Section
3.01.
Revolving Credit Note shall have the meaning specified in Section
3.02.
Revolving Credit Notice of Borrowing shall have the meaning specified
in Section 3.12.
S&P means Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc. or any successor thereto which provides credit ratings.
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<PAGE>
Security Agreement means the Security Agreement in substantially the
form of Exhibit I hereto, to be delivered by the Borrower under the terms of
this Agreement.
Security Documents means the Security Agreement, the Mortgage
(Brattleboro, Vermont) and any other security agreement granting a Lien on any
assets of an Obligor to secure such Obligor's Obligations.
Security Interest shall have the meaning specified in Section 5.03.
Senior Notes means the $100,000,000 9.375% Senior Notes of Borrower
due October 15, 2006 issued pursuant to the terms and provisions of the
Indenture.
Settlement Date shall mean the date each week on which the Agent and
the Lenders shall settle amongst themselves so that the Agent shall not have, as
Agent, any money at risk and on such Settlement Date each of the Lenders shall
have its Pro Rata Share of all outstanding Revolving Credit Loans, based upon
its Revolving Credit Commitments. Notwithstanding the previous sentence, upon
the occurrence of an Event of Default or a continuing decline or increase of the
Revolving Credit Loans or other Obligations, the Agent may, at its discretion,
elect to settle its and the Lenders' accounts more often than weekly.
Solvency Certificate means a certificate in substantially the form of
Exhibit E, to be delivered by each Obligor pursuant to the terms of this
Financing Agreement.
Solvent means, when used with respect to any Person, that (a) the fair
value of the property of such Person, on a going concern basis, is greater than
the total amount of liabilities (including, without limitation, contingent
liabilities) of such Person, (b) the present fair salable value of the assets of
such Person, on a going concern basis, is not less than the amount that will be
required to pay the probable liabilities of such Person on its debts as they
become absolute and matured, (c) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability to
pay as such debts and liabilities mature, and (d) such Person is not engaged in
business or a transaction, and is not about to engage in business or a
transaction, for which such Person's property would constitute unreasonably
small capital after giving due consideration to the prevailing practice in the
industry in which such Person is engaged. Contingent liabilities will be
computed at the amount that, in light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.
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Specialty Hong Kong shall mean Specialty Paperboard (Hong Kong)
Limited, a Hong Kong corporation.
Specialty Japan shall mean Specialty Paperboard Kabushiki Kaisha, a
Japanese corporation.
Subsidiary shall mean, as to any Person, a corporation of which shares
of stock having ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation are at the time owned, or the
management of which is otherwise controlled, directly, or indirectly through one
or more intermediaries, or both, by such Person.
Transferee shall have the meaning specified in Section 14.03.
Type of any Loan shall mean a Chase Manhattan Bank Rate Loan or a
Libor Rate Loan or both or either of the foregoing, all as the context may
require.
Unused Line Fee shall (a) mean the aggregate fee due to the Agent for
the ratable benefit of the Lenders at the end of each quarter for each Revolving
Line of Credit and (b) be determined by multiplying the difference between such
Revolving Line of Credit and the average daily Revolving Credit Loans of the
Borrower for said quarter by three-eighths of one percent (.375%) per annum for
the number of days in said quarter.
SECTION 1.02. Computation of Time Periods. In this Financing
Agreement unless otherwise specified, in the computation of periods of time from
a specified date to a later specified date, the word "from" means "from and
including" and words "to" and "until" each means "to but excluding".
SECTION 1.03. Accounting Principles and Terms. Except as otherwise
provided in this Financing Agreement, (a) all computations and determinations as
to financial matters, and all financial statements to be delivered under this
Financing Agreement, shall be made or prepared in accordance with GAAP and (b)
all accounting terms used in this Financing Agreement shall have the meaning
ascribed to such terms by such principles.
SECTION 1.04. Rules of Construction. When used in this Financing
Agreement: (a) "or" is not exclusive; (b) a reference to a Law includes any
amendment or modification to such Law; (c) a reference to a Person includes
its permitted successors and permitted assigns; and (d) unless otherwise
provided for in this Financing Agreement, a reference to an
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agreement, instrument or document shall include such agreement, instrument or
document as the same may be amended, modified or supplemented from time to
time in accordance with its terms and as permitted by the Loan Documents.
ARTICLE 2. CONDITIONS PRECEDENT
SECTION 2.01. Conditions Precedent to Initial Revolving Credit Loan.
The obligation of the Lenders to make an initial Revolving Credit Loan is
subject to the condition precedent that (1) the Agent shall have received each
of the following documents, in form and substance satisfactory to the Agent and
its counsel, and (2) each of the following other requirements shall have been
fulfilled:
(a) Evidence of Due Organization and all Corporate Actions by the
Obligors. A certificate of the Secretary or Assistant Secretary of each
Obligor, dated the Closing Date, attesting to the certificate of incorporation
and bylaws of such Obligor and all amendments thereto and to all corporate
actions taken by such Obligor, including resolutions of its board of directors,
taken by such Obligor, including resolutions of its board of directors,
authorizing the execution, delivery and performance of the Loan Documents and
each other document to be delivered pursuant to the Loan Documents.
(b) Incumbency and Signature Certificate of each Obligor. A
certificate of the Secretary or Assistant Secretary of each Obligor, dated as of
the Closing Date, certifying the names and true signatures of the officers of
such Obligor authorized to sign the Loan Documents, and the other documents to
be delivered pursuant to the Loan Documents.
(c) Good Standing Certificates of each Obligor. A certificate, dated
reasonably near the Closing Date, from the Secretary of State (or other
appropriate official) of the jurisdiction of incorporation of such Obligor
certifying as to the due incorporation and good standing of such Obligor and
certificates, dated reasonably near the Closing Date, from the Secretary of
State (or other appropriate official) of each other jurisdiction where such
Obligor is required to be qualified to conduct business, certifying that such
Obligor is duly qualified to do such business and is in good standing in such
state.
(d) Revolving Credit Note. The Revolving Credit Note duly executed by
the Borrower.
(e) Depository Accounts. Each Obligor shall have established a
system of lock box accounts (satisfactory to the
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Agent) for the collection of such Obligor's Accounts and shall have taken all
steps necessary to insure that all Accounts Receivable such Obligor shall
have established are delivered to such Depository Account of such Obligor.
(f) Structure of Arcon Stock Purchase and CPG Merger. The Required
Lenders shall be satisfied with the corporate and legal structure of the Arcon
Stock Purchase and CPG Merger and all the terms of the Arcon Purchase Documents
and the CPG Merger Documents.
(g) Arcon Purchase Documents. Evidence that (a) each transaction
contemplated by the Arcon Purchase Agreement has occurred and (b) all conditions
to the Arcon Stock Purchase have been met or waived with the concurrence of all
of the Lenders and certified copies of the Arcon Purchase Documents, with the
opinions of counsel included therein expressly stating that the Lenders are
entitled to rely thereon as fully as if such opinions were addressed to the
Lenders.
(h) CPG Merger Documents. Evidence that (a) each transaction
contemplated by the CPG Merger Agreement has occurred and (b) all conditions to
the CPG Merger Agreement have been met or waived with the concurrence of all of
the Lenders and certified copies of the CPG Merger Documents, with the opinion
of counsel included therein expressly stating that the Lenders are entitled to
rely thereon as fully as if such opinion were addressed to the Lenders.
(i) General Due Diligence. Due diligence satisfactory to the Required
Lenders with respect to each Obligor, including but not limited to the
management of each Obligor, satisfactory visits to selected plant sites, and
satisfactory interviews with key customers of each Obligor.
(j) Inventory and Accounts Receivable Analysis. A satisfactory
analysis of the inventory and accounts receivables and personal property of the
Borrower, CPG Investors, Arcon Holdings and each of its respective Subsidiaries.
(k) Lien Searches. The Agent shall have received tax, judgment,
Uniform Commercial Code searches satisfactory to the Agent for all locations
presently occupied or used by each Obligor.
(l) UCC Filings. Any documents (including without limitation,
financing statements) required to be filed in order to create, in favor of
the Agent for the ratable benefit of the Lenders, a first and exclusive
perfected security interest (except for Permitted Encumbrances) in the
Collateral with respect to which a security interest may be perfected by a
filing under the Uniform Commercial Code shall have been
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properly filed in each office in each jurisdiction required in order to
create in favor of the Agent for the ratable benefit of the Lenders a
perfected Lien on the Collateral. The Agent shall have received
acknowledgement copies of all such filings (or, in lieu thereof, the Agent
shall have received other evidence satisfactory to the Agent that all such
filings have been made); and the Agent shall have received evidence that all
necessary filing fees and all taxes or other expenses related to such filings
have been paid in full.
(m) Casualty Insurance. Borrower shall have delivered to the Agent
evidence satisfactory to the Lenders that casualty insurance policies listing
the Agent as loss payee or mortgagee, as the case may be, for the Brattleboro,
Vermont property and for the Inventory of each Obligor, are in full force and
effect, all as set forth in Section 9.07 of this Financing Agreement.
(n) Examination and Verification. The Agent shall have completed to
the satisfaction of the Lenders an examination and verification of the Accounts,
Inventory, books and records of each Obligor.
(o) Approvals and Permits. Evidence satisfactory to the Agent that
all Approvals and Permits required for the operation of the business of each
Obligor are in effect.
(p) Hart-Scott-Rodino. Evidence that each of the Arcon Stock Purchase
and CPG Merger was effected in accordance with the Hart-Scott-Rodino Act.
(q) Solvency Certificates. Solvency Certificates duly executed by
each Obligor.
(r) Landlord's Waiver(s). The Agent shall have received from each
landlord of any premises occupied by any Obligor a landlord's waiver waiving any
Lien such landlord has on any of the Inventory of any Obligor pursuant to an
agreement in form and substance satisfactory to the Lenders.
(s) Cash Budget Projection. The Agent shall have received a twelve
(12) month cash budget projection prepared by the Borrower in form and substance
acceptable to the Lenders.
(t) Warehouse Documents. The Agent shall have received from each
public warehouse in which Inventory of any Obligor is stored, an acknowledgement
in form and substance acceptable to the Lenders concerning the Lenders' security
interest in such Inventory.
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(u) Third Party Processor Letters. The Agent shall have received,
from each third party processor of Inventory of any Obligor, an acknowledgement
in form and substance acceptable to the Lenders concerning the Lenders' security
interest in such Inventory.
(v) Fees and Expenses. Payment in full to the Agent and the Lenders
of all fees required to be paid to the Agent pursuant to the terms and
conditions of this Financing Agreement; and payment in full of all other fees
required to be paid in accordance with the terms of the Loan Documents.
(w) Opinions of Counsel. Favorable opinion of counsel to the
Obligors acceptable to the Required Lenders in form and substance satisfactory
to the Required Lenders.
(x) Due Diligence. Satisfactory completion of all reasonable due
diligence items the Agent deems necessary, including but not limited to
interviews with key customers and any other Persons material to the operation of
each Obligor's business and review of actual and potential liabilities of each
Obligor under Environmental Laws or in connection with Environmental Discharges
relating to all past and present real estate, properties and operations of each
Obligor and their respective predecessors.
(y) Officer's Certificate. The following statements shall be true and
Agent shall have received certificates signed by duly authorized officers of the
Borrower stating that:
(i) The representations and warranties contained in this Agreement
and in each of the other Loan Documents are correct on and as of the date
of this Financing Agreement, as though made on and as of such date; and
(ii) No Default or Event of Default has occurred and is continuing.
(z) Brattleboro, Vermont Mortgage Modification. The Borrower shall
have executed and delivered to the Agent for the benefit of the Agent and the
Lenders, the Mortgage Modification Agreement (Brattleboro, Vermont) dated
December 31, 1996 by and between the Borrower and CITBC, and such Mortgage
Modification Agreement (Brattleboro, Vermont) shall have been delivered to a
title company for recording.
(aa) Disbursement Authorizations. The Borrower shall have delivered
to the Agent all information necessary for the Agent to issue wire transfer
instructions on behalf of the Borrower for the initial Revolving Credit Loan
and subsequent Revolving Credit Loans to be made to it under this
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Agreement, including, but not limited to, disbursement authorizations in form
acceptable to the Agent.
(bb) Structure of Senior Notes Offering. The Required Lenders shall
be satisfied with the terms and conditions of the offering by the Borrower of
its Senior Notes issued pursuant to the Indenture.
(cc) Security Agreement. The Security Agreement duly executed by the
Borrower together with (a) duly executed financing statements (UCC-1) to be
filed under the Uniform Commercial Code of all jurisdictions necessary or, in
the opinion of the Agent, desirable to perfect the security interest created by
the Security Agreement; (b) duly executed copies of the financing statements
(UCC-3) to be filed under the Uniform Commercial Code of all jurisdictions
necessary, or in the opinion of the Agent, desirable to terminate any Liens in
favor of any party other than the Agent; and (c) Uniform Commercial Code
searches identifying all of the financing statements on file with respect to
such party in all jurisdictions referred to under (a), including the financing
statements filed by the Agent against such party, indicating that no party other
than the Agent claims an interest in any of the Collateral.
(dd) Environmental Due Diligence. The Agent shall have received
evidence satisfactory to the Agent and the Lenders, in their complete
discretion, that the presence of any Hazardous Materials at, or the occurrence
of any Environmental Discharge at, to or from, the Warren Glen or Hughesville
properties on or prior to the Closing Date could not result in a Material
Adverse Change under any circumstances, including, without limitation,
circumstances in which any Obligor, any predecessor to any Obligor, or any
present or former Affiliate of any Obligor is called upon to satisfy the
obligations (contractual or otherwise) of any other Person in connection with
such Hazardous Materials or Environmental Discharge.
(ee) Additional Documentation. Such other approvals, opinions or
documents as the Agent or any Lender shall reasonably request.
SECTION 2.02. Conditions Precedent to Each Revolving Credit Loan.
The obligations of the Lenders to make each Revolving Credit Loan (including the
initial Revolving Credit Loans under this Agreement), shall be subject to the
further conditions precedent that on the date of providing such Revolving Credit
Loan:
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(a) The following statements shall be true:
(i) all of the representations and warranties contained in this
Financing Agreement and in each of the other Loan Documents
are correct on and as of the date of providing such
Revolving Credit Loan as though made on and as of such date;
and
(ii) no Default or Event of Default has occurred and is
continuing, or could result from providing such Revolving
Credit Loan;
(b) The Agent shall have received such other approvals, opinions or
documents as the Agent or any Lender may reasonably request.
SECTION 2.03. Deemed Representation. Each delivery of a Notice of
Borrowing requesting a Revolving Credit Loan shall constitute a representation
and warranty that the statements contained in Section 2.02 are true and correct
both on the date of such delivery of the Notice of Borrowing and as of the date
of the providing of such Revolving Credit Loan.
ARTICLE 3. AMOUNT AND TERMS OF THE REVOLVING CREDIT LOANS.
SECTION 3.01. Revolving Credit Loans. Subject to the terms and
conditions of this Financing Agreement, each Lender severally agrees to make
loans ("Revolving Credit Loans") to the Borrower from time to time during the
period from the Closing Date through the Revolving Credit Commitment Termination
Date, provided that (a) the amount of each Revolving Credit Loan does not exceed
the then effective Availability, and (b) the aggregate principal amount of all
Revolving Credit Loans outstanding at any time does not exceed the lesser of:
(i) the Revolving Credit Facility or (ii) the then effective Borrowing Base
("Revolving Credit Commitment"). Within the limits of the Revolving Credit
Commitment, the Borrower may borrow, make a payment pursuant to Section 3.10,
and reborrow under this Section 3.01. The Revolving Credit Loans may be
outstanding as Chase Manhattan Bank Rate Loans or Libor Loans. Each Type of
Revolving Credit Loan of each Lender shall be made and maintained at such
Lender's Applicable Lending Office for such Type of Loan.
SECTION 3.02. Revolving Credit Note. All Revolving Credit Loans
made by each Lender under this Financing Agreement shall be evidenced by, and
repaid with interest in accordance with, a promissory note of the Borrower in
substantially the form of Exhibit A hereto, in the principal amount equal to
such Lender's Pro Rata Share of the
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Revolving Credit Commitment, payable to such Lender for the account of its
Applicable Lending Office and maturing as to principal on the Revolving
Credit Commitment Termination Date (the "Revolving Credit Note"). Each
Lender is hereby authorized by the Borrower to endorse on the schedule
attached to the Revolving Credit Note held by it the date of making each
Revolving Credit Loan, the amount of each Revolving Credit Loan, the type of
the Revolving Credit Loan and each Conversion, Continuation and payment of
principal amount received by such Lender for the account of its Applicable
Lending Office of its Revolving Credit Loans, which endorsement shall, in the
absence of manifest error, be conclusive as to the outstanding balance of the
Revolving Credit Loans made by such Lender; provided, however, that the
failure to make such notation with respect to any Revolving Credit Loan or
Conversion, Continuation or payment shall not limit or otherwise affect the
Obligations of the Borrower under this Financing Agreement or the Revolving
Credit Note held by such Lender. Each Lender agrees that prior to any
assignment of its Revolving Credit Note it will endorse the schedule attached
to its Revolving Credit Note. All outstanding principal on the Revolving
Credit Loans shall be due and payable on the Revolving Credit Commitment
Termination Date.
SECTION 3.03. Overadvances. The Agent may, on behalf of the
Lenders, make a Revolving Credit Loan in excess of the Availability or the
Revolving Credit Facility ("Overadvances") in either case, up to an aggregate
amount outstanding at any time of Three Million Dollars ($3,000,000)
("Overadvance Availability"); provided that the Agent and the Lenders shall not
be obligated to make any Overadvances hereunder and any Overadvance made by the
Agent in excess of Availability or the Revolving Credit Facility shall be in the
sole and absolute discretion of the Agent subject to payment in the amount of
such Overadvances or to any additional terms the Agent deems necessary. In the
event that the Agent makes Overadvances on behalf of the Lenders, each Lender
severally agrees to make a Revolving Credit Loan equal to its Pro Rata Share of
all Overadvances.
SECTION 3.04. Information Relating to Accounts. In furtherance of
the continuing assignment and security interest in each Obligor's Accounts,
each Obligor will, upon the creation of Accounts, execute and deliver to the
Agent in such form and manner as the Agent may reasonably require, solely for
the Agent's convenience in maintaining records of collateral, such
confirmatory schedules of Accounts as the Agent may reasonably request, and
such other appropriate reports designating, identifying and describing the
Accounts as the Agent may reasonably require. In addition, upon the Agent's
request, such Obligor shall provide the Agent and each of the Lenders with
copies of agreements with, or purchase
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orders from, the Obligor's customers, and copies of invoices to customers,
proof of shipment or delivery and such other documentation and information
relating to said Accounts and other collateral as the Agent may reasonably
require. Failure to provide the Agents or any of the Lenders with any of the
foregoing shall in no way affect, diminish, modify or otherwise limit the
security interests granted herein. Each Obligor hereby authorizes the Agent
to regard its printed name or rubber stamp signature on assignment schedules
or invoices as the equivalent of a manual signature by one of such Borrower's
authorized officers or agents.
SECTION 3.05. Representations Relating to Accounts. Each Obligor
hereby represents and warrants that (a) each Account of such Obligor is based on
an actual and bona fide sale and delivery of goods or rendition of services to
customers, made by such Obligor in the ordinary course of its business; (b) the
goods and inventory being sold and the Accounts created are the exclusive
property of such Obligor and are not and shall not be subject to any lien,
consignment arrangement, encumbrance, security interest or financing statement
whatsoever, other than the Permitted Encumbrances; (c) the invoices evidencing
such Accounts are in the name of such Obligor; and (d) the customers of such
Obligor have accepted the goods or services, owe and are obligated to pay the
full amounts stated in the invoices according to their terms, without dispute,
offset, defense, counterclaim or contra, except for disputes and other matters
arising in the ordinary course of business of which such Obligor has advised the
Agent pursuant to Section 3.07. Each Obligor confirms to the Lenders that any
and all taxes or fees relating to its business, its sales, the Accounts of such
Obligor or goods relating thereto, are its sole responsibility and that same
will be paid by such Obligor or when due and that none of said taxes or fees
represent a lien on or claim against the Accounts. Each Obligor also warrants
and represents that it is a duly and validly existing corporation and is
qualified in all states and provinces where the failure to so qualify would have
an adverse effect on the business of such Obligor or the ability of such Obligor
to enforce collection of Accounts due from customers residing in such locations.
Each Obligor agrees to maintain such books and records regarding Accounts as the
Agent may reasonably require and agrees that the books and records of such
Obligor will reflect the Lenders' interest in the Accounts of such Obligor. All
of the books and records of such Obligor will be available to the Agent and the
Lenders at normal business hours, including any records handled or maintained
for such Obligor by any other company or entity.
SECTION 3.06. Collection of Accounts. Until the Agent has advised
an Obligor to the contrary after the occurrence of an Event of Default, such
Obligor may and will enforce, collect and receive all amounts owing on the
Accounts
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of such Obligor for the Lenders' benefit and on the Lenders' behalf, but at
such Obligor's expense; such privilege shall terminate automatically upon the
institution by or against such Obligor of any proceeding under any bankruptcy
or insolvency law or, at the election of the Agent, upon the occurrence of
any other Event of Default and until such Event of Default is waived. Any
checks, cash, notes or other instruments or property received by such Obligor
with respect to any Accounts of such Obligor shall be held by such Obligor in
trust for the Lenders, separate from such Obligor's own property and funds,
and immediately turned over to the Agent for the ratable benefit of the
Lenders with proper assignments or endorsements by deposit to the Depository
Accounts. All amounts received by the Agent in payment of Accounts of an
Obligor will be credited to such Obligor's accounts upon the Agent's receipt
of "collected funds" at the Agent's bank account in New York, New York on the
Business Day of receipt if received no later than 1:00 p.m. (New York time)
or on the next succeeding Business Day if received after 1:00 p.m. (New York
time). No checks, drafts or other instrument received by the Agent shall
constitute final payment to the Agent or the Lenders unless and until such
instruments have actually been collected.
Pursuant to separate arrangements between the Agent and each
institution at which a Depository Account is maintained (herein the "Depository
Banks"), each such Depository Bank has agreed, or will agree, if instructed by
the Agent as permitted hereunder to remit funds collected and to be collected in
the Depository Account to an account specified by the Agent. It is hereby
agreed between the Agent and each Obligor that until the first day the Lenders
make Revolving Credit Loans to such Obligor and (i) the Availability is
$5,000,000 or greater and (ii) there is then no Default or Event of Default, the
Agent shall permit such Obligor to instruct the Depository Banks to transfer any
funds in the Depository Accounts to their respective operating accounts or such
other accounts located in the United States (other than payroll accounts) as
such Obligor may designate. Upon the occurrence of an Event of Default, the
Agent shall have the right to immediately, without notice to an Obligor,
instruct such Depository Banks to remit funds collected and to be collected in
the Depository Accounts to an account specified by the Agent and with respect to
the disposition of any and all funds collected or to be collected in such
Depository Accounts.
SECTION 3.07. Notice Regarding Accounts. Each Obligor agrees to
notify each of the Lenders promptly of any matters materially affecting the
value, enforceability or collectibility of any Account of such Obligor and of
all material customer disputes, offsets, defenses, counterclaims, returns,
rejections and all reclaimed or repossessed
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merchandise or goods. Each Obligor agrees that it shall issue credit
memoranda promptly (with duplicates to the Agent upon request after the
occurrence of an Event of Default) upon accepting returns or granting
allowances, and may continue to do so until the Agent has notified such
Obligor that an Event of Default has occurred and that all future credits or
allowances are to be made only after the Agent's prior written approval.
Upon the occurrence of an Event of Default and until such time as such Event
of Default is waived and on notice from the Agent, each Obligor agrees that
all returned, reclaimed or repossessed merchandise or goods shall be set
aside by such Obligor, marked with the Agent's name and held by such Obligor
for the Agent's account as owner and assignee for the ratable benefit of the
Lenders.
SECTION 3.08. Borrower's Account. The Agent shall maintain a
separate account on its books in the Borrower's name in which the Borrower will
be charged with Revolving Credit Loans made by the Agent on behalf of the
Lenders to it or for the Borrower's account, and with any other Obligations of
the Borrower, including any and all costs, expenses and reasonable attorney's
fees which the Lenders and/or the Agent may incur in connection with the
exercise by or for the Agent or the Lenders of any of the rights or powers
herein conferred upon the Agent or in the prosecution or defense of any action
or proceeding to enforce or protect any rights of the Agent or the Lenders in
connection with this Financing Agreement or the Collateral assigned hereunder,
or any Obligations owing to the Lenders and/or the Agent by the Borrower. The
Borrower will be credited with all amounts received by the Agent from such
Person or from others for such Person's account, including, as above set forth,
all amounts received by the Agent in payment of assigned Accounts and such
amounts will be applied to payment of the Obligations. In no event shall prior
recourse to any Accounts or other security granted to or by the Borrower be a
prerequisite to the Agent's right to demand payment of any Obligation. Further,
it is understood that the Lenders and the Agent shall have no obligation
whatsoever to perform in any respect any of the Borrower's contracts or
obligations relating to its Accounts.
After the end of each month, the Agent shall promptly send the
Borrower a statement showing the accounting for the charges, Revolving Credit
Loans and other transactions occurring between the Agent and such Person during
that month. The monthly statements shall be deemed correct and binding upon the
Borrower and shall constitute an account stated among such Person, the Lenders
and the Agent unless the Agent receives a written statement of the exceptions
within thirty (30) days of the date of the monthly statement.
SECTION 3.09. Application of Payments. Notwithstanding anything to
the contrary contained in this
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Article 3 or elsewhere in this Financing Agreement, the Agent shall apply all
amounts received by it in payment of Accounts or Obligations of the Borrower
to Chase Manhattan Bank Rate Revolving Credit Loans of the Borrower prior to
any application to other Types of Revolving Credit Loans of the Borrower;
provided, however, (a) upon the occurrence of an Event of Default or (b) in
the event the aggregate amount of outstanding Revolving Credit Loans of the
Borrower which are Libor Rate Loans exceeds the Borrowing Base of the
Borrower, the Agent may apply all such amounts received by it to the payment
of Obligations in such manner and in such order as the Agent may elect in its
reasonable business discretion. In the event that any such amounts are
applied to Revolving Credit Loans of the Borrower which are Libor Rate Loans,
such application shall be treated as a prepayment of such loans of the
Borrower and the Agent shall be entitled to the Libor Rate Prepayment Premium
with respect thereto.
SECTION 3.10. Prepayments. Subject to the limitation noted below,
the Borrower may prepay the Revolving Credit Loans upon at least one (1)
Business Day's notice to Agent in the case of Chase Manhattan Bank Rate Loans,
and at least three (3) Business Day's notice to Agent in the case of Libor Rate
Loans, in whole or in part with accrued interest to the date of such prepayment
on the amount prepaid, provided that (a) each partial prepayment shall be in the
case of a Libor Rate Loan, in a principal amount of not less than One Million
Dollars ($1,000,000) and integral multiples of One Hundred Thousand Dollars
($100,000); and (b) Libor Rate Loans prepaid on any Business Day other than the
last day of the Libor Rate Period applicable for such Loan shall require the
Borrower to pay the Libor Rate Prepayment Premiums. Notwithstanding anything to
the contrary in this Financing Agreement, the Borrower may not cancel its
Revolving Credit Commitment prior to the payment in full of all outstanding
Obligations owed to CITEF under the Lease Agreement or any loan agreements.
In the event that the Borrower shall cause its Revolving Credit
Facility to be cancelled and the Borrower shall obtain an alternative commitment
from another lender for financing, Borrower shall prepay the Revolving Credit
Loans in whole with accrued interest to the date of such cancellation and in
addition, the Borrower shall pay to the Agent, for the account of each Lender, a
fee ("Prepayment Fee"), in the following amounts:
Period Amount
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Twelve (12) month period from 1.5% of the average
December 31, 1996 to December principal amount of all
31, 1997 Revolving Credit Loans
outstanding at any time for
the six month period prior
to such cancellation
Twelve (12) month period from 1.0% of the average
December 31, 1997 to December principal amount of all
31, 1998 Revolving Credit Loans
outstanding at any time for
the six month period prior
to such cancellation
Twelve (12) month period from 0.5% of the average
December 31, 1998 to December principal amount of all
31, 1999 Revolving Credit Loans
outstanding at any time for
the six month period prior
to such cancellation
To the extent the outstanding principal amount of the Revolving Credit
Loans exceed the Borrowing Base, the Borrower shall prepay such Revolving Credit
Loans in an amount equal to the excess of the outstanding principal amount of
Revolving Credit Loans over the then effective Borrowing Base.
SECTION 3.11. Funding of Revolving Credit Loans. The Agent, for the
account of the Lenders, shall disburse all Revolving Credit Loans and shall
handle all collections of Collateral and repayment of Obligations. It is
understood that for purposes of Revolving Credit Loans and for purposes of this
Section 3.11, the Agent is using the funds of CITBC.
On each Settlement Date, the Agent and the Lenders shall each remit to
the other, in immediately available funds, all amounts necessary so as to ensure
that, as of such Settlement Date, each Lenders shall have its Pro Rata Share of
all outstanding Revolving Credit Loans in accordance with its Revolving Credit
Commitments.
The Agent shall forward to each Lender, at the end of each month, a
copy of the account statement rendered by the Agent to the Borrower.
SECTION 3.12. Notice and Manner of Borrowing. With regard to each
Revolving Credit Loan, the Borrower shall deliver to the Agent and, if
required by the Agent, with a copy to each Lender, a written or telegraphic
or facsimile notice substantially in the form of Exhibit B hereto (effective
upon receipt) ("Revolving Credit Notice of Borrowing") not later than 12:00
noon (New York time) on the
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day of making each Chase Manhattan Bank Rate Revolving Credit Loan and at
least three (3) Business Days prior to the date of any Libor Rate Revolving
Credit Loan. Each Revolving Credit Notice of Borrowing must specify: (a) the
date of such Revolving Credit Loan; (b) the amount of such Revolving Credit
Loan; (c) the initial Type or Types which will comprise the requested
Revolving Credit Loan and (d) in the case of a Libor Rate Revolving Credit
Loan, the initial Libor Rate Period applicable thereto. The Agent will
promptly notify each Lender of receipt by the Agent of a Revolving Credit
Notice of Borrowing and of the contents thereof.
SECTION 3.13. Obligations of Agent and Lenders. Each Lender is
solely responsible for its Pro Rata Share of each Revolving Credit Commitment
and neither Agent nor any Lender shall be responsible for, nor assume any
obligations for, the failure of any Lender to make available its Pro Rata Share
of any such Revolving Credit Loans. Should any Lender refuse to make available
its Revolving Credit Loans, then each of the other Lenders may, but without
obligation to do so, increase, unilaterally, its portion of the Revolving Credit
Loans in which event the Borrower shall be so obligated to such other Lender.
Nothing contained herein shall be deemed to obligate the Agent to make
available to the Borrower the full amount of a requested Revolving Credit Loan
when the Agent has not received any Lender's Pro Rata Share of such Revolving
Credit Loan or if the Agent otherwise has any notice that any of the Lenders
will not advance its Pro Rata Share thereof. The Agent, for the account of the
Lenders, shall disburse all Revolving Credit Loans and shall handle all
collections of Collateral and repayment of Obligations. It is understood that
for purposes of Revolving Credit Loans and for purposes of this Article 3 and
prior to settlement among the Lenders on any Settlement Date the Agent is using
the funds of CITBC.
Unless the Agent shall have been notified in writing by any Lender
prior to any advance to the Borrower that such Lender will not make the
amount which would constitute its share of the borrowing on such date
available to the Agent, the Agent may assume that such Lender shall make such
amount available to the Agent on a Settlement Date, and the Agent may, in
reliance upon such assumption, make available to the Borrower for the benefit
of the Borrower a corresponding amount. Absent such notice each Lender's
commitment shall be absolute and unconditional and such Lender shall
reimburse the Agent its Pro Rata Share of such borrowing upon demand. A
certificate of the Agent submitted to any Lender with respect to any amount
owing under this subsection shall be conclusive, absent manifest error. If
such Lender's Pro Rata Share of such borrowing is not in fact made available
to the Agent by such Lender on the Settlement Date, the Agent shall be
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entitled to charge the Borrower's account with any such amount with interest
thereon at the rate per annum applicable to Revolving Credit Loans hereunder,
on demand, from the Borrower without prejudice to any rights which the Agent
may have against such Lender hereunder. Nothing contained in this subsection
shall relieve any Lender which has failed to make available its Pro Rata
Share of any borrowing hereunder from its obligation to do so in accordance
with the terms hereof. Nothing contained herein shall be deemed to obligate
the Agent to make available to the Borrower the full amount of a requested
advance when the Agent has not received any Lender's Pro Rata Share of such
Revolving Credit Loan or if the Agent has any notice that any of the Lenders
will not advance its Pro Rata Share thereof.
SECTION 3.14. Minimum Amounts. The amount of each Revolving Credit
Loan borrowed on any given day and the aggregate amount of each Revolving Credit
Loan with the same interest rate after giving effect to the conversions and
continuations provided for in Section 5.01 shall, in the case of Libor Rate
Loans, be in an amount at least equal to One Million Dollars ($1,000,000) or a
greater amount which is an integral multiple of One Hundred Thousand Dollars
($100,000) (Libor Rate Loans having different Libor Rate Periods outstanding at
the same time shall be deemed separate Loans for purposes of the foregoing, one
for each Libor Rate Period). There shall be no minimum amount of principal
applicable to a conversion or continuation of a Chase Manhattan Bank Rate Loan.
SECTION 3.15. Use of Proceeds. The proceeds of the Revolving Credit
Loans shall be used by the Borrower for its working capital and general
corporate purposes and may be used by the Borrower to make loans to any Obligor
for working capital purposes; provided, however, that an amount not to exceed
$15,000,000 of the proceeds of the Revolving Credit Loans may be used by the
Borrower to pay all or a portion of the consideration for the acquisition of
stock or assets of another Person. The Borrower will not, directly or
indirectly, use any Revolving Credit Loan proceeds for the purpose of purchasing
or carrying any margin stock within the meaning of Regulations G, T, U or X of
the Board of Governors or to extend credit to any Person for the purpose of
purchasing or carrying any such margin stock.
SECTION 3.16. Taxes. Any and all payments by the Borrower made
hereunder shall be made free and clear of and without deduction for any and all
taxes, levies, imposts, deductions, charges or withholdings imposed by any
Governmental Authority, and all liabilities with respect thereto, excluding
taxes imposed on or measured by the net income of any of the Lenders on the
receipt or accrual of stated principal and interest payments by the jurisdiction
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under the laws of which such Lender is organized or any political subdivision
thereof or in which such Lender maintains an office or conducts business (all
such non-excluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as "Non-Excluded Taxes"). If
the Borrower shall be required by Law to withhold or deduct any Non-Excluded
Taxes from or in respect of any sum payable hereunder, (a) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 3.16) Lender receives an amount equal to the sum it would have
received had no such deductions been made, (b) the Borrower shall make such
deductions, and (c) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable Law.
In addition, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise under the laws of the United States of America or the State of
New York or any other taxing authority from any payment made hereunder or from
the execution or delivery or otherwise with respect to this Agreement or any
other Loan Document (hereinafter referred to an "Other Taxes").
The Borrower shall indemnify each Lender for the full amount of
Non-Excluded Taxes and Other Taxes (including, without limitation, any
Non-Excluded Taxes or Other Taxes imposed by any jurisdiction on amounts payable
under this Section 3.16) paid by such Lender or any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Non-Excluded Taxes or Other Taxes were correctly or legally
asserted. Payments by the Borrower pursuant to this indemnification shall be
made within thirty (30) days from the date a Lender makes written demand
therefor.
Within thirty (30) days after the date of any payment of Non-Excluded
Taxes or Other Taxes by the Borrower, the Borrower shall furnish to the
applicable Lender the original or a certified copy of a receipt evidencing
payment thereof. The Borrower shall compensate the applicable Lender for all
losses and expenses sustained by such Lender as a result of any failure by the
Borrower to so furnish such copy of such receipt.
Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 3.16 shall survive the payment in full of the Revolving Credit
Loans.
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Each Lender that is organized under the laws of any jurisdiction other
than the United States of America or any State thereof (including the District
of Columbia) agrees, if eligible, to furnish to the Borrower and the Agent,
prior to the first Quarterly Payment Date, two copies of either U.S. Internal
Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 or any
successor forms thereto (wherein such Lender claims entitlement to complete
exemption from U.S. federal withholding tax on all payments made by the Borrower
hereunder) and upon request of the Borrower to provide to such Person and the
Agent a new Form 4224 or Form 1001 or any successor form thereto (claiming a
complete exemption from U.S. federal withholding tax on all payments made by
such Person hereunder) if any previously delivered form is found to be
incomplete or incorrect in any material respect or upon the obsolescence of any
previously delivered form.
SECTION 3.17. Additional Costs. The Borrower shall pay directly to
the applicable Lender from time to time on demand such amounts as such Lender
may determine to be necessary to compensate it for any increased costs which
such Lender determines are attributable to its making or maintaining any Libor
Rate Loan, or its obligation to convert any Chase Manhattan Bank Rate Loan to a
Libor Rate Loan hereunder, or any reduction in any amount receivable by such
Lender hereunder in respect of any of such Libor Rate Loans or such obligation
(such increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), resulting from any Regulatory Change which:
(a) changes the basis of taxation of any amounts payable to such
Lender under this Agreement or the Revolving Credit Loans or the Revolving
Credit Note in respect of any of such Libor Rate Loans (other than changes in
the rate of net income tax imposed on such Lender); or
(b) imposes or modifies any reserve, special deposit, deposit
insurance or assessment, minimum capital, capital ratio or similar requirements
relating to any extensions of credit or other assets of, or any deposits with or
other liabilities of, such Lender (including any Libor Rate Loans or any
deposits referred to in the definition of "Libor Rate" in Section 1.01 hereof),
or any Revolving Credit Commitment of such Lender; or
(c) imposes any other condition affecting this Financing Agreement or
the Revolving Credit Loans or the Revolving Credit Note (or any of such
extensions of credit or liabilities).
Without limiting the effect of the provisions of the first paragraph
of this Section 3.17, in the event that, by reason of any Regulatory Change,
a Lender either (1) incurs
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Additional Costs based on or measured by the excess above a specified level
of the amount of a category of deposits of other liabilities of such Lender
which includes deposits by reference to which the Libor Rate is determined as
provided in this Financing Agreement or a category of extensions of credit or
other assets of such Lender which includes Revolving Credit Loans based on
the Libor Rate or (2) becomes subject to restrictions on the amount of such a
category of liabilities or assets which it may hold, then, if such Lender so
elects by notice to the Borrower and the Agent, the obligation of such Lender
to make or continue, or to convert Chase Manhattan Bank Rate Loans into Libor
Rate Loans shall be suspended until such Regulatory Change ceases to be in
effect (in which case the provisions of Section 3.18 hereof shall be
applicable).
A certificate of any Lender claiming compensation under this Section,
setting forth the additional amount or amounts to be paid to it hereunder, shall
be conclusive in the absence of manifest error.
SECTION 3.18. Limitation on Types of Revolving Credit Loans. Anything
herein to the contrary notwithstanding, if, on or prior to the determination of
a Libor Rate for any Libor Rate Period:
(a) The Agent or any of the Lenders determines (which determination
shall be conclusive) that quotations of interest rates for the relevant deposits
referred to in the definition of "Libor Rate" in Section 1.01 hereof are not
being provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for Libor Rate Loans as provided in
this Financing Agreement; or
(b) Any Lender determines (which determination shall be conclusive)
that the relevant rates of interest referred to in the definition of "Libor
Rate" in Section 1.01 hereof upon the basis of which the rate of interest for
Libor Rate Loans for such Libor Rate Period are to be determined do not
adequately cover the cost to such Lender of making or maintaining such Libor
Rate Loans for such Libor Rate Period;
then Agent shall give the Borrower prompt notice thereof, and so long as such
condition remains in effect, such Lenders shall be under no obligation to make
such Libor Rate Loans, convert Chase Manhattan Bank Rate Loans into such Libor
Rate Loans or continue such Libor Rate Loans and if the Borrower has outstanding
Libor Rate Loans shall, on the last day(s) of the then current Libor Rate
Period(s) for such outstanding Libor Rate Loans, either prepay such Libor Rate
Loans or convert such Libor Rate Loans into a Chase Manhattan Bank Rate Loan in
accordance with Section 6.01.
SECTION 3.19. Illegality. Notwithstanding any other provision of
this Agreement, in the event that it
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becomes unlawful for any Lender to honor its obligation to make or maintain
Libor Rate Loans hereunder or convert Chase Manhattan Bank Rate Loans into
Libor Rate Loans, then such Lender shall promptly notify the Borrower thereof
and such Lender's obligation to make or continue, or to convert a Chase
Manhattan Bank Rate Loan into the affected Libor Rate Loan shall be suspended
until such time as such Lender may again make and maintain such Libor Rate
Loans (in which case the provisions of Section 3.20 hereof shall be
applicable).
SECTION 3.20. Treatment of Affected Loans. If the obligations of a
Lender to make or continue a Libor Rate Loan, or to convert Chase Manhattan Bank
Rate Loans into Libor Rate Loans are suspended pursuant to Section 3.17 or 3.19
hereof (Libor Rate Loans so affected being herein called "Affected Loans"), such
Lender's Affected Loans shall be automatically converted into Chase Manhattan
Bank Rate Loans on the last day(s) of the then current Libor Rate Period(s) for
the Affected Loans (or, in the case of a conversion required by Section 3.17 or
3.19, on such earlier date as such Lender may specify to the Borrower).
To the extent that such Lender's Affected Loans have been so
converted, all payments and prepayments of principal which would otherwise be
applied to such Lender's Affected Loans shall be applied instead to its Chase
Manhattan Bank Rate Loans. All Revolving Credit Loans which would otherwise be
made or continued by Lenders as Libor Rate Loans shall be made or continued
instead as Chase Manhattan Bank Rate Loans and all Chase Manhattan Bank Rate
Loans of Lenders which would otherwise be converted into Libor Rate Loans shall
remain as Chase Manhattan Bank Rate Loans.
SECTION 3.21. Adequacy. If any of the Lenders shall have
determined that, after the date hereof, the adoption of any applicable Law,
rule or regulation regarding capital adequacy, or any change therein, or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation
or administration thereof, or any request or directive regarding capital
adequacy (whether or not having the force of Law) of any such Governmental
Authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Lender (or its Parent) as a
consequence of such Lender's obligations hereunder to a level below that
which such Lender could have achieved but for such adoption, change, request
or directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Lender to be material, then from time
to time, the Borrower shall pay to such Lender such additional amount or
amounts as will compensate such Lender for such reduction. A certificate of
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a Lender claiming compensation under this Section 3.21, shall be conclusive
in the absence of manifest error.
ARTICLE 4. GUARANTY
SECTION 4.01. Guaranty. Each Guarantor, jointly and severally,
hereby irrevocably, absolutely and unconditionally guarantees to each Lender
Party and their successors, endorsees, transferees and assigns the prompt and
complete payment by the Borrower as and when due and payable (whether at stated
maturity or by required prepayment, acceleration, demand or otherwise), of all
Obligations now existing or hereafter incurred by the Borrower, including but
not limited to those under the Revolving Credit Loans (all such Obligations
being herein called the "Borrower Obligations"); and agrees to pay on demand any
and all expenses (including counsel fees and expenses) which may be paid or
incurred by any Lender Party in collecting any or all of the Borrower
Obligations and/or enforcing any rights under this Guaranty or under the
Borrower Obligations.
SECTION 4.02. Guarantors' Guaranty Obligations Unconditional. Each
Guarantor hereby jointly and severally guarantees that its Borrower Obligations
will be paid strictly in accordance with the terms of the Loan Documents and
other agreements to which the Borrower is a party, regardless of any Law now or
hereafter in effect in any jurisdiction affecting any such terms or the rights
of any Lender Party with respect thereto. The obligations and liabilities of
each Guarantor under this Guaranty shall be absolute and unconditional
irrespective of: (1) any lack of validity or enforceability of any of the
Borrower Obligations, any Loan Document, or any agreement or instrument relating
thereto; (2) any change in the time, manner or place of payment of, or in any
other term in respect of, all or any of the Borrower Obligations, or any other
amendment or waiver of or consent to any departure from any Loan Document or any
other documents or instruments executed in connection with or related to the
Borrower Obligations; (3) any exchange or release of, or non-perfection of any
Lien on or in, any Collateral, or any release or amendment or waiver of or
consent to any departure from any other guaranty, for all or any of the Borrower
Obligations; or (4) any other circumstances which might otherwise constitute a
defense available to, or a discharge of, the Borrower or any Guarantor in
respect of the Borrower Obligations or the Guarantors in respect of this
Guaranty.
This Guaranty is a continuing guaranty and shall remain in full
force and effect until: (1) the payment in full and indefeasible
satisfaction of all the Borrower Obligations (after the Revolving Credit
Termination Date), and (2) the payment of the other expenses to be paid by
the
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Borrower pursuant hereto. This Guaranty shall continue to be effective or
shall be reinstated, as the case may be, if at any time any payment, or any
part thereof, of any of the Borrower Obligations is rescinded or must
otherwise be returned by any Lender Party upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or any Guarantor
or otherwise, all as though such payment had not been made.
The obligations and liabilities of the Borrower and each Guarantor
under this Guaranty shall not be conditioned or contingent upon the pursuit by
any Lender or any other Person at any time of any right or remedy against the
Borrower or any Guarantor or any other Person which may be or become liable in
respect of all or any part of the Borrower Obligations or against any Collateral
or security or guarantee therefor or right of setoff with respect thereto.
The Borrower and each Guarantor hereby consents that, without the
necessity of any reservation of rights against the Borrower or any Guarantor and
without notice to or further assent by the Borrower or any Guarantor any demand
for payment of any of the Borrower Obligations made by any Lender Party may be
rescinded by such Lender Party and any of the Borrower Obligations continued
after such rescission.
SECTION 4.03. Waivers. To the extent permitted by applicable law,
the Borrower and each Guarantor hereby waives: (1) promptness and diligence;
(2) notice of or proof of reliance by any Lender Party upon this Guaranty or
acceptance of this Guaranty; (3) notice of the incurrence of any Borrower
Obligation by the Borrower or Guaranty Obligation by any Guarantor or the
renewal, extension or accrual of any Borrower Obligation or Guaranty Obligation;
(4) notice of any actions taken by any Lender Party, the Borrower, any Guarantor
or any other party under any Loan Document, or any other agreement or instrument
relating to the Borrower Obligations; (5) all other notices, demands and
protests, and all other formalities of every kind in connection with the
enforcement of the Borrower Obligations or of the obligations of the Borrower or
any Guarantor hereunder, the omission of or delay in which, but for the
provisions of this Section 4.3, might constitute grounds for relieving the
Borrower or any Guarantor of its obligations hereunder; and (6) any requirement
that any Lender Party protect, secure, perfect or insure any Lien on any
property subject thereto or exhaust any right or take any action against the
Borrower or any Guarantor or any other Person or any Collateral.
SECTION 4.04. Subrogation. Each Borrower and each Guarantor agrees
that it hereby waives and releases any rights which it may acquire by way of
subrogation under this Guaranty, whether acquired by any payment made
hereunder, by
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any setoff or application of funds of such Borrower or Guarantor by any
Lender Party or otherwise.
ARTICLE 5. COLLATERAL
SECTION 5.01. (a) Grant of a Security Interest by Borrower. As
security for the prompt payment in full of all Revolving Credit Loans and to
secure the payment in full of the other Borrower Obligations, the Borrower
hereby pledges and grants to the Agent for the ratable benefit of the Lenders a
continuing general Lien upon and security interest in all of its:
(1) present and hereafter acquired Inventory;
(2) present and future Accounts; and
(3) the Brattleboro Collateral.
The security interests granted hereunder shall extend and attach to:
(i) All Collateral which is presently in existence and which is owned
by the Borrower or in which the Borrower has any interest, whether held by the
Borrower or others for its account, and, if any Brattleboro Collateral is
Equipment, whether the Borrower's interest in such Equipment is as owner or
lessee or conditional vendee;
(ii) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either the Agent or the Borrower from the
Borrower's customers, as well as to all supplies, goods, incidentals, packaging
materials, labels and any other items which contribute to the finished goods or
products manufactured or processed by the Borrower or to the sale, promotion or
shipment thereof; and
(iii) All proceeds of any and all of the foregoing.
(b) Grant of a Security Interest by Guarantors. As security for the
prompt payment and performance in full of all of the Guaranty Obligations, each
Guarantor hereby pledges and grants to the Agent for the ratable benefit of the
Lenders a continuing general Lien upon and security interest in all of its:
(1) present and hereafter acquired Inventory; and
(2) present and future Accounts.
The security interests granted hereunder shall extend and attach to:
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(i) All Collateral which is presently in existence and which is owned
by the applicable Guarantor or in which such Guarantor has any interest, whether
held by such Guarantor or others for its account;
(ii) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either the Agent or the applicable
Guarantor from such Guarantor's customers, as well as to all supplies, goods,
incidentals, packaging materials, labels and any other items which contribute to
the finished goods or products manufactured or processed by any Guarantor or to
the sale, promotion or shipment thereof; and
(iii) All proceeds of any and all of the foregoing.
SECTION 5.02. Covenants Regarding Inventory. Each Obligor agrees
to safeguard, protect and hold all Inventory for the Lenders' account and
make no disposition thereof except in the regular course of the business of
such Obligor as herein provided. Until the Agent has given such Obligor
notice to the contrary, as provided for below, any Inventory may be sold and
shipped by such Obligor to its customers in the ordinary course of such
Obligor's business, on open account and on terms currently being extended by
such Obligor to its customers, provided that all proceeds of all sales
(including cash, accounts receivable, checks, notes, instruments for the
payment of money and similar proceeds) are forthwith transferred, endorsed,
and turned over and delivered to the Agent for the ratable benefit of the
Lenders in accordance with Section 3.06 of this Financing Agreement. The
Agent shall have the right to withdraw this permission at any time upon the
occurrence of an Event of Default and until such time as such Event of
Default is waived, in which event no further disposition shall be made of the
Inventory by such Obligor without the Agent's prior written approval. Cash
sales or sales of Inventory in which a Lien upon, or security interest in,
Inventory is retained by such Obligor shall be made by such Obligor only with
the approval of the Agent, and the proceeds of such sales or sales of
Inventory for cash shall not be commingled with such Obligor's other
property, but shall be segregated, held by such Obligor in trust for the
Lenders as the Lenders' exclusive property, and shall be delivered
immediately by such Obligor to the Agent in the identical form received by
such Obligor by deposit to the Depository Accounts. Upon the sale, exchange,
or other disposition of Inventory, as herein provided, the security interest
in such Obligor's Inventory provided for herein shall, without break in
continuity and without further formality or act, continue in, and attach to,
all proceeds, including any instruments for the payment of money, accounts
receivable, contract rights, documents of title, shipping documents, chattel
paper and all other cash and non-cash
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proceeds of such sale, exchange or disposition. As to any such sale,
exchange or other disposition, the Agent shall have all of the rights of an
unpaid seller, including stoppage in transit, replevin, rescission and
reclamation.
SECTION 5.03. Covenants Regarding Equipment. The Equipment is and
will only be used by the Borrower in its business and will not be held for sale
or lease, or removed from its premises, or otherwise disposed of by the Borrower
without the prior written approval of the Agent. The Borrower will not sell,
transfer, lease or otherwise dispose of any of the Equipment constituting a part
of the Brattleboro Collateral, or attempt, offer or contract to do so, except
for sales of assets permitted by this Financing Agreement. Concurrently with
any such permitted disposition, the property acquired by a transferee in such
disposition shall automatically be released from the security interest created
by this Financing Agreement (the "Security Interest"). It is acknowledged and
agreed that notwithstanding any release of property from the Security Interest
in accordance with the foregoing provisions of this Section, the Security
Interest shall in any event continue in the proceeds of the Brattleboro
Collateral. The Agent shall promptly execute and deliver (and, when
appropriate, shall cause any separate agent, co-agent or trustee to execute and
deliver) any releases, instruments or documents reasonably requested by the
Borrower to accomplish or confirm the release of the Equipment constituting a
part of the Brattleboro Collateral provided by this Section. Any such release
of the Equipment constituting a part of the Brattleboro Collateral provided by
the Agent shall specifically describe that portion of the Brattleboro Collateral
to be released, shall be expressed to be unconditional and shall be without
recourse or warranty (other than a warranty that the Agent has not assigned its
rights and interests to any other Person). The Borrower shall pay all of the
Agent's out-of-pocket expenses in connection with any release of the Brattleboro
Collateral.
The Borrower agrees at its own cost and expense to keep the Equipment
in as good and substantial repair and condition as the same is now or at the
time the Lien and security interest granted herein shall attach thereto,
reasonable wear and tear excepted, making any and all repairs and replacements
when and where necessary. The Borrower also agrees to safeguard, protect and
hold all Equipment for the Lenders' account and make no disposition thereof
unless the Borrower first obtains the prior written approval of the Agent. Any
sale, exchange or other disposition of any Equipment shall only be made by the
Borrower with the prior written approval of the Agent, and the proceeds of any
such sales shall not be commingled with the Borrower's other property, but shall
be segregated, held by the Borrower in trust for the Lenders as the Lenders'
exclusive property, and
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shall be delivered immediately by the Borrower to the Agent in the identical
form received by the Borrower by deposit to the Depository Accounts. Upon
the sale, exchange, or other disposition of the Equipment, as herein
provided, the security interest provided for herein shall, without break in
continuity and without further formality or act, continue in, and attach to,
all proceeds, including any instruments for the payment of money, accounts
receivable, contract rights, documents of title, shipping documents, chattel
paper and all other cash and non-cash proceeds of such sales, exchange or
disposition. As to any such sale, exchange or other disposition, the Agent
shall have all of the rights of an unpaid seller, including stoppage in
transit, replevin, rescission and reclamation. Notwithstanding anything
hereinabove contained to the contrary, the Borrower may sell, exchange or
otherwise dispose of obsolete Equipment or Equipment no longer needed in the
Borrower's operations, provided, however, that (a) the then book value of the
Equipment so disposed of does not exceed Two Hundred Fifty Thousand Dollars
($250,000) in the aggregate in any Fiscal Year and (b) the proceeds of such
sales or dispositions are delivered to the Agent for the ratable benefit of
the Lenders in accordance with the foregoing provisions of this paragraph,
except that the Borrower may retain and use such proceeds to purchase
forthwith replacement Equipment which the Borrower determines in its
reasonable business judgment to have a collateral value at least equal to the
Equipment so disposed of or sold, provided, however, that the aforesaid right
shall automatically cease upon the occurrence of an Event of Default which is
not waived.
SECTION 5.04. Collateral Covenant. Each Obligor hereby covenants
that, except for the Permitted Encumbrances, such Obligor is or will be at the
time additional Collateral is acquired by it, the absolute owner of the
Collateral with full right to pledge, sell, consign, transfer and create a
security interest therein, free and clear of any and all claims or Liens in
favor of others; that such Obligor will at its expense forever warrant and, at
the Lenders' and/or the Agent's request, defend the same from any and all claims
and demands of any other person other than the Permitted Encumbrances. Such
Obligor will not grant, create or permit to exist, any Lien upon or security
interest in the Collateral, or any proceeds thereof, in favor of any other
Person other than the holders of the Permitted Encumbrances.
No Obligor will (a) change the location of its chief executive
office/chief place of business from that specified in Schedule 5.04 or remove
its books and records from the location specified in Schedule 5.04, (b)
permit any of the Inventory or Equipment owned by it to be kept at a location
other than those listed on Schedule 5.04 hereto or (c) change its name
(including the adoption of any new trade name),
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identity or corporate structure unless it shall have provided at least thirty
(30) days prior written notice to the Agent of any such change. Each Obligor
will from time to time notify the Agent of each location at which any amount
of the Collateral or such books and records are to be kept including for
temporary processing, storage or similar purposes. No Obligor shall remove
any amount of Collateral or such books or record to a location not set forth
on Schedule 5.04 or otherwise keep any amount of Collateral (other than Real
Estate, to the extent described in Schedule 5.04A hereto) at a location not
set forth on Schedule 5.04 unless, not less than thirty (30) days prior to
the day such removal or other change occurs such Obligor shall give written
notice to the Agent of such removal or other change and the new location of
such Collateral or such books and records. No action requiring notice to the
Agent under this paragraph shall be effected until such filings and other
measures required under applicable Law to continue uninterrupted the first
perfected security interest and Lien of the Agent in the Collateral affected
thereby shall have been taken, and until the Agent shall have received such
opinions of counsel with respect thereto as it shall have reasonably
requested. Each Obligor also agrees to advise the Agent promptly, in
sufficient detail, of any material adverse change relating to the type,
quantity or quality of the Collateral or to the security interests granted to
the Lenders or the Agent therein. Each Obligor as to itself, hereby
authorizes the Agent to regard its printed name or rubber stamp signature on
assignment schedules or invoices as the equivalent of a manual signature by
one of its authorized officers or agents.
SECTION 5.05. Covenants Regarding Accounts. No Obligor will (a)
amend, modify, terminate or waive any provision of any contract, license or
agreement giving rise to an Account of such Obligor in any manner which could
reasonably be expected to materially adversely affect the value of such
contract, license or Account as Collateral, (b) fail to exercise promptly and
diligently each and every material right which it may have under each material
contract, license or agreement giving rise to an Account of such Obligor (other
than any right of termination), except in a manner consistent with the ordinary
and customary conduct of its business or (c) fail to deliver to the Agent upon
its reasonable request a copy of each material demand, notice or document
received by it relating in any way to any material contract, license or
agreement giving rise to an Account of such Obligor.
Other than in the ordinary course of business as generally conducted
by such Obligor over a period of time, no Obligor will grant any extension of
the time of payment of any of the Accounts, compromise, compound or settle
the same for less than the full amount thereof, release, wholly or
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partially, any Person liable for the payment thereof, or allow any credit or
discount whatsoever thereon.
SECTION 5.06. Covenants Regarding Lease Agreement. The Borrower
will not amend or modify any of the terms or provisions of the Lease Agreement,
as in effect on the date hereof.
SECTION 5.07. Continuing Security Interest. The rights and security
interests granted to the Agent for the ratable benefit of the Lenders hereunder
are to continue in full force and effect, notwithstanding the termination of
this Financing Agreement or the fact that the account maintained in the
Borrower's name on the books of the Agent may from time to time be temporarily
in a credit position, until the final payment in full to the Agent and the
Lenders of all Obligations and the termination of this Financing Agreement. Any
delay, or omission by the Agent to exercise any right hereunder, shall not be
deemed a waiver thereof, or be deemed a waiver of any other right, unless such
waiver be in writing and signed by the Agent. A waiver on any one occasion
shall not be construed as a bar to or waiver of any right or remedy on any
future occasion.
SECTION 5.08. Actions by Agent. To the extent that the Obligations
are now or hereafter secured by any assets or property other than the Collateral
or by the guarantee, endorsement, assets or property of any other Person, then
the Agent shall have the right in its sole discretion to determine which rights,
security, Liens, security interests or remedies the Agent shall at any time
pursue, foreclose upon, relinquish, subordinate, modify or take any other action
with respect to, without in any way modifying or affecting any of them, or any
of the Agent's or the Lenders' rights hereunder.
SECTION 5.09. Additional Collateral and Further Assurances. Upon
the request of the Agent, each Obligor will, at the sole expense of such
Obligor, promptly and duly execute and deliver such further instruments and
documents and take such further action as the Agent may reasonably request for
the purpose of obtaining or preserving the full benefits of this Financing
Agreement, the Security Documents and of the rights and powers herein and
therein granted for the benefit of the Agent and the Lenders.
Each Obligor will comply with the requirements of all state and
federal Laws in order to grant to the Agent for the benefit of the Lenders
valid and perfected first security interests and Liens in the Collateral,
subject only to the Permitted Encumbrances. The Agent is hereby authorized
by each Obligor to file any financing statements covering the Collateral
whether or not the Obligor's signature appears thereon. Each Obligor agrees
to do whatever the Agent may
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request, from time to time, by way of: filing notices of Liens, financing
statements, amendments, renewals and continuations thereof; cooperating with
the Agent; keeping stock records; and performing such further acts as the
Lenders may reasonably require in order to perfect the Liens contemplated by
this Financing Agreement in favor of the Lenders for the benefit of the
Lenders.
Any reserves or balances to the credit of the Borrower and any other
property or assets of an Obligor in the possession of the Agent or any of the
Lenders may be held by such holder as security for any Obligations and applied
in whole or partial satisfaction of such Obligations when due. The Liens and
security interests granted herein and any other Lien or security interest the
Agent or any Lender may have in any other assets of an Obligor shall secure
payment and performance of all now existing and future Obligations. The Agent
may in its discretion charge any or all of the Obligations to the account of an
Obligor when due.
This Financing Agreement and the obligation of the Borrower to perform
all of its covenants and obligations hereunder are further secured by a Mortgage
(Brattleboro, Vermont) on the Real Estate. The Borrower shall give to the Agent
for the ratable benefit of the Lenders from time to time such mortgage on the
Real Estate as the Agent shall require to obtain a valid first Lien thereon
subject only to those exceptions of title as set forth in future title insurance
policies that are satisfactory to the Lenders.
SECTION 5.10. Additional Information. Each Obligor will execute and
deliver to the Agent, from time to time, such written statements and schedules
as the Agent may reasonably require, designating, identifying or describing the
Collateral pledged to the Lenders or the Agent hereunder, including, without
limitation, such schedules of Accounts as the Agent may reasonably request to
support or confirm any information previously given, and such other appropriate
reports designating, identifying and describing the Accounts as the Agent may
reasonably require, and changes after the date hereof in the descriptions of the
specific properties constituting its owned and leased properties. An Obligor's
failure, however, to promptly give the Agent such statements or schedules shall
not affect, diminish, modify or otherwise limit the Lenders' or the Agent's
security interests in the Collateral.
SECTION 5.11. Compliance with Fair Labor Standards Act. Each Obligor
shall comply in all material respects with all provisions of the Fair Labor
Standards Act as set forth in Sections 201 through 219 of Title 29 of the United
States Code.
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ARTICLE 6. INTEREST, FEES AND EXPENSES.
SECTION 6.01. Method of Electing Interest Rates. The Revolving
Credit Loans made to the Borrower shall bear interest at either the Chase
Manhattan Bank Rate or the Libor Rate. Thereafter, the Borrower may from time
to time elect to change or continue the Type borne by each Revolving Credit
Loan, as follows:
(a) if such Revolving Credit Loans are Chase Manhattan Bank Rate
Loans, the Borrower may elect to convert such Revolving Credit Loans to Libor
Rate Loans as of any Business Day;
(b) if such Revolving Credit Loans are Libor Rate Loans, the Borrower
may elect to convert such Revolving Credit Loans to Chase Manhattan Bank Rate
Loans or, or elect to continue such Libor Rate Loans as Libor Rate Loans for an
additional Libor Rate Period, in each case effective on the last day of the then
current Libor Rate Period applicable to such Revolving Credit Loans.
Each such election shall be made by delivering a notice substantially in the
form of Exhibit C hereto (a "Notice of Interest Rate Selection") to Agent by (1)
12:00 Noon (New York City time) at least one (1) Business Day before the
conversion of a Libor Rate Loan into a Chase Manhattan Bank Rate Loan, or (2)
12:00 Noon (New York City time) at least three (3) Business Days before the
conversion of a Chase Manhattan Bank Rate Loan into a Libor Rate Loan or the
continuation of a Libor Rate Loan as a Libor Rate Loan. A Notice of Loan
Interest Rate Selection may, if it so specifies, apply to only a portion of the
aggregate principal amount of the relevant Revolving Credit Loan; provided that
the portion to which such notice applies, and the remaining portion to which it
does not apply, each are sufficient to meet the minimum amount specified in
Section 3.14.
Each Notice of Interest Rate Selection relating to a Chase Manhattan
Bank Rate Loan or Libor Rate Loan shall specify:
(i) the Revolving Credit Loan (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable
clause of the first paragraph of this Section 6.01;
(iii) if the Revolving Credit Loans are to be converted, and if
such new Revolving Credit Loans are
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Libor Rate Loans, the duration of the initial Libor Rate Period
applicable thereto; and
(iv) if such Revolving Credit Loans are to be continued as Libor
Rate Loans for an additional Libor Rate Period, the duration of such
additional Libor Rate Period.
Each Libor Rate Period specified in a Notice of Interest Rate
Selection shall comply with the provisions of the definition of Libor Rate
Period. No conversion into a Libor Rate Loan and no continuation of a Libor
Rate Loan shall be permitted when a Default or Event of Default has occurred and
is continuing. If the Borrower fails to deliver a timely Notice of Interest
Rate Selection to the Agent for any Libor Rate Loans to the Borrower such
Revolving Credit Loans shall be converted into Chase Manhattan Bank Rate Loans
on the last day of the then current Libor Rate Period applicable thereto.
Anything herein to the contrary notwithstanding, at no time shall
there be outstanding more than three (3) different Libor Rate Periods relating
to Libor Rate Loans in the aggregate.
SECTION 6.02. Interest. The Borrower shall pay interest on the
outstanding unpaid principal amount of its Revolving Credit Loans for each day
from and including the date such Revolving Credit Loan is made until but
excluding the date such Revolving Credit Loan is paid in full, at one of the
following rates per annum:
(1) Chase Manhattan Bank Rate Loan. For a Chase Manhattan Bank Rate
Loan, a rate per annum equal at all times to the sum of the Chase Manhattan Bank
Rate in effect for such day plus the Applicable Margin; and
(2) Libor Rate Loan. For a Libor Rate Loan, a rate per annum equal
at all times during each Libor Rate Period of such Revolving Credit Loan to the
sum of the Libor Rate for such Libor Rate Period plus the Applicable Margin.
All accrued and unpaid interest on the Revolving Credit Loans will be
payable in arrears on each Quarterly Date, regardless of interest rate, and
shall be calculated based on a 360 day year. The Agent shall be entitled to
charge the Borrower's account with the applicable interest rate(s) until all
Obligations have been paid in full.
The interest rate on Chase Manhattan Bank Rate Loans shall change
when the Chase Manhattan Bank Rate changes. Interest on the Chase Manhattan
Bank Rate Loans and the Libor Rate Loans shall not exceed the maximum amount
permitted under applicable Law. Upon the occurrence of an Event of Default
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interest will accrue at the Default Rate of Interest as provided in Section
12.02.
Agent shall determine each interest rate applicable to the Revolving
Credit Loans hereunder. Agent shall give prompt notice to the Borrower and each
Lender of each rate of interest so determined, and its determination thereof
shall be conclusive in the absence of manifest error.
SECTION 6.03. Fees. During the period from the Closing Date to the
Revolving Credit Commitment Termination Date, the Borrower agrees to pay to the
Agent for the account of each Lender the Unused Line Fee relating to the
Revolving Credit Commitment to the Borrower. All Unused Line Fees are payable
in arrears on each Quarterly Payment Date. Upon receipt of any such Unused Line
Fee, the Agent will promptly thereafter cause to be distributed to each Lender
its Pro Rata Share of such Fee.
The Borrower shall reimburse or pay the Agent, as the case may be, for
(i) all Out-of-Pocket Expenses of the Agent and/or the Lenders, and (ii) any
applicable Documentation Fee.
On April 30, 1997 and each anniversary thereof, the Borrower shall pay
to the Agent a Collateral Management Fee (for its own account) in the amount of
Thirty-Five Thousand Dollars ($35,000). All the fees under this paragraph are
"Collateral Management Fees" and shall be fully earned when paid and shall not
be refundable or rebateable by reason of prepayment, acceleration upon an Event
of Default, or any other circumstance and shall survive any termination of this
Financing Agreement.
The Borrower shall pay the Agent's standard charges for, and the fees
and expenses of, the Agent's personnel used by the Agent for reviewing the books
and records of the Borrower and for verifying, testing, protecting,
safeguarding, preserving or disposing of all or any part of the Collateral,
provided, however, that the foregoing shall not be payable until the occurrence
of an Event of Default if the Borrower are paying a Collateral Management Fee.
The Borrower hereby authorizes the Agent to charge the Borrower's
accounts with the Agent with the amount of all payments due hereunder as such
payments become due. The Borrower confirms that any charges which the Agent may
so make to its account as herein provided will be made as an accommodation to
the Borrower and solely at the Agent's discretion.
SECTION 6.04. Payments and Computations. The Borrower shall make
each principal and interest payment and
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pay all fees not later than 12:00 Noon (New York time) on the day when due in
Dollars in immediately available funds in New York City to Agent at its
principal office.
All computations of interest on Libor Rate Loans, Chase Manhattan Bank
Rate Loans and fees, shall be made by Agent on the basis of a year of three
hundred sixty (360) days and paid, in each case, for the actual number of days
elapsed (including the first day but excluding the last day). Each
determination by Agent of an interest rate or fees hereunder shall be conclusive
and binding for all purposes absent manifest error.
Calculation of all amounts payable to the Agent for the ratable
benefit of the Lenders under this Financing Agreement with regard to Libor Rate
Loans shall be made as though the Lenders had actually funded the Libor Rate
Loans through the purchase of deposits in the relevant market and currency, as
the case may be, bearing interest at the rate applicable to such Libor Rate
Loans and having a maturity comparable to the relevant Libor Period, provided,
however, that the Lenders may fund each of the Libor Rate Loans in any manner as
the Agent sees fit and the foregoing assumption shall be used only for
calculation of amounts payable under the Financing Agreement.
Whenever any payment of principal or interest (except on Libor Rate
Loans) or of fees shall be due on a day which is not a Business Day, such
payment shall be made on the next succeeding Business Day. Whenever any payment
of principal or interest on a Libor Rate Loan shall be due on a day which is not
a Business Day, such payment shall be made on the next succeeding Business Day
unless such Business Day falls in another calendar month, in which case the date
for payment thereof shall be the next preceding Business Day. If the date for
any payment of principal is extended by operation of Law or otherwise, interest
thereon shall be payable for such extended time.
SECTION 6.05. Certain Compensation. The Borrower hereby jointly
and severally agrees to indemnify the Agent and each Lender and hold the
Agent and each Lender harmless from any loss, cost or expense they may
sustain or incur as a consequence of the failure by the Borrower to complete
any borrowing hereunder of a Libor Rate after notice thereof has been given
by such Borrower to the Agent, including, without limitation, any loss, cost
or expense incurred by reason of the liquidation or re-employment of deposits
or other funds acquired by the Agent to fund such borrowing when the
applicable amount of the Revolving Credit Loan, as a result of such failure,
is not made subject to such interest rates on such date. The Agent shall
certify the amount of its and/or the Lenders' loss, cost or expense to the
Borrower, and such
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certification shall be final and conclusive absent manifest error.
Without limiting the foregoing, such compensation shall include the
Libor Rate Prepayment Premium.
ARTICLE 7. POWERS.
SECTION 7.01. Powers. The Borrower hereby constitutes the Agent or
any person or agent the Agent may designate as its attorney-in-fact, at the
Borrower's cost and expense, to exercise all of the following powers, which
being coupled with an interest, shall be irrevocable until all of the Borrower's
Obligations to the Agent and the Lenders have been paid in full after the
termination of this Financing Agreement:
(1) To receive, take, endorse, sign, assign and deliver, all in the
name of the Agent, the Lenders, or such Borrower, any and all checks, notes,
drafts, and other documents or instruments relating to the Collateral;
(2) To receive, open and dispose of all mail addressed to the Borrower
and to notify postal authorities to change the address for delivery thereof to
such address as the Agent may designate;
(3) To request from customers indebted on Accounts at any time, in the
name of the Agent or the Borrower or that of the Agent's designee, information
concerning the amounts owing on the Accounts;
(4) To transmit to customers indebted on Accounts notice of the
Agent's and the Lenders' interest therein and to notify customers indebted on
Accounts of the Borrower to make payment directly to the Agent for the
Borrower's account; and
(5) To take or bring, in the name of the Agent, the Lenders or the
Borrower, all steps, actions, suits or proceedings deemed by the Agent necessary
or desirable to enforce or effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the
powers set forth in (b), (d) and (e) above may only be exercised after the
occurrence of an Event of Default and until such time as such Event of Default
is waived in writing.
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ARTICLE 8. REPRESENTATIONS AND WARRANTIES
Each of the Obligors, individually and jointly, represents and
warrants that:
SECTION 8.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION.
Such Obligor is duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, has the corporate
power and authority to own its assets and to transact the business in which
it is now engaged or proposed to be engaged, and is duly qualified as a
foreign corporation and in good standing under the laws of each other
jurisdiction in which such qualification is required except to the extent
that its failure to be so qualified could not result in a Material Adverse
Change.
SECTION 8.02. CORPORATE POWER AND AUTHORITY; NO CONFLICTS. The
execution, delivery and performance by such Obligor of the Loan Documents
have been duly authorized by all necessary corporate action and do not and
will not: (a) require any consent or approval of its stockholders; (b)
contravene its certificate of incorporation or by-laws; (c) violate any
provision of, or require any filing (other than the filing of the financing
statements contemplated by the Security Documents), registration, consent or
approval under any Law (including, without limitation, Regulation U), order,
writ, judgment, injunction, decree, determination or award presently in
effect having applicability to such corporation; (d) result in a breach of or
constitute a default under or require any consent under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which such
Obligor is a party or by which it or its properties may be bound or affected;
(e) result in, or require, the creation or imposition of any Lien (other than
as created under the Security Documents), upon or with respect to any of the
properties now owned or hereafter acquired by such Person.
SECTION 8.03. LEGALLY ENFORCEABLE AGREEMENTS. Each Loan Document
is a legal, valid and binding obligation of such Obligor, enforceable against
such Obligor in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally.
SECTION 8.04. LITIGATION. Except as disclosed in Schedule 8.04
hereto, there are no actions, suits or proceedings pending or, to the
knowledge of any of the Obligors, as the case may be, threatened, against or
affecting such Obligor before any court, governmental agency or arbitrator,
which could, in any one case or in the aggregate, result in a Material
Adverse Change.
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SECTION 8.05. FINANCIAL STATEMENTS. (a) The consolidated balance
sheet of the Borrower and its Subsidiaries as of December 31, 1994 and
December 31, 1995, the related statements of income, statements of
stockholders' equity (deficit) and statements of cash flows of the Borrower
for the Fiscal Years then ended, and the accompanying footnotes, together
with the opinion thereon, dated February 29, 1996, of Coopers & Lybrand LLP,
independent certified public accountants, copies of which have been furnished
to the Lenders, are complete and correct and fairly present the financial
condition of the Borrower and its Subsidiaries as at such dates and the
results of the operations of the Borrower and its Subsidiaries for the
periods covered by such statements, all in accordance with GAAP consistently
applied. There are no liabilities of the Borrower and its Subsidiaries,
fixed or contingent, which are material but are not reflected in the
financial statements or in the notes thereto, other than liabilities arising
in the ordinary course of business since December 31, 1995. No information,
exhibit, or report furnished by the Borrower and its Subsidiaries to the
Agent or any Lender in connection with the negotiation of this Financing
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein
not materially misleading.
(b) The consolidated unaudited balance sheet of the Borrower and its
Subsidiaries as of September 30, 1996, the related statements of income,
statements of stockholders' equity (deficit) and statements of cash flows of
such entities for the six-month periods then ended, and the accompanying
footnotes, copies of which have been furnished to the Lenders, are complete
and correct and fairly present the financial condition of the Borrower and
its Subsidiaries, as at such dates and the results of the operations of the
Borrower and its Subsidiaries for the periods covered by such statements, all
in accordance with GAAP consistently applied. There are no liabilities of
the Borrower and its Subsidiaries, fixed or contingent, which are material
but not reflected in the financial statements or in the notes thereto, other
than liabilities arising in the ordinary course of business since September
30, 1996. No information, exhibit, or report furnished by the Borrower and
its Subsidiaries to the Agent or any Lender in connection with the
negotiation of this Financing Agreement contained any material misstatement
of fact or omitted to state a material fact or any fact necessary to make the
statements contained therein not materially misleading.
(c) The consolidated balance sheet of CPG Investors and its
Subsidiaries as of December 31, 1994 and December 31, 1995, the related
statements of income, statements of stockholders' equity (deficit) and
statements of cash flows of
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CPG Investors and its Subsidiaries for the fiscal years then ended, and the
accompanying footnotes, together with the opinion thereon, dated February 29,
1996 of Coopers & Lybrand LLP, independent certified public accountants,
copies of which have been furnished to the Lenders, are complete and correct
and fairly present the financial condition of CPG Investors and its
Subsidiaries as at such dates and the results of the operations of CPG
Investors and its Subsidiaries for the periods covered by such statements,
all in accordance with GAAP consistently applied. There are no liabilities
of CPG Investors and its Subsidiaries, fixed or contingent, which are
material but are not reflected in the financial statement or in the notes
thereto, other than liabilities arising in the ordinary course of business
since December 31, 1995. No information, exhibit, or report furnished by CPG
Investors and its Subsidiaries to the Agent or any Lender in connection with
the negotiation of this Financing Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
(d) The consolidated unaudited balance sheet of CPG Investors and
its Subsidiaries as of June 30, 1996, the related statements of income,
statements of stockholders' equity (deficit) and statements of cash flows of
such entities for the six-month period then ended, and the accompanying
footnotes, copies of which have been furnished to the Lenders, are complete
and correct and fairly present the financial condition of CPG Investors and
its Subsidiaries, as at such date and the results of the operations of CPG
Investors and its Subsidiaries for the periods covered by such statements,
all in accordance with GAAP consistently applied. There are no liabilities
of CPG Investors and its Subsidiaries, fixed or contingent, which are
material but not reflected in the financial statements or in the notes
thereto, other than liabilities arising in the ordinary course of business
since June 30, 1996. No information, exhibit, or report furnished by CPG
Investors and its Subsidiaries to the Agent or any Lender in connection with
the negotiation of this Financing Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
(e) The consolidated balance sheets of Arcon Holdings and its
Subsidiary as of October 31, 1994 and October 31, 1995, the related
statements of income, statements of stockholders' equity (deficit) and
statements of cash flows of Arcon Holdings and its Subsidiary for the fiscal
years then ended, and the accompanying footnotes, together with the opinion
thereon, dated November 28, 1995 of Price Waterhouse LLP, independent
certified public accountants, copies of which have been furnished to the
Lenders, are complete and correct and fairly present the financial condition
of Arcon Holdings
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and its Subsidiary as at such dates and the results of the operations of
Arcon Holdings and its Subsidiary for the periods covered by such statements,
all in accordance with GAAP consistently applied. There are no liabilities
of Arcon Holdings and its Subsidiary, fixed or contingent, which are material
but are not reflected in the financial statement or in the notes thereto,
other than liabilities arising in the ordinary course of business since
October 31, 1995. No information, exhibit, or report furnished by Arcon
Holdings and its Subsidiary to the Agent or any Lender in connection with the
negotiation of this Financing Agreement contained any material misstatement
of fact or omitted to state a material fact or any fact necessary to make the
statements contained therein not materially misleading.
(f) The consolidated unaudited balance sheet of Arcon Holdings and
its Subsidiary as of June 30, 1996, the related statements of income,
statements of stockholders' equity (deficit) and statements of cash flows of
such entities for the eight-month period then ended, and the accompanying
footnotes, copies of which have been furnished to the Lenders, are complete
and correct and fairly present the financial condition of Arcon Holdings and
its Subsidiary, as at such date and the results of the operations of Arcon
Holdings and its Subsidiary for the periods covered by such statements, all
in accordance with GAAP consistently applied. There are no liabilities of
Arcon Holdings and its Subsidiary, fixed or contingent, which are material
but not reflected in the financial statements or in the notes thereto, other
than liabilities arising in the ordinary course of business since June 30,
1996. No information, exhibit, or report furnished by Arcon Holdings and its
Subsidiary to the Agent or any Lender in connection with the negotiation of
this Financing Agreement contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the statements
contained therein not materially misleading.
(g) NO MATERIAL ADVERSE CHANGE. Since December 31, 1995 there has
been no Material Adverse Change with respect to any Obligor.
SECTION 8.06. OWNERSHIP AND LIENS. No Obligor has any fee
interests in any real property or leasehold interests in real property having
an unexpired term (including any option or renewal periods) in excess of 20
years other than the interest encumbered by the Mortgage (Brattleboro,
Vermont). Each Obligor has title to, or valid leasehold interests in, all of
its properties and assets, real and personal, including the properties and
assets, and leasehold interests reflected in the financial statements
referred to in Section 5.05 (other than any properties or assets disposed of
in the ordinary course of business), and none of the properties and assets
owned by such Obligor and none of its
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leasehold interests is subject to any Lien, except Permitted Encumbrances.
SECTION 8.07. TAXES. Each Obligor has filed all tax returns
(federal, state and local) required to be filed and has paid all taxes,
assessments and governmental charges and levies thereon to be due, including
interest and penalties, except to the extent they are the subject of a Good
Faith Contest.
SECTION 8.08. ERISA. Each Obligor is substantially in compliance
with all applicable provisions of ERISA and the Code. No Reportable Event
has occurred with respect to any Pension Plan; no notice of intent to
terminate a Pension Plan has been filed nor has any Pension Plan been
terminated; no Obligor nor any other Person, including any fiduciary, has
engaged in any prohibited transaction (as defined in Section 4975 of the Code
or Section 406 of ERISA) which could subject any Obligor, or any entity which
any Obligor has an obligation to indemnify, to any tax or penalty imposed
under Section 4975 of the Code or Section 502 of ERISA; there is no lien
outstanding pursuant to Section 4068 of ERISA or Section 412 of the Code or
security interest, within the meaning of Section 401(a)(29) of the Code,
given in connection with a Pension Plan; no circumstance exists which
constitutes grounds under Section 4042 of ERISA entitling the PBGC to
institute proceedings to terminate, or appoint a trustee to administer, a
Pension Plan, nor has the PBGC instituted any such proceedings; no Obligor,
nor any ERISA Affiliate has completely or partially withdrawn under Sections
4201 or 4204 of ERISA from a Multiemployer Plan; the minimum funding
requirements under ERISA and the Code have been satisfied with respect to all
Pension Plans and the aggregate unfunded liabilities under all Pension Plans
does not exceed Two Hundred Thousand Dollars ($200,000); no Multiemployer
Plan is in Reorganization or is Insolvent; and neither Borrower, any
Guarantor, nor any ERISA Affiliate has received notice that indicates the
existence of potential or contingent withdrawal liability under a
Multiemployer Plan in excess of One Million Eight Hundred Thousand Dollars
($1,800,000). No Obligor has any liability for retiree medical or life
insurance benefits other than liability with respect to active employees
covered by the Owensboro, Kentucky location and the total FASB liability for
such group is not material to any Obligor.
SECTION 8.09. SUBSIDIARIES. The Borrower has no Subsidiaries other
than Specialty Hong Kong, Specialty Japan, Endura, CPG Investors, CPG
Holdings, CPG-Warren, Custom, Arcon Holdings and Arcon Coating.
SECTION 8.10. OPERATION OF BUSINESS. Each Obligor possesses all
licenses, permits, franchises, patents, copyrights, trademarks and trade
names, or rights thereto, to
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conduct its business substantially as now conducted and as presently proposed
to be conducted except where failure to so possess could not result in a
Material Adverse Change and no Obligor is in violation of any valid rights of
others with respect to any of the foregoing.
SECTION 8.11. NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS. Each
Obligor has satisfied all judgments and no Obligor is in default with respect
to any judgment, writ, injunction, decree, rule or regulation of any court,
arbitrator or federal, state, municipal or other Governmental Authority,
commission, board, bureau, agency or instrumentality, domestic or foreign.
SECTION 8.12. NO DEFAULTS ON OTHER AGREEMENTS. No Obligor is a
party to any indenture, loan or credit agreement or any lease or other
agreement or instrument or subject to any certificate of incorporation or
corporate restriction which could result in a Material Adverse Change. No
Obligor is in default in any respect in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in
any agreement or instrument.
SECTION 8.13. LABOR DISPUTES AND ACTS OF GOD. Neither the
business nor the properties of any Obligor are affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance).
SECTION 8.14. GOVERNMENTAL REGULATION. No Obligor is subject to
regulation under the Public Utility Holding Company Act of 1935, the
Investment Company Act of 1940, the Interstate Commerce Act, the Federal
Power Act or any statute or regulation limiting its ability to incur
indebtedness for money borrowed as contemplated hereby.
SECTION 8.15. PARTNERSHIPS. No Obligor is a partner in any
partnership.
SECTION 8.16. ENVIRONMENTAL PROTECTION. Each Obligor has obtained
all Approvals and Permits required under all Environmental Laws and such
Approvals and Permits are in good standing. Each Obligor is in compliance
with all Environmental Laws and the terms and conditions of such Approvals
and Permits, and is also in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in those Laws.
No Environmental Lien has attached to the Brattleboro Collateral.
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None of the Real Estate or any other property owned or leased by any
Obligor is listed or proposed for listing on the National Priorities List
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, or listed on the Comprehensive Environmental
Response, Compensation and Liability Information System List or any similar
state list of sites, and the Borrower is not aware of any conditions at the
Real Estate which, if known to a Governmental Authority, would qualify such
Real Estate for inclusion on any such list.
Except as disclosed in Schedule 8.16,
(a) No Obligor is subject to any plan, order, writ, decree,
judgment, settlement or injunction issued, entered into, promulgated or
approved under or in connection with any Environmental Laws or any
Environmental Discharges;
(b) No Obligor has received any Environmental Notice;
(c) There have been no Environmental Discharges at, to, or from the
Real Estate or either Borrower's other property or facilities or operations,
except such Environmental Discharges as have occurred pursuant to and in full
compliance with all Environmental Laws and Approvals and Permits issued
thereunder;
(d) There are not and, to the knowledge of each Obligor, have never
been any Hazardous Materials present at the Real Property or other
properties, facilities or operations of the Borrower, except such Hazardous
Materials as are and were managed pursuant to and in full compliance with all
Environmental Laws and Approvals and Permits issued thereunder;
(e) No Obligor has any actual or contingent liability in connection
with any Environmental Discharges at any location, including, without
limitation, the Real Property, any site to which an Obligor has transported
or arranged for the transport of Hazardous Substances, or any site at which
an Obligor has disposed of Hazardous Substances; and
(f) No Obligor has any actual or contingent liability in connection
with any property, businesses, or operations previously owned or operated by
the Borrower for (i) any violation of any Environmental Laws, (ii) any
Remedial Action, or (iii) any Environmental Discharges at any location,
including, without limitation, the Real Property, any property, facilities or
operations previously owned or operated by an Obligor, any site to which an
Obligor has transported or arranged for the transport of Hazardous
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Substances, or any site at which an Obligor has disposed of Hazardous
Substances.
SECTION 8.17. SOLVENCY. Each Obligor is Solvent.
SECTION 8.18. ARCON PURCHASE DOCUMENTS. As of the Closing Date,
the Arcon Purchase Documents have been duly authorized, executed and
delivered by each of the parties thereto and such Documents are a legal,
valid and binding obligation of each of the parties thereto, enforceable in
accordance with the terms of each such Document. The sale of stock
contemplated by the Arcon Purchase Documents has become effective and such
sale of stock has been duly consummated pursuant to the terms of the Arcon
Purchase Documents. After giving effect to the sale of stock in accordance
with the Arcon Purchase Documents, the representations and warranties
contained in this Agreement and each of the other Loan Documents are correct
in all respects and no Default or Event of Default has occurred or would
result from such sale of stock. As of the Closing Date, all the
representations and warranties in the Arcon Purchase Documents are true and
correct.
SECTION 8.19. CPG MERGER DOCUMENTS. As of the Closing Date, the
CPG Merger Documents have been duly authorized, executed and delivered by
each of the parties thereto and such Documents are a legal, valid and binding
obligation of each of the parties thereto, enforceable in accordance with the
terms of each such Document. The merger of a subsidiary of the Borrower into
CPG Investors and the issuance of stock in connection therewith has become
effective and such transaction has been duly consummated pursuant to the
terms of the CPG Merger Documents. After giving effect to such transaction
in accordance with the CPG Merger Documents, the representations and
warranties contained in this Agreement and each of the other Loan Documents
are correct in all respects and no Default or Event of Default has occurred
or would result from such transaction. As of the Closing Date, all the
representations and warranties in the CPG Merger Document are true and
correct.
SECTION 8.20. INTELLECTUAL PROPERTY. Except as set forth on
Schedule 8.20 hereto, neither Borrower nor any Guarantor has any trademarks,
patents or copyrights or any applications pending for any trademarks, patents
or copyrights.
SECTION 8.21. LICENSE OF INTELLECTUAL PROPERTY. Except as set
forth on Schedule 8.21 hereto, neither Borrower nor any Guarantor holds or
has it entered into any agreement for the use of any license for any
trademark, patent, copyright or other intellectual property rights.
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ARTICLE 9. AFFIRMATIVE COVENANTS.
So long as any Revolving Credit Loans are outstanding or the Lenders
have any Revolving Credit Commitments hereunder or any other amount is owing
to any Lender hereunder or under any Loan Documents:
SECTION 9.01. REPORTING REQUIREMENTS. The Borrower will furnish to
each Lender:
(a) ANNUAL REPORTING REQUIREMENTS: as soon as practicable, and in
any event within one hundred twenty (120) days after the end of each Fiscal
Year of the Borrower, an audited consolidated balance sheet of the Borrower
and its Subsidiaries as at the end of such Year, and audited consolidated
statements of earnings, stockholders' equity (deficit), and cash flow of the
Borrower and its Subsidiaries for such Year, setting forth in each case, in
comparative form the figures for the previous Fiscal Year, certified without
qualification arising out of the scope of the audit by a nationally
recognized firm of independent public accountants or other independent public
accountants satisfactory to the Required Lenders, and an unaudited
consolidating balance sheet of the Borrower and its Subsidiaries as at the
end of such Year and unaudited consolidating statements of earnings,
stockholders' equity (deficit) and cash flow of the Borrower and its
Subsidiaries for such Year, setting forth in each case in comparative form
the figures for the previous Fiscal Year. The Borrower shall deliver to the
Agent and each Required Lender no later than thirty (30) days prior to the
start of each new Fiscal Year, annual consolidated and consolidating cash
flow projections of the Borrower and its Subsidiaries, including a projected
consolidated and consolidating balance sheet and statements of earnings,
stockholders' equity (deficit), and cash flow for such Fiscal Year in form
satisfactory to the Required Lenders;
(b) QUARTERLY REPORTING REQUIREMENTS: as soon as practicable, and
in any event within sixty (60) days, after the end of the first, second and
third fiscal quarters of each Fiscal Year of the Borrower (commencing on the
fiscal quarter ending on September 30, 1996), the unaudited consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries as at the
end of such fiscal quarter and the related unaudited consolidated and
consolidating statements of income, stockholders' equity (deficit), and cash
flows, setting forth in each case, in comparative form the figures of the
comparable period for the previous Fiscal Year, certified as to accuracy by
the Borrower (subject to normal year-end audit adjustments);
(c) OFFICER'S CERTIFICATE: each financial statement which the
Borrower is required to submit hereunder must
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be accompanied by an officer's certificate signed by the chief financial
officer of the Borrower certifying that: (i) the financial statement(s)
fairly and accurately represent(s) the consolidated and consolidating
financial condition of the Borrower and its Subsidiaries at the end of the
particular accounting period, as well as the consolidated and consolidating
operating results of the Borrower and its Subsidiaries during such accounting
period, subject to year-end audit adjustments; and (ii) during the particular
accounting period, (A) there has been no default or condition which, with the
passage of time or notice, or both, would constitute a Default or Event of
Default under this Agreement and such officer has obtained no knowledge of
any Default; provided, however, that if any Executive Officer has knowledge
that any Default or Event of Default has occurred during such period, the
existence of and a detailed description of same shall be set forth in the
Officer's Certificate; and (B) the Borrower has not received any notice of
cancellation with respect to its property insurance policies that have not
been replaced;
(d) MANAGEMENT LETTER: promptly after receipt thereof, a copy of
each report delivered to the Borrower by the independent public accountants
which certify the Borrower's financial statements in connection with any
annual or interim audit of its books, including any management reports or
letters, if any, addressed to the Borrower or any of their respective
officers by such accountants;
(e) OTHER INFORMATION: from time to time, with reasonable
promptness, such other information with respect to each Obligor as Agent or
Lender may from time to time reasonably request;
(f) ACCOUNTS RECEIVABLE AGING SUMMARIES: within thirty (30) days
after the end of each month, Accounts Receivable aging summaries with respect
to each Obligor and within thirty (30) days after the end of each quarter of
each Fiscal Year of such Obligor, detailed Accounts Receivable aging
schedules with respect to each Obligor, prepared in accordance with GAAP,
and, if so requested by the Agent, within sixty (60) days after the close of
each Fiscal Year, an audit of Accounts Receivable of each Obligor for such
Fiscal Year prepared by a nationally-recognized accounting firm acceptable to
the Agent;
(g) REPORTS: promptly after the sending or filing thereof, copies
of all proxy statements, financial statements and reports which the Borrower
sends to all its stockholders, and copies of all regular, periodic and
special reports, and all registration statements which the Borrower files
with the Securities and Exchange Commission or any agency which may be
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substituted therefor, or with any national securities exchange; and
(h) BORROWING BASE CERTIFICATE: within twenty-five (25) days after
the last day of each month or such lesser period of time as the Agent may
require in its sole discretion, a Borrowing Base Certificate.
SECTION 9.02. NOTICES. The Borrower will, promptly upon obtaining
knowledge of any of the following occurrences and promptly upon the giving or
receipt of any of the following notices, deliver to Agent:
(a) written notice of the occurrence of any Default or Event of
Default, specifically stating that a Default or Event of Default, as the case
may be, has occurred and describing such Default or Event of Default;
(b) written notice of the occurrence of any casualty, damage or loss
to or in respect of the Collateral, in an amount greater than Five Hundred
Thousand Dollars ($500,000), whether or not giving rise to a claim under any
insurance policy, together with copies of any document relating thereto
(including copies of any such claim) in possession or control of the Borrower
or any agent of the Borrower;
(c) written notice of any Material Adverse Change;
(d) written notice of any litigation or proceeding affecting any
Obligor which if adversely determined could result in a Material Adverse
Change;
(e) written notice of the assertion of any Lien (other than
Permitted Encumbrances) against the Collateral or the occurrence of any event
that could have a material adverse effect on the value of the Collateral or
the Liens created pursuant to this Agreement or any Security Document;
(f) written notice of any cancellation of any insurance policy
required to be maintained by any Obligor pursuant to Section 9.07 hereof;
(g) written notice of (i) all expenditures (actual or anticipated)
in excess of Five Hundred Thousand Dollars ($500,000) for (A) Remedial
Action, (B) compliance with Environmental Laws or (C) environmental testing
and the impact of said expenses on any Obligor's working capital; and (ii)
any Environmental Notices advising an Obligor of any liability (real or
potential), which liability could result in a Material Adverse Change;
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(h) on the first Anniversary of the date hereof and on each
Anniversary thereafter, a report describing issues (not previously disclosed
to the Lenders under other provisions of this Section 9.02) which have arisen
during the prior year pertaining to Environmental Laws, Environmental
Discharges, Hazardous Materials, and Remedial Action and the action which is
proposed to be taken or being taken with respect thereto;
(i) if and when an Obligor or any ERISA Affiliate (i) gives or is
required to give notice to the PBGC of any Reportable Event with respect to
any Pension Plan, a copy of any notice of such Reportable Event given or
required to be given to the Pension Benefit Guaranty Corporation; (ii)
receives notice of a complete or partial withdrawal liability under Title IV
of ERISA or that any Multiemployer Plan is in Reorganization, is Insolvent or
has been terminated, a copy of such notice; (iii) receives notice from the
Pension Benefit Guaranty Corporation under Title IV of ERISA of an intent to
terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Pension Plan or
Multiemployer Plan, a copy of such notice; (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Code, a copy of such
application; (v) gives notice of intent to terminate any Pension Plan under
Section 4041(c) of ERISA a copy of such notice and other information filed
with the PBGC; (vi) gives notice of withdrawal from any Pension Plan pursuant
to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any
required payment or contribution to any Pension Plan or Multiemployer Plan or
makes any amendment to any Pension Plan which has resulted or is reasonably
likely to result in the imposition of a Lien, an accumulated funding
deficiency (as defined in Section 302 of ERISA or Section 412 of the Code),
whether or not waived, or the posting of a bond or other security, a
certificate of the appropriate financial officer setting forth details as to
such occurrence and action, if any which either Borrower or other ERISA
Affiliate is required or proposes to take;
(j) if and when (i) a transaction prohibited under Section 4975 of
the Code or Section 406 of ERISA occurs resulting in liability to any Obligor
or any entity which the Borrower has an obligation to indemnify, (ii) a
Pension Plan intended to qualify under Section 401(a) or 401(k) of the Code
fails to so qualify or (c) liability is imposed to enforce Section 515 of
ERISA with respect to any Multiemployer Plan, a certificate of the
appropriate financial officer setting forth details as to such occurrence and
action, if any, which the Borrower or other ERISA Affiliate is required or
proposes to take;
(k) written notice of any change in the location of any Collateral,
other than to locations that, as of the date
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hereof, are known to the Agent and for which the Agent has filed financing
statements and otherwise perfected its Liens thereon;
(l) written notice, in sufficient detail, of any material adverse
change relating to the type, quantity or quality of the Collateral or on the
security interests granted to the Agent for the ratable benefit of the
Lenders.
Each notice pursuant to this Section 9.02 shall be accompanied by a
statement of the Borrower furnishing such notice setting forth details of the
occurrence referred to therein and stating what action the Borrower proposes
to take with respect thereto.
SECTION 9.03. PAYMENT OF TAXES AND CLAIMS. Each Obligor will pay,
when due, all taxes, assessments, claims and other charges (herein "taxes")
lawfully levied or assessed upon such Obligor or the Collateral and if such
taxes remain unpaid after such date fixed for the payment thereof unless such
taxes are the subject of a Good Faith Contest or if any Lien shall be claimed
thereunder (a) for taxes due the United States of America or (b) which in the
Lenders' reasonable opinion might create a valid obligation having priority
over the rights granted to the Lenders herein, the Agent may, on such
Obligor's behalf, pay such taxes, and the amount thereof shall at the Agent's
option be charged to such Borrower's Revolving Credit Loans and shall be an
Obligation secured hereby. If the amount of taxes of the Borrower paid by
the Agent pursuant to this Section 9.03 is in excess of Availability, then
the Borrower shall be deemed to be in default of this Section 9.03.
SECTION 9.04. MAINTENANCE OF EXISTENCE. Each Obligor will preserve
and maintain its corporate existence and good standing in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation
in each jurisdiction in which such qualification is required, except to the
extent that its failure to do so qualify could not result in a material
adverse change.
SECTION 9.05. CONDUCT OF BUSINESS. Each Obligor will continue to
engage in an efficient and economical manner in a business similar to the
type of business as conducted by it as of the date hereof.
SECTION 9.06. COMPLIANCE WITH LAWS. Each Obligor will comply with
all Laws, except to the extent that failure to do so could not result in a
Material Adverse Change; provided that such Obligor may contest any acts,
rules, regulations, orders and directions of such bodies or officials in any
reasonable manner which will not, in the Lenders'
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reasonable opinion, materially and adversely effect the Lenders' rights or
priority in the Collateral.
SECTION 9.07. INSURANCE. (a) The Borrower will maintain, with
financially sound and reputable companies, acceptable to the Agent, insurance
policies (a) insuring the Borrower, the Agent and the Lenders against
Comprehensive General Liability and auto liability, liability for personal
injury and property damage relating to the Brattleboro Collateral and
Inventory and (b) insuring the Brattleboro Collateral and Inventory of the
Borrower against all risk of loss by fire, explosion, theft and auto
comprehensive/collision, and such other casualties as may be reasonably
satisfactory to the Agent, such policies to be in such amounts and on such
terms as the Agent shall reasonably require. All policies covering the
Brattleboro Collateral and Inventory are, subject to the rights of any
holders of Permitted Encumbrances holding claims senior to the Lenders, to be
made payable to the Agent for the benefit of the Lenders, in case of loss,
under a standard non-contributory "mortgage", "lender" or "secured party"
clause and are to contain such other provisions as the Lenders may require to
fully protect the Lenders' interest in the Real Estate and shall protect the
Lenders' interest in the Brattleboro Collateral and Inventory and any
payments to be made under such policies. All original certificates of
Insurance, policies or true copies thereof are to be delivered to the Agent,
premium prepaid, with the loss payable endorsement in the Agent's favor for
the benefit of the Lenders, and shall provide for not less than thirty (30)
days prior written notice to the Agent of the exercise of any right of
cancellation.
In addition to the foregoing, the Borrower will maintain Business
Interruption and Comprehensive Boiler and Machinery Insurance in form and
amounts and with insurers acceptable to the Agent. In addition, Workman's
Compensation Insurance in amounts required by applicable law and in form
acceptable to the Agent shall be maintained in connection with the
Brattleboro Collateral and Inventory.
(b) Each Guarantor will maintain, with financially sound and
reputable companies, acceptable to the Agent, insurance policies (a) insuring
such Guarantor, the Agent and the Lenders against Comprehensive General
Liability and auto liability, liability for personal injury and property
damage relating to the Inventory of the Guarantors and (b) insuring the
Inventory of the Guarantors against all risk of loss by fire, explosion,
theft and auto comprehensive/collision, and such other casualties as may be
reasonably satisfactory to the Agent, such policies to be in such amounts and
on such terms as the Agent shall reasonably require. All policies covering
the Inventory of the Guarantors are, subject to the rights of any holders of
Permitted Encumbrances holding claims senior to
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the Lenders, to be made payable to the Agent for the benefit of the Lenders,
in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as the Lenders may
require to fully protect the Lenders' interest in the Inventory of the
Guarantors and any payments to be made under such policies. All original
certificates of Insurance, policies or true copies thereof are to be
delivered to the Agent, premium prepaid, with the loss payable endorsement in
the Agent's favor for the benefit of the Lenders, and shall provide for not
less than thirty (30) days prior written notice to the Agent of the exercise
of any right of cancellation.
In addition to the foregoing, each Guarantor will maintain Business
Interruption and Comprehensive Boiler and Machinery Insurance in form and
amounts and with insurers acceptable to the Agent. In addition, Workman's
Compensation Insurance in amounts required by applicable law and in form
acceptable to the Agent shall be maintained in connection with the Inventory
of the Guarantor.
(c) At the request of the Borrower or if such Obligor fails to
maintain such insurance, the Agent may arrange for such insurance, but at the
Borrower's expense and without any responsibility on the Lenders' part for:
obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims. Upon the occurrence
and during the continuance of an Event of Default, the Agent shall, subject
to the rights of any holders of Permitted Encumbrances holding claims senior
to the Lenders, have the sole right, in the name of the Agent for the benefit
of the Lenders or the Borrower, to file claims under any insurance policies,
to receive, receipt and give acquittance for any payments that may be payable
thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect
the collection, compromise or settlement of any claims under any such
insurance policies.
In the event of any loss or damage by fire or other casualty,
insurance proceeds relating to Inventory shall first reduce the outstanding
Revolving Credit Loans and then either pay the balance to the Agent to be
held as cash collateral pending repair, restoration or replacement of the
insured property pursuant to the provisions below.
In the event any part of the Brattleboro Collateral is damaged by
fire or other casualty and the insurance proceeds for such damage or other
casualty (the "Proceeds") is less than or equal to One Hundred Thousand
Dollars ($100,000), the Agent shall promptly apply such Proceeds to reduce
the outstanding balances of such Revolving Credit Loans.
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As long as no Event of Default shall have occurred and be
continuing, the Brattleboro Collateral Borrower has sufficient business
interruption insurance to replace the lost profits of any of its facilities,
and the Proceeds are in excess of One Hundred Thousand Dollars ($100,000),
the Borrower may elect (by delivering written notice to the Agent) to repair
or restore the Brattleboro Collateral to substantially the equivalent
condition prior to such fire or other casualty as set forth herein, or to
replace the same with substantially the equivalent or functionally equivalent
Real Estate or Equipment. If the Borrower does not, or cannot, elect to use
the Proceeds as set forth above, the Agent may, subject to the rights of any
holders of Permitted Encumbrances holding claims senior to the Lenders and
the Agent, apply the Proceeds to the payment of the Obligations in such
manner and in such order as the Agent may reasonably elect.
If the Borrower elects to use the Proceeds for the repair,
replacement or restoration of any Real Estate or Equipment, and there is then
no Event of Default, (a) proceeds on Equipment and Real Estate in excess of
One Hundred Thousand Dollars ($100,000) will be applied to the reduction of
the Borrowers' Revolving Credit Loans, and (b) the Agent may set up a reserve
against Availability for an amount equal to the amount of proceeds so
allocated to the Borrower's Revolving Credit Loan. The reserves will
collectively be reduced dollar-for-dollar upon receipt of non-cancelable
executed purchase orders, delivery receipts or contracts for the replacement,
repair or restoration of Equipment or the Real Estate and disbursements in
connection therewith, such reduction to be allocated between the Borrower's
reserve in such proportions as the Agent shall determine. Prior to the
commencement of any restoration, repair or replacement of Real Estate, the
Borrower shall provide the Agent with a restoration plan and a total budget
certified by the chief executive officer and chief financial officer of the
Borrower, and, if the total budget exceeds One Million Dollars ($1,000,000),
also certified by an independent third party experienced in construction
costing. If there are insufficient proceeds to cover the cost of restoration
as so determined, the Borrower shall be responsible for the amount of any
such insufficiency prior to the commencement of restoration and shall
demonstrate evidence of such before the reserve will be reduced. Completion
of restoration shall be evidenced by a final, unqualified certification of
the design architect employed, if any, but only if the cost of restoration
exceeded One Million Dollars ($1,000,000); an unconditional certificate of
occupancy, if applicable; such other certification as may be required by law;
or if none of the above is applicable, a written good faith determination of
completion by the chief executive officer and chief financial officer of the
Borrower as the case may be (herein collectively
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the "Completion"). Upon Completion, any remaining reserves as established
hereunder will be automatically released.
All policies of insurance required under the provisions of this
Section shall contain (a) an endorsement by the insurer that any loss shall
be payable in accordance with the terms of such policy notwithstanding any
act or negligence of the Borrower that might otherwise give rise to a defense
by the insurer to its payment of such loss, and (b) a waiver by the insured
of all rights of subrogation to any rights of the additional insureds against
the Borrower, and (c) a disclaimer of all rights of setoff, counterclaim or
deduction against the insureds other than the Borrower. The Borrower shall
not take out separate insurance concurrent in form or contributing in the
event of loss with that required by this Agreement unless the same shall
contain a standard non-contributory lender's loss payable endorsement in
scope and form approved by the Required Lenders prior to the Closing Date
with loss payable to the Agent for the benefit of the Lenders as its
interests may appear. All retentions and deductibles under policies where
the Agent is loss payee shall be the sole responsibility of the Borrower
maintaining such policies subject to the Lenders' approval.
Without limiting any of the foregoing, each of the insurance
policies required by this Section 9.07 which is required to name the Agent in
its capacity as agent for each of the Lenders, as an additional insured
thereunder shall provide:
(a) that no cancellation, reduction in amount or material change in
coverage thereof shall be effective until at least thirty (30) days after
receipt by the Agent of written notice thereof;
(b) that the interests of Agent and each of the Lenders will be
insured regardless of any breach by any Obligor or any other Person of any
warranties, declarations or conditions contained therein;
(c) that neither Agent nor any of the Lenders shall have any
obligation or liability for premiums, commissions, assessments or calls in
connection with such insurance.
On or before the Closing Date and prior to each policy expiration
thereafter, each Obligor shall deliver to the Agent an original certificate
or binder signed by the insurer or its duly authorized representative showing
the insurance then maintained by the Borrower pursuant to this Section 9.07,
and stating that such insurance complies with the terms of this Section 9.07,
together with evidence that payment of the premiums on such insurance is
current. The Obligors shall effect such changes in the form (but not the
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amount or types) of the policies required pursuant to this Section 9.07, as
may be required by the Agent, provided such changes (a) are commercially
available at reasonable rates, which determination shall be made by Agent and
(b) the effect of such changes by the Borrower would not result in a
violation of the provisions of the Mortgage (Brattleboro, Vermont).
SECTION 9.08. BOOKS AND RECORDS; INSPECTION. Each Obligor will
maintain books and records pertaining to the Collateral owned by it in such
detail, form and scope as is consistent in all material respects with current
practices and agrees that the books and records of such Obligor will reflect
the Lenders' interest in such Collateral. Each Obligor agrees that all of
its books and records, including records handled or maintained for such
Obligor by any other company or entity, will be available to the Agent, the
Lenders and that the Agent, the Lenders or their respective agents,
accountants and attorneys may enter upon such Obligor's premises or any other
properties on or in which any of such Obligor's Collateral may be located at
any time during normal business hours upon reasonable notice (provided, that
no such notice is required after the occurrence and during the continuance of
an Event of Default), and from time to time, for the purpose of inspecting
the Collateral, and any and all records pertaining thereto, including,
without limitation, copies of agreements with, or purchase orders from, such
Obligor's customers, and copies of invoices to customers, proof of shipment
or delivery and such other documentation and information relating to said
Accounts and other Collateral as the Agent may reasonably require. Each
Obligor hereby further agrees that the Lenders may, from and after the date
hereof, request any information from, and have access to such Obligor's
officers and its independent public accountant, and such Obligor will cause
such officers and direct such accountants to make available to the Lenders
such information.
SECTION 9.09. ERISA COVENANT. Each Obligor will, and will cause
each of its ERISA Affiliates to, maintain all Employee Benefit Plans in
compliance in all material respects with all applicable law, including any
reporting requirements, and make all contributions due under the terms of
each Employee Benefit Plan or as required by law. As soon as possible
following the date hereof (but in no event more than thirty (30) days
thereafter) each Obligor contributing to a Multiemployer Plan shall request
from each such Multiemployer Plan an estimate, in writing, of withdrawal
liability (contingent or otherwise) under such Multiemployer Plan and shall
provide a copy of such written withdrawal liability estimate to the Agent.
In addition, within the same time period each Obligor shall request from the
applicable Multiemployer Plans an estimate, in writing, of the amount of any
withdrawal liability to be assessed in connection with the stock purchase
transactions contemplated by the Arcon Purchase
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Documents and the merger contemplated by the CPG Merger Documents and shall
provide a copy of such written estimate to the Agent.
SECTION 9.10. INTERCOMPANY TRANSFER OF FUNDS. The Borrower will
take such actions as may be necessary in order to cause (1) each Guarantor to
pay dividends on its capital stock, from funds legally available therefor, or
to purchase shares of capital stock of any Guarantor, or for any Subsidiary
of a Guarantor to loan or advance funds to the Guarantor, in each case to the
extent necessary to enable the Guarantor to pay its Guaranty Obligations
hereunder, and (2) the Borrower to contribute to the capital of any
Guarantor, or to purchase additional shares of capital stock of any
Guarantor, or for any Subsidiary of a Borrower to loan or advance funds to
the Borrower, in each case to the extent necessary to enable the Borrower to
pay its Obligations hereunder.
SECTION 9.11. INVENTORY AND ACCOUNTS RECEIVABLE ANALYSIS OF
ACQUIRED ENTITY. In the event of an acquisition of an Acquired Entity by an
Obligor, such Obligor shall or shall cause the Acquired Entity to afford the
Agent the right to inspect and perform an analysis within thirty days of the
acquisition, satisfactory to the Agent, of the inventory, accounts
receivables and personal property of such Acquired Entity.
SECTION 9.12. ACQUIRED ENTITIES. Each of the following conditions
shall be satisfied by the Borrower with respect to each Acquired Entity
acquired on or after the date hereof:
(a) the Acquired Entity shall have executed all documentation and
take all steps required pursuant to which such Acquired Entity shall become
a Guarantor under this Agreement and shall agree to be bound by the terms
of this Agreement applicable to a Guarantor;
(b) the Acquired Entity shall have executed all documentation and
take all steps required to give the Agent a first priority perfected Lien
in all of such Acquired Entity's Inventory and Accounts, which Lien shall
not be subject to any other financing arrangement;
(c) the Agent shall have received a certificate of the Secretary or
Assistant Secretary of such Acquired Entity attesting to the Certificate of
Incorporation and Bylaws of such Acquired Entity and all amendments thereto
and to all corporate action taken by such Acquired Entity, including
resolutions of its Board of Directors authorizing the execution, delivery
and performance of
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this Agreement and any other documents executed in connection therewith;
and
(d) the Agent shall have received a favorable opinion of counsel to
such Acquired Entity covering all of the matters covered by (a), (b) and
(c) above, and as to such other matters as the Agent may reasonably
request.
SECTION 9.13. COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Each Obligor
(i) will comply with all Environmental Laws as presently existing or
as adopted or amended in the future, all Approvals and Permits issued
pursuant to such Environmental Laws, and all writs, decrees, judgments,
settlements and orders issued in connection with such Environmental Laws;
(ii) obtain and renew all Approvals and Permits required pursuant to
Environmental Laws;
(iii) conduct any Remedial Action in compliance with Environmental
Laws; provided, however, that an Obligor shall not be required to undertake
any Remedial Action to the extent that its obligation to do so is being
contested in good faith and by proper proceedings, will not result in any
non-compliance with Environmental Laws, and appropriate reserves are being
maintained with respect to such circumstances; and
(iv) notify the Agent of any of the following that is likely to have a
Material Adverse Change:
(A) any Environmental Notice, including one to take or pay for
any Remedial Action with respect to any Hazardous Material at, to, or
from any of Obligor's past, present or future locations or facilities
or Real Estate or at, to or from any other location or facility; and
(B) any knowledge by any Obligor of an occurrence or condition
at, to or from any of Obligor's past, present or future locations or
facilities or Real Estate, or at, to or from any other location or
facility, that might reasonably result in a violation of Environmental
Law.
(b) Without limitation of the foregoing, within one year of the date
hereof, each Obligor shall have substantially addressed all matters
identified as non-compliance with Environmental Laws and shall have
undertaken all Remedial Actions identified in the August 1996 Environmental
Due
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Diligence Report for Custom Papers Group Mill Facilities prepared by ENSR
Consulting and Engineering for the Borrower.
(c) The Borrower will complete or undertake all transactions
pursuant to Section 6.6 of the CPG Merger Agreement and will agree in writing
on an amount to be deposited into the Rochester Environmental Escrow Account
(as defined in the CPG Merger Agreement) to provide the indemnification set
forth in Section 10.2(b)(i)(B) of the CPG Merger Agreement.
SECTION 9.14. INVENTORY AND ACCOUNTS RECEIVABLE ANALYSIS OF CPG
INVESTORS. Within ninety (90) days of the date hereof, CPG Investors and its
Subsidiaries shall afford the Agent the right to inspect and perform an
analysis, satisfactory to the Agent, of the inventory, accounts receivable
and personal property of CPG Investors and its Subsidiaries.
ARTICLE 10. NEGATIVE COVENANTS
So long as any Revolving Credit Loans are outstanding, or any Lender
has any Revolving Credit Commitment hereunder or any other amount is owing to
the Lenders hereunder or under any other Loan Documents, no Obligor shall:
SECTION 10.01. DEBT. Create, incur or suffer to exist any
Indebtedness other than (i) Permitted Indebtedness or (ii) other
Indebtedness, so long as after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio is greater than 2.00 to 1.00.
SECTION 10.02. LIENS. Create or suffer to exist or permit any Lien
upon or with respect to any of its properties except for Permitted
Encumbrances.
SECTION 10.03. GUARANTIES. Assume, guarantee, endorse, or
otherwise be or become directly or contingently responsible or liable
(including, but not limited to an agreement to purchase any obligation,
stock, assets, goods or services or to supply or advance any funds, assets,
goods or services, or an agreement to maintain or cause any such Person to
maintain a minimum working capital or net worth or otherwise to assure the
creditors of such Person against loss) for the obligations, stock or
dividends of any Person, except guarantees by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business and the guaranties of Borrower Obligations pursuant to
Article 4 of this Financing Agreement.
SECTION 10.04. SALE OF ASSETS. Sell, lease, assign, transfer or
otherwise dispose of (a) its now or hereafter acquired Collateral, except as
otherwise
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specifically permitted by this Financing Agreement or any other document
relating to the transactions contemplated hereunder or (b) all or
substantially all of its assets, which do not constitute Collateral.
SECTION 10.05. PROHIBITION OF FUNDAMENTAL CHANGES. Enter into any
transaction of merger or consolidation, or change its form of organization or
business, or liquidate or dissolve (or suffer any liquidation or
dissolution), or sell, assign, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whether now owned or hereafter acquired) to any Person except for the
Arcon Stock Purchase and the CPG Merger.
SECTION 10.06. INVESTMENTS. Make any loan or advance to any Person
or purchase or otherwise acquire any capital stock, assets, obligations or
other securities of, make any capital contribution to, or otherwise invest
in, or acquire any interest, in any Person, except: (i) Permitted
Investments, (ii) loans, advances, capital contributions and share purchases
permitted by Section 9.07 or Section 9.10 of this Financing Agreement, and
(iii) loans, advances and capital contributions made by any Obligor in
another Obligor, including any loan, advance or capital contribution made by
an Obligor in a newly formed Subsidiary which shall become an Obligor
hereunder. Notwithstanding the foregoing, the Borrower shall be permitted to
make loans, advances or capital contributions to each of Specialty Hong Kong
and Specialty Japan to fund their respective operations, provided (A) the
operations of each such entity are conducted on a basis substantially similar
in size, scope and nature to those conducted by such entity in the
twelve-month period ended on the date hereof, and (B) the aggregate amount of
such loans, advances and capital contributions from the Borrower to all such
entities, net of repayments and dividends from such entities to the Borrower
shall not exceed the following amounts for the indicated periods:
(1) For calendar year 1996, $5,000,000; and
(2) For each calendar year thereafter, the applicable amount for the
preceding calendar year plus $250,000.
SECTION 10.07. TRANSACTION WITH AFFILIATES. Enter into any
transaction, including, without limitation, any purchase, sale, lease, loan
or exchange of property with any Affiliate of such Obligor unless such
transaction shall be on terms no less favorable to such Obligor than would be
obtainable at the time in a comparable arm's length transaction with an
unrelated third party; provided, that this Section 10.07 shall not apply to
(a) customary fees paid by
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the Borrower to members of its Board of Directors, (b) any transaction
between the Borrower and any employee of such Person that is approved by such
Person's Board of Directors (provided that such approval shall not be
required with respect to normal compensation arrangements involving any such
employee) and (c) loans, advances, capital contributions and share purchases
permitted by Section 9.07 or Section 9.10 of this Financing Agreement.
SECTION 10.08. NATURE OF BUSINESS. Change its corporate name,
principal place of business or structure, or enter into or engage in any
operation or activity other than activities of the types conducted by each
Obligor on the date hereof or as of the date of the acquisition of an
Acquired Entity and operations and activities substantially similar thereto
and logical extensions thereof.
SECTION 10.09. DIVIDENDS. Declare or pay any dividends; or
purchase, redeem, retire, or otherwise acquire for value any of the capital
stock or securities convertible into capital stock of such Obligor now or
hereafter outstanding; or make any distribution of assets to its stockholders
as such, whether in cash, assets, or in obligations of the Borrower, or
allocate or otherwise set apart any sum for the payment of any dividend or
distribution on, or for the purchase, redemption, or retirement of any shares
of its capital stock, except (i) dividend payments by any Guarantor to the
Borrower or (ii) during any Fiscal Year ending on or after December 31, 1995
the Borrower may declare and pay dividends on its capital stock or purchase
or redeem its capital stock in an aggregate amount not to exceed thirty-three
and one third percent (33 1/3%) of the total of Consolidated Net Income minus
consolidated Amortization of Deferred Book Gain of the Borrower and its
Subsidiaries for the prior Fiscal Year of the Borrower, provided that at the
time of such declaration and distribution and after giving effect to such
dividend (a) there is aggregate Availability of at least Two Million Five
Hundred Thousand Dollars ($2,500,000), and (b) no Default or Event of Default
is outstanding or will occur as a result thereof.
SECTION 10.10. LEASES. Except for the Lease Agreement, enter into
any Operating Lease if after giving effect thereto the aggregate obligations
with respect to all of the Operating Leases of the Obligors during any Fiscal
Year would exceed Five Hundred Thousand Dollars ($500,000).
SECTION 10.11. ENVIRONMENTAL COMPLIANCE. Except in compliance with
applicable Environmental Laws, (a) use any of the Real Estate or other
property of any Obligor or any portion thereof for the handling, processing,
storage or disposal of Hazardous Materials, (b) cause or permit to be located
on any of the property of any Obligor any underground
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tank or other underground storage receptacle for Hazardous Materials, (c)
generate any Hazardous Materials on any of the Real Estate or other property
of any Obligor, (d) conduct any activity on the Real Estate or other property
of any Obligor or use any property in any manner so as to cause an
Environmental Discharge or (e) otherwise conduct any activity on the Real
Estate or any other property or use any property in any manner that would
lead to any claim under or violate any Environmental Law.
SECTION 10.12. FISCAL YEAR. Change its Fiscal Year from a period
of January 1 to December 31.
SECTION 10.13. SUBSIDIARY STOCK ISSUANCE. Permit any Subsidiary of
any Obligor to issue or sell to any Person, other than such Obligor, any of
such Subsidiary's shares, interests, participation or other equivalents
(however designated including stock appreciation rights), warrants or options
to acquire capital stock.
ARTICLE 11. INTENTIONALLY OMITTED.
ARTICLE 12. EVENTS OF DEFAULT
SECTION 12.01. EVENTS OF DEFAULT. Notwithstanding anything
hereinabove to the contrary, the Agent may, and if directed to do so by the
Required Lenders shall, terminate this Financing Agreement immediately upon
the occurrence of any of the following (herein "Events of Default"):
(a) failure of an Obligor to pay any of its Obligations within
five (5) business days of the due date thereof, provided that nothing
contained herein shall prohibit the Agent from charging such amounts
to an Obligor's account on the due date thereof (if the Agent so
charges such Obligor's account, no Event of Default relating to
non-payment of Obligations will be deemed to have occurred) and,
provided further, that if the Agent chooses not to charge such amounts
to an Obligor's account on the due date thereof, the Agent shall so
notify the Obligor and the Obligor shall have five (5) days from the
date it receives such notice to pay such Obligations;
(b) any representation or warranty of an Obligor contained
herein or in any other Loan Document, or any representation, warranty,
statement in any certificate, financial statement or other document
furnished to Agent or any of the Lenders by or on behalf of an Obligor
under any
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Loan Document shall, as of the time made, confirmed or
furnished, prove to have been (i) in the case of such representations
and warranties which are not subject to a Material Adverse Change
exception, incorrect in any material respect or (ii) in all cases
where such representations and warranty is subject to such an
exception, incorrect;
(c) breach by an Obligor of any warranty, representation or
covenant contained herein (other than those referred to in
subparagraph (d) below) or in any other Loan Document or written
agreement entered into in connection with this Financing Agreement
between an Obligor and the Lenders and/or the Agent or delivered by an
Obligor to any of the Lenders and/or the Agent in connection herewith
or the transactions contemplated hereby, if such breach shall not have
been remedied to the Required Lenders' satisfaction within the earlier
to occur of the applicable grace period in such written agreement or
thirty (30) days from the date of such breach;
(d) breach by an Obligor of any representation, warranty or
covenant contained in Sections 3.05, 3.06, 5.02, 5.03, 5,04, 5.10,
8.06, 8.17, 8.19, 8.20, 9.01(g), 9.03, 9.07 or Article 10 (other than
Section 10.11);
(e) if an Obligor shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
property, (ii) admit in writing its inability, or be generally unable,
to pay its debts as such debts become due, (iii) make a general
assignment for the benefit of its creditors, (iv) commence any case,
proceeding or other action seeking to have an order for relief entered
on its behalf as debtor or to adjudicate it a bankrupt or insolvent,
or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating
to bankruptcy, insolvency, reorganization, winding up or composition
or readjustment of debts, (v) file an answer or other pleading in any
such case, proceeding or other action admitting the material
allegations of any petition, complaint or similar pleading filed or
(vi) take any corporate or other action for the purpose of effecting
any of the foregoing;
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(f) if a proceeding or case shall be commenced without the
application or consent of an Obligor in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization,
dissolution, winding-up, or the composition or readjustment of debts
of such Person, or (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of such Person under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, or a warrant of attachment,
execution or similar process shall be issued against property of such
Person and such proceeding, case, warrant or process shall continue
undismissed, or any order, judgment or decree approving or ordering
any of the foregoing shall be entered, or any order for relief against
such Person shall be entered in an involuntary case under any law
relating to bankruptcy, insolvency, reorganization, winding up or
composition or readjustment of debts;
(g) cessation of the business of an Obligor or the calling of a
meeting of the creditors of such Person for purposes of compromising
the debts and obligations of such Person.
(h) an Obligor shall (a) fail to pay any Indebtedness in excess
of Two Hundred Fifty Thousand Dollars ($250,000) (other than with
respect to this Financing Agreement) of such Obligor, or any interest
or premium thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise); or (b) fail to
perform or observe any term, covenant, or condition on its part to be
performed or observed under any agreement or instrument relating to
any such Indebtedness, when required to be performed or observed, if
the effect of such failure to perform or observe is to accelerate, or
to permit the acceleration after the giving of notice or passage of
time, or both, of the maturity of such Indebtedness, whether or not
such failure to perform or observe shall be waived by the holder of
such Indebtedness, or any such Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof;
(i) if a judgment or judgments for the payment of money in
excess of Two Hundred Fifty Thousand Dollars ($250,000) shall be
rendered against an Obligor and the same shall remain in
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effect and unstayed or bonded pending appeal for a period of thirty (30)
or more consecutive days;
(j) if any Loan Document shall cease, for any reason, to be in
full force and effect or shall be declared null and void, or the
validity or enforceability thereof shall be contested by any party
thereto, or any party thereof shall deny it has any further liability
or obligation under or shall fail to perform its obligations under
such Loan Document;
(k) if any of the following events occur or exist with respect
to an Obligor or any ERISA Affiliate: (i) an Obligor or any other
Person engages in a transaction in connection with which a Borrower,
or any entity which a Borrower has an obligation to indemnify, could
be subject to liability for either a civil penalty assessed pursuant
to Section 502 of ERISA or a tax imposed under Section 4975 of the
Code; (ii) an accumulated funding deficiency (as defined in Section
302 of ERISA or Section 412 of the Code), whether or not waived,
exists with respect to any Pension Plan; (iii) any Reportable Event,
as defined in ERISA, with respect to any Pension Plan; (iv) the giving
under Section 4041 of ERISA of a notice of intent to terminate any
Pension Plan or the termination of any Pension Plan; (v) any event or
circumstance that might constitute grounds entitling the PBGC to
institute proceedings under Section 4042 of ERISA for the termination
of, or for the appointment of a trustee to administer, any Pension
Plan, or the institution by the PBGC of any such proceedings; (vi) the
imposition of liability to enforce Section 515 of ERISA; (vii) the
failure of a Pension Plan intended to qualify under Section 401(a) or
401(k) of the Code to so qualify; (viii) complete or partial
withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer
Plan or the Reorganization, Insolvency, or termination of any
Multiemployer Plan; or (ix) the imposition of liability in respect of
any Pension Plan or Multiemployer Plan subject to Title IV of ERISA
(other than a liability to the PBGC for insurance premiums under Title
IV of ERISA, payment of which is not yet due); (x) pursuant to
Section 4068 of ERISA or Section 401(a)(29) or Section 412 of the
Code, a lien arises or security interest is granted with respect to
any Pension Plan; PROVIDED, HOWEVER, that no Event of Default shall be
deemed to exist with respect to any event or condition described in
clause (i) through (ix) above unless
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such event or condition, individually or together with all other such
events or conditions, if any, could subject an Obligor to any tax,
penalty, or other liability to an Employee Benefit Plan, the Pension
Benefit Guaranty Corporation, or otherwise (or any combination thereof)
which could result in a Material Adverse Change;
(l) if there shall occur a default which is not cured or waived
within the applicable grace period, if any, under the Mortgage
(Brattleboro, Vermont);
(m) if any time the Agent for the benefit of the Lenders no longer
has a Lien on any of the Collateral; or
(n) The Borrower shall fail to pay any amount owing under the Lease
Agreement when due, and such failure shall continue unremedied for a period
of ten (10) days from the date such amount was due.
SECTION 12.02. ACCELERATION OF OBLIGATIONS. Upon the occurrence of
a Default and/or an Event of Default, the Agent may (at its option) and shall
at the written direction of the Required Lenders declare that all Revolving
Credit Loans provided for in this Financing Agreement shall be thereafter in
the Agent's sole discretion and the obligation of the Lenders to make
Revolving Credit Loans shall cease unless such Default is cured to the
Required Lenders' satisfaction or such Event of Default is waived. If an
Event of Default shall occur and be continuing, the Agent may, and if
directed to do so by the Required Lenders shall, upon notice by the Agent to
the Borrowers, (a) declare the Revolving Credit Commitments terminated,
whereupon such Revolving Credit Commitments shall forthwith terminate
immediately and any accrued fees shall forthwith become due and payable and
all Obligations, and, as liquidated damages for loss of a bargain and not as
a penalty, a lost transaction fee shall be due and payable in addition to the
accelerated amounts set forth herein and all other amounts payable under this
Financing Agreement and any other Loan Documents to be, whereupon the same
shall become, forthwith due and payable without presentment, demand or
protest of any kind, all of which are hereby waived by the Borrower, anything
contained in this Agreement to the contrary notwithstanding, equal to the
full outstanding principal amounts of the Revolving Credit Loans being
accelerated multiplied by three percent (3%); PROVIDED, HOWEVER, that the
lost transaction fee shall be paid by the Borrower on Chase Manhattan Bank
Rate Loans and Libor Rate Loans only if such loans are accelerated on or
prior to the first Anniversary Date; (b) charge the Borrower the Default Rate
of Interest on all then outstanding or thereafter incurred Obligations ,
PROVIDED (i) the Agent has given the
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Borrower written notice of the Event of Default, PROVIDED, HOWEVER, that no
notice is required if the Event of Default is the Event listed in paragraph
(e), (f) or (g) of Section 12.01 hereof and (ii) the Borrower has failed to
cure the Event of Default within ten (10) days after (x) the Agent deposited
such notice in the United States mail or (y) the occurrence of the Event of
Default listed in paragraph (e), (f) or (g) or Section 12.01 hereof; and (c)
immediately terminate this Financing Agreement upon notice to the Borrower;
PROVIDED, HOWEVER, that no notice of termination is required if the Event of
Default is the Event listed in paragraph (e), (f) or (g) of Section 12.01
hereof. The exercise by the Lenders of any option or remedy hereunder is not
exclusive of any other option or remedy which may be exercised at any time by
the Lenders, acting through the Agent.
SECTION 12.03. OTHER REMEDIES. Immediately upon the occurrence of
any Event of Default and so long as such Event of Default is continuing, the
Agent may to the extent permitted by Law: (a) remove from any premises where
same may be located any and all documents, instruments, files and records,
and any receptacles or cabinets containing same, relating to the Accounts, or
the Agent may use, at the Borrower's expense, such of the Obligor's
personnel, supplies or space at the Obligor's places of business or
otherwise, as may be necessary to properly administer and control the
Accounts or the handling of collections and realizations thereon; (b) bring
suit, in the name of the Obligor's, or either of them, or the Lenders or the
Agent, and generally shall have all other rights respecting said Accounts,
including without limitation the right to accelerate or extend the time of
payment, settle, compromise, release in whole or in part any amounts owing on
any Accounts and issue credits in the name of the Borrower, or either of
them, or the Agent; (c) sell, assign and deliver the Collateral and any
returned, reclaimed or repossessed merchandise, with or without
advertisement, at public or private sale, for cash, on credit or otherwise,
at the Agent's sole option and discretion, and any one or more of the Lenders
or the Agent may bid or become a purchaser at any such sale, free from any
right of redemption, which right is hereby expressly waived by the Borrower;
(d) foreclose the security interests created herein by any available judicial
procedure, or to take possession of any or all of the Inventory or the
Brattleboro Collateral without judicial process, and to enter any premises
where any Inventory and Equipment comprising part of the Brattleboro
Collateral may be located for the purpose of taking possession of or removing
the same and (e) exercise any other rights and remedies provided in Law, in
equity, by contract or otherwise. The Agent shall have the right, without
notice or advertisement, to sell, lease, or otherwise dispose of all or any
part of the Collateral whether in its then condition or after further
preparation or processing, in the name of any
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Obligor, any one or more of the Lenders or the Agent, or in the name of such
other party as the Agent may designate, either at public or private sale or
at any broker's board, in lots or in bulk, for cash or for credit, with or
without warranties or representations, and upon such other terms and
conditions as the Agent in its sole discretion may deem advisable, and the
Agent and any one or more of the Lenders shall have the right to purchase at
any such sale. If any Inventory and Equipment comprising part of the
Brattleboro Collateral shall require rebuilding, repairing, maintenance or
preparation, the Agent shall have the right, at its option, to do such of the
aforesaid as is necessary, for the purpose of putting the Inventory and
Equipment comprising part of the Brattleboro Collateral in such saleable form
as the Agent shall deem appropriate. The Borrower agrees, at the request of
the Agent, to assemble the Inventory and Equipment comprising part of the
Brattleboro Collateral and to make it available to the Agent at premises of
the Borrower or elsewhere and to make available to the Agent the premises and
facilities of the Borrower for the purpose of the Agent's taking possession
of, removing or putting the Inventory and Equipment comprising part of the
Brattleboro Collateral in saleable form. However, if notice of intended
disposition of any Collateral is required by Law, it is agreed that ten (10)
days notice shall constitute reasonable notification and full compliance with
the law. The net cash proceeds resulting from the Agent's exercise of any of
the foregoing rights, (after deducting all charges, costs and expenses,
including reasonable attorneys' fees) shall be applied by the Agent to the
payment of the Obligor's Obligations, whether due or to become due, in such
order as the Agent may elect, and the Obligors shall remain liable to the
Agent and the Lenders for any deficiencies, and the Agent and the Lenders in
turn agree to remit to the Obligors or their respective successors or
assigns, any surplus resulting therefrom. The enumeration of the foregoing
rights is not intended to be exhaustive and the exercise of any right shall
not preclude the exercise of any other rights, all of which shall be
cumulative. The Mortgage (Brattleboro, Vermont) shall govern the rights and
remedies of the Agent and the Lenders thereto.
ARTICLE 13. AGENCY
SECTION 13.01. THE AGENT. Each Lender hereby irrevocably designates
and appoints CITBC as the Agent for the Lenders under this Financing
Agreement and any modifications, supplements and amendments thereto and any
other Loan Documents executed in connection therewith and irrevocably
authorizes CITBC as Agent for such Lenders, to take such action on its behalf
under the provisions of the Financing Agreement and all such ancillary
documents and to exercise such powers and perform such duties as are
expressly delegated
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to the Agent by the terms of the Financing Agreement and all such ancillary
documents together with such other powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary elsewhere in this
Financing Agreement, the Agent shall not have any duties or responsibilities,
except those expressly set forth herein, or any fiduciary relationship with
any Lender and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into the Financing Agreement and
such ancillary documents or otherwise exist against the Agent.
SECTION 13.02. DELEGATION OF DUTIES. The Agent may execute any of
its duties under this Financing Agreement and all ancillary documents by or
through agents or attorneys-in-fact and shall be entitled to the advice of
counsel concerning all matters pertaining to such duties.
SECTION 13.03. EXCULPATORY PROVISIONS. Neither the Agent nor any
of its officers, directors, employees, agents, or attorneys-in-fact shall be
(a) liable to any Lender for any action lawfully taken or omitted to be taken
by it or such Person under or in connection with the Financing Agreement and
all ancillary documents (except for its or such Person's own gross negligence
or willful misconduct), or (b) responsible in any manner to any of the
Lenders for any recitals, statements, representations or warranties made by
an Obligor or any officer thereof contained in the Financing Agreement and
all ancillary documents or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, the Financing Agreement and all ancillary documents or for
the value, validity, effectiveness, genuineness, enforceability or
sufficiency of the Financing Agreement and all ancillary documents or for any
failure of an Obligor to perform its obligations thereunder. The Agent shall
not be under any obligation to any Lender to ascertain or to inquire as to
the observance or performance of any of the agreements contained in, or
conditions of, the Financing Agreement or any ancillary document or to
inspect the properties, books or records of an Obligor.
SECTION 13.04. RELIANCE BY AGENT. The Agent shall be entitled to
rely, and shall be fully protected in relying, upon any note, writing,
resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, facsimile, message, statement, order or other document or
conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Obligors), independent accountants and other experts selected by the Agent.
The Agent shall be fully justified in failing or refusing to take any action
under the Financing Agreement and any ancillary
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document unless it shall first receive such advice or concurrence of the
Required Lenders as it deems appropriate or it shall first be indemnified to
its satisfaction by all of the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under the Financing Agreement and all ancillary
documents in accordance with a request of the Required Lenders, and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all of the Lenders.
SECTION 13.05. NOTICE OF DEFAULT. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent has received notice from a Lender or the Borrower
describing such Default or Event of Default. In the event that the Agent
receives such a notice, the Agent shall promptly give notice thereof to the
Lenders. The Agent shall take such action with respect to such Default or
Event of Default as shall be reasonably directed by the Required Lenders;
provided that unless and until the Agent shall have received such direction,
the Agent may in the interim (but shall not be obligated to) take such
action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable and in the best interests of the
Lenders.
SECTION 13.06. NON-RELIANCE ON AGENT AND OTHER LENDERS. Each
Lender expressly acknowledges that neither the Agent nor any of its officers,
directors, employees, agents or attorneys-in-fact has made any
representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Borrower shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without
reliance upon the Agent or any other Lender and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of the Obligors and made its own decision to
enter into this Financing Agreement. Each Lender also represents that it
will, independently and without reliance upon the Agent or any other Lender
and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit analysis, appraisals and decisions
in taking or not taking action under the Financing Agreement and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition or creditworthiness of
the Obligors. The Agent, however, shall provide the Lenders with copies of
all financial statements, projections and business plans which come into the
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possession of the Agent or any of its officers, employees, agents or
attorneys-in-fact.
SECTION 13.07. INDEMNIFICATION. The Lenders agree to indemnify the
Agent in its capacity as such (to the extent not reimbursed by an Obligor,
and without limiting the obligation of an Obligor to do so), from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever
which may at any time be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of the Financing Agreement on any
ancillary documents or any documents contemplated by or referred to herein or
the transactions contemplated hereby or any action taken or omitted by the
Agent under or in connection with any of the foregoing; PROVIDED that no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting solely from the Agent's gross negligence
or willful misconduct. The agreements in this paragraph shall survive the
payment of the Obligations.
SECTION 13.08. THE AGENT IN ITS INDIVIDUAL CAPACITY. The Agent may
make loans to, and generally engage in any kind of business with an Obligor
as though the Agent were not the Agent hereunder. With respect to its loans
made or renewed by it or Revolving Credit Loan obligations hereunder as a
Lender, the Agent shall have the same rights and powers, duties and
liabilities under the Financing Agreement as any Lender and may exercise the
same as though it were not the Agent and the terms "Lender" and "Lenders"
shall include the Agent in its individual capacity.
SECTION 13.09. SUCCESSOR AGENT. The Agent may resign as Agent upon
thirty (30) days' prior notice to the Lenders and such resignation shall be
effective upon the appointment of a successor Agent. Upon receiving notice
from the Agent of the Agent's intention to resign as Agent, the Lenders shall
appoint a successor agent for the Lenders whereupon such successor agent
shall succeed to the rights, powers and duties of the Agent and the term
"Agent" shall mean such successor agent effective upon its appointment, and
the former Agent's rights, powers and duties as Agent shall be terminated,
without any other or further act or deed on the part of such former Agent or
any of the parties to this Financing Agreement. After any retiring Agent's
resignation hereunder as Agent the provisions of this Article 13 shall
continue to inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent.
SECTION 13.10. ARRANGEMENTS REQUIRING CONSENT OF LENDERS.
Notwithstanding anything contained in this Financing Agreement to the
contrary, the Agent will not, without the
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prior written consent of all of the Lenders: amend the Financing Agreement to
(a) increase the Revolving Credit Commitments; (b) reduce the interest rate;
(c) reduce or waive any fees or the repayment of any Obligations due the
Lenders or the Agent; (d) extend the maturity of the Obligations; or (e)
alter or amend (i) this Section 13.10 or (ii) the definition of Eligible
Accounts Receivable and/or Eligible Inventory and the Agent's criteria for
determining compliance therewith. Except as otherwise hereinabove provided,
the Agent will not, without the prior written consent of the Required
Lenders: (a) amend the Financing Agreement or (b) waive any Event of Default
under the Financing Agreement. In all other respects, the Agent is
authorized to take such actions or fail to take such actions if the Agent, in
its reasonable discretion, deems such to be advisable and in the best
interest of the Lenders, including, but not limited to, the making of an
Overadvance or the termination of the Revolving Credit Commitments and/or the
Financing Agreement upon the occurrence of an Event of Default unless it is
specifically instructed to the contrary by the written instructions of the
Required Lenders.
Notwithstanding the foregoing, the Agent may (in its sole
discretion) and shall at the written direction of the Required Lenders upon
the occurrence of an Event of Default and upon written notice to the Lenders
and the Borrower, accelerate the Revolving Credit Loans, and the other
Obligations of the Borrower hereunder. In such event, the Revolving Credit
Loans shall be immediately deemed due and payable and each Lender's Revolving
Credit Commitment in the Revolving Credit Loans shall be settled in
accordance with this Financing Agreement based on the Revolving Credit Loans
outstanding as of the date of such written declaration. Thereafter, all
collections received for application to the Revolving Credit Loans as
provided in this Financing Agreement shall be applied first to the costs and
expenses of collection and Out-of-Pocket Expenses, if any, then to the
payment of interest on the Revolving Credit Loans, then to the principal
balance of the Revolving Credit Loans. The Lenders acknowledge that an
orderly repayment of the Revolving Credit Loans and/or liquidation of
Collateral may necessitate the making of new Revolving Credit Loans after a
declaration of acceleration by the Agent and/or the Required Lenders and that
all of the Lenders shall participate in such Revolving Credit Loans based on
their respective Revolving Credit Commitments. Such new Revolving Credit
Loans shall be in accordance with a program of orderly liquidation and shall
be treated as costs of collection, Out-of-Pocket Expenses and/or liquidation
with respect to the priority of repayment as provided in this paragraph and
as otherwise applicable.
Notwithstanding the foregoing, the Agent in its sole discretion may:
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(a) cure any ambiguity, defect or inconsistency in the terms of this
Financing Agreement;
(b) release collateral in bulk (i) as required pursuant to the
explicit terms of this Financing Agreement or any of the ancillary documents
thereto and (ii) in an amount not to exceed Two Million Dollars ($2,000,000)
in any Fiscal Year provided that at the election of the Agent there is a
corresponding reduction in the Obligations to the Lenders, as applicable and
as set forth in this Financing Agreement;
(c) within the criteria specified in the definition of "Eligible
Accounts Receivable" in Section 1.01 of this Financing Agreement, make
determinations of eligibility of Collateral with such non-material temporary
modification as the Agent may from time to time implement (provided that the
consent of the Lenders to any other modifications thereof shall be implied if
the Agent does not receive notice to the contrary within ten (10) business
days of sending notice of any proposed change to the Lenders); and
(d) establish reserves.
SECTION 13.11. RECAPTURE OF PAYMENTS. If the Agent is required at
any time to return to an Obligor or to a trustee, receiver, liquidator,
custodian or other similar official any portion of the payments made by such
Obligor to the Agent as a result of a bankruptcy with respect to such
Obligor, any guarantor or any other person or entity or otherwise, then each
Lender shall, on demand of the Agent, forthwith return to the Agent its Pro
Rata Share of any such payments made to such Lender by the Agent, together
with its Pro Rata Share of interest or penalties, if any, payable by the
Lenders. This provision shall survive the termination of this Financing
Agreement.
ARTICLE 14. RIGHTS AND OBLIGATIONS OF THE LENDERS AND THE AGENT
SECTION 14.01. ADJUSTMENTS AMONG LENDERS. Notwithstanding anything
herein to the contrary contained in this Financing Agreement, prior to the
occurrence of an Event of Default, in the event that any Lender shall obtain
payment in respect of a Revolving Credit Note, or interest thereon or upon or
following on Event of Default, in the event any Lender shall obtain payment
in respect of a Revolving Credit Note, or interest thereon, or receive any
Collateral or proceeds thereof with respect to any Revolving Credit Note,
whether voluntarily or involuntarily, and whether through the exercise of a
right of banker's Lien, set-off or counterclaim against the Borrower or
otherwise, in a greater proportion than any such payment obtained by any
other Lender in respect of the
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corresponding Revolving Credit Note held by such Lender, then the Lender so
receiving such greater proportionate payment or such greater proportionate
amount of Collateral in the case of an occurrence of an Event of Default
shall purchase for cash from the other Lender or Lenders such portion of each
such other Lender or Lenders' Revolving Credit Loan as appropriate, as shall
be necessary to cause such Lender receiving the proportionate overpayment to
share the excess payment with each Lender or shall provide the other Lenders
with the benefits of any such Collateral, or the proceeds thereof, as shall
be necessary to cause such Lender receiving the proportionate overpayment to
share the excess payment or benefits of such Collateral or proceeds ratably
with each Lender in the case of an occurrence of an Event of Default. Upon
or following an Event of Default payments on the Revolving Credit Note
received by each Lender and receipt of Collateral by each Lender shall be in
the same proportion as the proportion of: (a) the Obligations owing to such
Lender in respect of the Revolving Credit Note held by such Lender; to (b)
the Obligations owing to all of the Lenders in respect of all of the
Revolving Credit Notes; provided, however, that, with respect to the two
paragraphs above, if all or any portion of such excess payment or benefits is
thereafter recovered from the Lender that received the proportionate
overpayment, such purchase of Obligations or payment of benefits, as the case
may be, shall be rescinded, and the purchase price and benefits returned, to
the extent of such recovery, but without interest.
SECTION 14.02. SHARING OF PAYMENTS. The Agent shall, after receipt
of any interest and fees earned under the Financing Agreement, remit to each
Lender: (a) its Pro Rata Share of all fees, provided, however, that no
Lender (other than CITBC in its role as Agent) shall share in (i) the
Collateral Management Fee or Documentation Fee or the fees provided for in
Section 6.03 of this Financing Agreement and (ii) applicable fees, costs,
expenses and Out-of-Pocket Expenses of the Agent which shall be remitted to
and retained by the Agent; and (b) interest computed at the rate and as
provided for in Section 6.02 of this Financing Agreement on all outstanding
amounts advanced by such Lender on each Settlement Date, prior to adjustment,
that were made subsequent to the last remittance by the Agent to the Lender
of the Borrower's interest.
SECTION 14.03. SALE OF PARTICIPATIONS. The Borrower acknowledges
each Lender may sell participations to one or more banks or other entities in
all or a portion of its rights and obligations under this Financing Agreement
(including, without limitation, all or a portion of its Revolving Credit
Commitment, the Revolving Credit Loans owing to it, and the Revolving Credit
Note(s) held by it); PROVIDED, HOWEVER, that: (a) any such Lender's
obligations under this
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Financing Agreement (including, without limitation, its Revolving Credit
Commitment hereunder) shall remain unchanged, and (b) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations, (c) such Lender shall remain the holder of any such
Revolving Credit Note executed to its order hereunder for all purposes of
this Financing Agreement, and (d) the Borrower, the Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Financing
Agreement. The Borrower further acknowledges that in doing so, the Lenders
may grant to such participants certain rights which would require the
participant's consent to certain waivers, amendments and other actions with
respect to the provisions of this Financing Agreement.
Each Obligor authorizes each Lender to disclose to any participant
or purchasing lender (each, a "Transferee") and any prospective Transferee
any and all financial information in such Lender's possession concerning such
Obligor and their respective affiliates which has been delivered to such
Lender by or on behalf of an Obligor pursuant to this Financing Agreement or
which has been delivered to such Lender by or on behalf of an Obligor in
connection with such Lender's credit evaluation of an Obligor and its
affiliates prior to entering into this Financing Agreement.
SECTION 14.04. NATURE OF REVOLVING CREDIT COMMITMENTS. Each
Obligor hereby agrees that each Lender is solely responsible for its portion
of the Revolving Credit Commitments and that neither the Agent nor any Lender
shall be responsible for, nor assume any obligations for the failure of any
Lender to make available its portion of the Revolving Credit Loans. Further,
should any Lender refuse to make available its portion of the Revolving
Credit Loans, then any one or more of the other Lenders may, but without
obligation to do so, increase, unilaterally, its portion of the Revolving
Credit Loans in which event the Borrower is so obligated to that other Lender.
SECTION 14.05. SHARING OF COSTS AND EXPENSES. In the event that
the Agent, the Lenders or any one of them is sued or threatened with suit by
an Obligor or any one of them, or by any receiver, trustee, creditor or any
committee of creditors on account of any preference, voidable transfer or
lender liability issue, alleged to have occurred or been received as a result
of, or during the transactions contemplated under this Financing Agreement,
then in such event any money paid in satisfaction or compromise of such suit,
action, claim or demand and any expenses, costs and attorneys' fees paid or
incurred in connection therewith, whether by the Agent, the Lenders or any
one of them, shall be shared proportionately by the Lenders. In addition,
any
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costs, expenses, fees or disbursements incurred by outside agencies or
attorneys retained by the Agent to effect collection or enforcement of any
rights in the Collateral, including enforcing, preserving or maintaining
rights under this Financing Agreement shall be shared proportionately by the
Lenders to the extent not reimbursed by an Obligor or from the proceeds of
Collateral. The provisions of this paragraph shall not apply to any suits,
actions, proceedings or claims that (a) predate the date of this Financing
Agreement or (b) are based on transactions, actions or omissions that predate
the date of this Financing Agreement.
SECTION 14.06. SHARING OF PAYMENTS. The Borrower hereby agrees
that, in addition to (and without limitation of) any right of set-off,
banker's Lien or counterclaim a Lender may otherwise have, each Lender shall
be entitled, at its option, to offset balances held by it at any of its
offices, as the case may be, against any principal of or interest on its
Revolving Credit Loans payable to such Lender, that is not paid when due
(regardless of whether such balances are then due to the Borrower), in which
case such Lender shall promptly notify the Borrower and the Agent thereof,
provided that such Lenders failure to give such notice shall not affect the
validity thereof or create any liability on the part of such Lender
whatsoever. If a Lender shall effect payment of any principal of or interest
on Revolving Credit Loans held by such Lender under this Financing Agreement
through the exercise of any right of set-off, banker's Lien, counterclaim or
similar right, such Lender shall promptly purchase from the other Lenders
participations in the loans and/or advances held by the other Lenders in such
amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all the Lenders shall share the benefit of such
payment pro rata in accordance with the unpaid principal and interest on the
loans and/or advances held by each of them. To such end, all of the Lenders
shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must
otherwise be restored. The Borrower agrees that any Lender so purchasing a
participation in the Revolving Credit Loans held by the other Lenders may
exercise all rights of set-off, banker's Lien, counterclaim or similar rights
with respect to such participation as fully as if such Lender were a direct
holder of the Revolving Credit Loans in the amount of such participation.
Nothing contained herein shall require any Lender to exercise any such right
or shall affect the right of any Lender to exercise and retain the benefits
of exercising, any such right with respect to any other indebtedness or
obligation of the Borrower.
SECTION 14.07. ASSIGNMENTS. Each Lender shall have the right at
any time to assign to one or more commercial banks, commercial finance
lenders or other financial
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institutions all or a portion of its rights and obligations under this
Financing Agreement including, without limitation, its Revolving Credit
Commitments and Revolving Credit Loans. Upon such assignment and provided
such assignee assumes its portion of each Lender's obligations hereunder, (a)
the assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
assignment, have the rights and obligations of a Lender hereunder and (b)
each Lender shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such assignment, relinquish their rights and
be released from their obligations under this Financing Agreement. The
Borrower shall, if necessary, execute any documents reasonably required to
effectuate the assignments.
In the event any Lender makes any assignment, each such assignment
shall be of a constant, and not a varying, percentage of all of such Lender's
rights and obligations under this Financing Agreement. Upon the execution,
delivery, acceptance and recording, from and after the effective date
specified in an Assignment and Acceptance substantially in the form of
Exhibit G hereto (the "Assignment and Acceptance").
By executing and delivering an Assignment and Acceptance, the Lender
and the assignee thereunder confirm to and agree with each other and the
other parties hereto as follows: (a) other than as provided in such
Assignment and Acceptance, such Lender makes no representation or warranty
and assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Financing Agreement or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Financing Agreement or any other instrument or document
furnished pursuant hereto; (b) such Lender makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of an Obligor or the performance or observance by an Obligor of any
of its obligations under this Financing Agreement or any other instrument or
document furnished pursuant hereto; (c) such assignee confirms that it has
received a copy of this Financing Agreement, together with copies of such
financial statements and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (d) such assignee will, independently and
without reliance upon the Agent, CITBC, or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue
to make its own credit decisions in taking or not taking action under this
Financing Agreement; (e) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under
this Financing Agreement as are delegated to the Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and (f) such
assignee agrees that it
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will perform in accordance with their terms all of the obligations which by
the terms of this Financing Agreement are required to be performed by it as a
Lender.
Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender, together with all Revolving Credit Note subject to such
assignment, the Agent shall: (a) accept such Assignment and Acceptance, and
(b) give prompt notice thereof to the Borrower. Within five (5) Business
Days after its receipt of such notice, the Borrower, at its own expense,
shall execute and deliver to the Agent in exchange for each surrendered
Revolving Credit Note a new Revolving Credit Note to the order of such
assignee in an amount equal to the applicable Revolving Credit Commitment
and/or Revolving Credit Loans assumed by it pursuant to such Assignment and
Acceptance and, if such Lender has retained a Revolving Credit Commitment
and/or Revolving Credit Loan hereunder, new Revolving Credit Note to the
order of such Lender in amounts equal to the applicable Revolving Credit
Commitment retained by it hereunder. Such new Revolving Credit Note shall be
dated the effective date of such Assignment and Acceptance and shall
otherwise be in substantially the form of Exhibit A.
SECTION 14.08. ACKNOWLEDGEMENTS BY AGENT. The Lenders hereby
irrevocably authorize the Agent, at its option and in its discretion and
without the necessity of any notice from the Agent to the Lenders, (a) to
acknowledge that neither the Agent nor the Lenders have a Lien on any leased
property of the Borrower or any other property in which the Borrower does not
own any interest; (b) to (i) acknowledge a Purchase Money Lien that conforms
to the criteria set forth on the definition of said term in Section 1.01 of
this Financing Agreement and (ii) subordinate to any holder of such Purchase
Money Lien any Lien on the Equipment subject thereto that the Agent and the
Lenders have as long as the Borrower owning such Equipment is indebted to
such creditor; (iii) to release any Lien granted to or held by the Agent upon
any Collateral: (A) upon termination of the Revolving Credit Commitments and
this Financing Agreement and the payment and satisfaction of the Obligations;
(B) constituting property sold or to be sold or disposed of as part of or in
connection with any disposition permitted hereunder; (C) constituting
property leased to the Borrower under a lease which has expired or been
terminated in a transaction permitted under this Financing Agreement or is
about to expire and which has not been, and is not intended by the Borrower
to be, renewed or extended; (D) consisting of an instrument evidencing
Indebtedness, which instrument has been pledged to the Agent for the ratable
benefit of the Lenders, if the Indebtedness evidenced thereby has been paid
in full; or (E) if approved, authorized or ratified in writing by all the
Lenders. Upon request by the Agent at any time, the Lenders will confirm in
writing the Agent's authority to
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release particular types or items of Collateral pursuant to this Section.
SECTION 14.09. TERMINATION OF FINANCING AGREEMENT. The Agent, at
the direction of all of the Lenders, may terminate the Revolving Credit
Commitments and this Financing Agreement on April 30, 2000 or any Anniversary
Date of the Closing Date subsequent to April 30, 2000 by giving the Borrower
at least sixty (60) days' prior written notice of termination.
Notwithstanding the foregoing, the Agent may terminate the Financing
Agreement immediately upon the occurrence of an Event of Default, provided,
however, that if the Event of Default is an event listed in paragraph (e),
(f) or (g) of Section 12.01 hereof, the Agent may regard this Financing
Agreement as terminated and notice to that effect is not required.
Any of the Lenders may terminate this Financing Agreement on April
30, 2000 or any Anniversary Date of the Closing Date subsequent to April 30,
2000 by giving the Agent and the other Lenders at least ninety (90) days
prior written notice of termination. Within thirty (30) days of receipt of
such notice from any such Lender(s), the Agent shall either: (a) give notice
to the Borrower of termination of the Revolving Credit Commitment and this
Financing Agreement in accordance with the terms hereof, in which event the
obligations of the Lenders hereunder shall terminate as of the date on which
termination of this Financing Agreement with the Borrower shall become
operative and effective or (b) if the other Lenders so elect, they shall have
the right to purchase the terminating Lender's Pro Rata Share of its interest
hereunder for the full amount thereof, together with any accrued interest.
Termination of this Financing Agreement by any of the Lenders as herein
provided shall not affect the Lenders' respective rights and obligations
under this Financing Agreement incurred prior to the effective date of
termination as set forth in the preceding sentence. This Financing
Agreement, unless terminated as herein provided, shall continue.
The Borrower may terminate this Financing Agreement and the
Revolving Credit Commitment, in whole, only on or after all of the
obligations owing to CITEF by the Borrower under the Lease Agreement or any
loan agreement shall have been paid in full, and then only upon sixty (60)
days' prior written notice by the Borrower to the Agent, provided that the
Borrower pay to the Agent for the ratable benefit of the Lenders immediately
on demand the Libor Rate Prepayment Premium. All Obligations shall become
due and payable as of any termination hereunder or under Article 12 hereof
and, pending a final accounting, the Agent may withhold any balances in the
Borrower's accounts (unless supplied with an indemnity satisfactory to the
Agent) to cover all of the
98
<PAGE>
Obligations, whether absolute or contingent. All of the Agent's and the
Lenders' rights, liens and security interests shall continue after any
termination until all Obligations have been paid and indefeasibly satisfied
in full.
ARTICLE 15. MISCELLANEOUS
SECTION 15.01. WAIVERS. Each Obligor hereby waives diligence,
demand, presentment and protest and any notices thereof as well as notice of
nonpayment. No delay or omission of the Agent or any of the Lenders or any
Obligor to exercise any right or remedy hereunder, whether before or after
the happening of any Event of Default, shall impair any such right or shall
operate as a waiver thereof or as a waiver of any such Event of Default. No
single or partial exercise by the Agent or any of the Lenders of any right or
remedy precludes any other or further exercise thereof, or precludes any
other right or remedy.
SECTION 15.02. ENTIRE AGREEMENT. This Financing Agreement and the
documents executed and delivered in connection therewith constitute the
entire agreement between the Borrower, the Guarantors and the Agent and the
Lenders; supersede any prior agreements; subject to the provisions Section
13.10, can be changed only by a writing signed by the Borrower, the
Guarantors, the Agent and the Required Lenders; and shall bind and benefit
the Borrower, the Guarantor, the Agent and the Lenders and their respective
successors and assigns.
SECTION 15.03. USURY. In no event shall an Obligor, upon demand by
the Agent for payment of any indebtedness relating hereto, by acceleration of
the maturity thereof, or otherwise, be obligated to pay interest and fees in
excess of the amount permitted by Law. Regardless of any provision herein or
in any agreement made in connection herewith, the Lenders shall never be
entitled to receive, charge or apply, as interest on any indebtedness
relating hereto, any amount in excess of the maximum amount of interest
permissible under applicable Law. If the Agent or any one or more of the
Lenders ever receive, collect or apply any such excess, it shall be deemed a
partial repayment of principal and treated as such; and if principal is paid
in full, any remaining excess shall be refunded to the Borrower or the
Guarantor, as the case may be. This paragraph shall control every other
provision hereof and of any other agreement made in connection herewith.
SECTION 15.04. PAYMENT OF EXPENSES. All statements, reports,
certificates, opinions and other documents or information required to be
furnished by the
99
<PAGE>
Borrower or any Guarantor to Agent or any Lender under this Financing
Agreement or any other Loan Document shall be supplied without cost to Agent
or any Lenders. The Borrower or the Guarantors shall pay, on demand, (1) all
Out-of-Pocket Costs and Expenses of Agent and Lenders, including, without
limitation, the fees and disbursements of Dewey Ballantine, counsel to Agent
and Lenders, incurred in connection with (a) the negotiation, preparation,
execution and delivery of the Loan Documents, (b) any waiver of amendment of,
or supplement or modification to, the Loan Documents and (c) the review of
any of the other agreements, instruments or documents referred to in this
Agreement or relating to the transactions contemplated hereby including,
without limitation, ongoing review of environmental matters; (d) all cost
associated with the Title Insurance Policy; (e) all costs and expenses of the
Agent and Lenders (including fees and disbursements of legal counsel)
incident to the successful enforcement, collection, protection or
preservation of any right or claim of Agent or Lenders under the Loan
Documents and (f) all fees and expenses incurred in connection with the
perfection of the Lenders' Liens, all recording fees, mortgage taxes, serving
costs, and all searches; (2) the Collateral Management Fee; (3) the
Documentation Fee; and (4) the Unused Line Fee.
SECTION 15.05. INDEMNITY. The Borrower hereby agrees to indemnify
the Lenders and the Agent and each of their affiliates, officers, directors,
employees, attorneys, consultants and agents (collectively, "Indemnitees")
and agrees to defend and hold the Indemnitees harmless from and against any
and all loss, damage, claim, liability, injury, obligation, penalty, action,
suit, cost, or expense of whatsoever kind or nature, imposed on, incurred by
or asserted against any Indemnitee by reason of (a) any investigation,
litigation or other proceedings (including any threatened investigation,
litigation or other proceedings) relating to or arising in connection with
this Financing Agreement, any other Loan Document or the transactions
contemplated hereby or thereby (but excluding any such losses, liabilities,
claims or damages incurred by reason of the gross negligence or willful
misconduct of the Person to be indemnified) and (b) any Environmental
Discharge; any handling, storage, use, disposal, manufacture, treatment,
recycling, remediation, removal, generation, release, discharge, refining or
dumping of any Hazardous Materials; any Remedial Action; or any violation or
alleged violation of Environmental Laws, arising from or in connection with
the past, present or future operations, properties or equipment of the
Borrower or its predecessors in interest. The Borrower also agrees to
reimburse any Indemnitee for all expenses incurred in connection with any
such investigation, litigation or other proceedings (whether actual or
threatened), or such Environmental Discharge; handling, storage, use,
disposal, manufacture, treatment, recycling, remediation, removal,
generation, release,
100
<PAGE>
discharge, refining or dumping of any Hazardous Materials; Remedial Action;
or violation or alleged violation of Environmental Laws including, without
limitation, the fees and disbursements of counsel incurred in connection with
any of the foregoing. The Borrower further agrees that this indemnification
shall survive termination of this Financing Agreement as well as the payment
of all Obligations or amounts payable hereunder.
SECTION 15.06. SEVERABILITY. If any provision hereof or of any
other Agreement made in connection herewith is held to be illegal or
unenforceable, such provision shall be fully severable, and the remaining
provisions of the applicable agreement shall remain in full force and effect
and shall not be affected by such provision's severance. Furthermore, in
lieu of any such provision, there shall be added automatically as a part of
the applicable agreement a legal and enforceable provision as similar in
terms to the severed provision as may be possible.
SECTION 15.07. WAIVER OF JURY TRIAL. THE BORROWER, THE GUARANTORS,
THE AGENT AND EACH LENDER EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. THE
BORROWER AND EACH GUARANTOR HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED.
SECTION 15.08. NOTICES. Except as otherwise herein provided, any
notice or other communication required hereunder shall be in writing, and
shall be deemed to have been validly served, given or delivered when hand
delivered or sent by telegram or facsimile, or three days after deposit in
the United State mails, with proper first class postage prepaid and addressed
to the party to be notified as follows:
(a)if to CITBC or the Agent at:
The CIT Group/Business Credit, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: Regional Manager
Fax (212) 536-1294
(b) if to any party which becomes a Lender subsequent to the date hereof,
such address as appears beneath such Lender's name on the signature page of
the Assignment and Acceptance such Lender executes in accordance with
Paragraph 10 of Section 13 of this Financing Agreement.
101
<PAGE>
(c) if to the Borrower at:
Specialty Paperboard, Inc.
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Chief Financial Officer
Fax: (802) 257-5973
with a copy to (provided, however, the failure to deliver such copy
will not invalidate any notices delivered to the Borrower nor create
any liability on the part of the Agent or any Lender):
Moffatt, Thomas, Barrett, Rock & Fields
First Security Building
911 West Idaho
P.O. Box 829
Boise, Idaho 83702
(d) if to a Guarantor at:
c/o Specialty Paperboard
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
with a copy to (provided, however, the failure to deliver such copy
will not invalidate any notices delivered to the Borrower nor create
any liability on the part of the Agent or any Lender):
Moffatt, Thomas, Barrett, Rock & Fields
Field Security Building
911 West Idaho
P.O. Box 829
Boise, Idaho 83702
or to such other address as any party may designate for itself by like notice.
SECTION 15.09. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND
ENFORCEMENT OF THIS FINANCING AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
SECTION 15.10. CONFIDENTIALITY. The Lenders shall maintain the
confidential nature of, and shall not use or disclose, any of the Borrower's
financial information, confidential information or trade secrets without
first obtaining the Borrower's written consent. Nothing in this Section
15.10 shall require the Agent or the Lenders to obtain the consent of the
Borrower or a Guarantor before exercising any of their respective rights
under the Loan Documents upon
102
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the occurrence of a Default or Event of Default. The obligations of the
Agent and the Lenders shall in no event apply to: (a) providing information
about the Borrower or a Guarantor to any financial institution contemplated
in Section 14.03 or 14.07; (b) any situation in which the Agent or any of the
Lenders is required by Law or required by any Governmental Authority or
governmental, regulatory or supervisory authority or official to disclose
information; (c) providing information to counsel to the Lenders in
connection with the transactions contemplated by the Loan Documents; (d)
providing information to independent auditors retained by the Lenders; (e)
any information that is in or becomes part of the public domain otherwise
than through a wrongful act of the Agent or any of the Lenders or any
employees or agents thereof; (f) any information that is in the possession of
the Agent or any of the Lenders prior to receipt thereof from the Borrower or
a Guarantor or any other Person known to such Lender to be acting on behalf
of the Borrower or a Guarantor; (g) any information that is independently
developed by the Agent or any of the Lenders; and (h) any information that is
disclosed to the Agent or any of the Lenders by a third party that has no
obligation of confidentiality with respect to the information disclosed.
103
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Financing
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above. This Financing Agreement shall take
effect as of the date set forth above after being accepted below.
SPECIALTY PAPERBOARD, INC., as
Borrower
By /s/ David Spokowski
------------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
SPECIALTY PAPERBOARD/ENDURA, INC., as
Guarantor
By /s/ David Spokowski
----------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
104
<PAGE>
ARCON HOLDINGS CORP., as Guarantor
By /s/ David Spokowski
----------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
ARCON COATING MILLS INC., as
Guarantor
By /s/ David Spokowski
--------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
CPG INVESTORS INC., as Guarantor
By /s/ David Spokowski
--------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
105
<PAGE>
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
CPG HOLDINGS, INC., as Guarantor
By /s/ David Spokowski
--------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
CPG-WARREN GLEN INC., as Guarantor
By /s/ David Spokowski
------------------------------
Name: David Spokowski
Title: Treasurer
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
106
<PAGE>
CUSTOM PAPERS GROUP INC., as
Guarantor
By /s/ David Spokowski
------------------------------
Name: David Spokowski
Title: TREASURER
Address for Notices:
P.O. Box 498
Brudies Road
Brattleboro, VT 05302
Attn: Bruce Moore
Chief Financial Officer
Telecopy: (802) 257-5973
THE CIT GROUP/BUSINESS CREDIT, INC.,
as Agent
By /s/ David Spokowski
---------------------------------
Name: Edward A. Jesser
Title: Vice President
Applicable Lending Office:
New York
Address for Notices:
1211 Avenue of the Americas
New York, New York 10036
Attn: Mr. Roy Fuchs, Vice President
Telecopy: (212) 536-1293
107
<PAGE>
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Lender
By /s/ David Spokowski
---------------------------------
Name: Edward A. Jesser
Title: Vice President
Applicable Lending Office:
New York
Address for Notices:
1211 Avenue of the Americas
New York, New York 10036
Attn: Mr. Roy Fuchs, Vice President
Telecopy: (212) 536-1293
108
<PAGE>
EXHIBIT 12.1
SPECIALTY PAPERBOARD, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical:
Income (loss) before income taxes......... (4,207) 1,434 6,634 7,996 7,529 5,091 7,994
Interest expense.......................... 8,231 7,752 3,137 1,356 892 811 310
Rental expense............................ -- -- -- 681 1,022 843 1,070
--------- --------- --------- --------- --------- --------- ---------
Earnings................................ 4,024 9,186 9,771 10,033 9,443 6,745 9,374
Rental expense............................ -- -- -- 681 1,022 843 1,070
Interest expense.......................... 8,231 7,752 3,137 1,356 892 811 310
--------- --------- --------- --------- --------- --------- ---------
Fixed charges........................... 8,231 7,752 3,137 2,037 1,914 1,654 1,380
Ratio of earnings to fixed charges........ 0.49 1.18 3.11 4.93 4.93 4.08 6.79
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS PRO FORMA
PRO FORMA ENDED LATEST TWELVE
YEAR ENDED SEPTEMBER 30, MONTHS ENDED
DECEMBER 31, -------------------- SEPTEMBER 30,
1995 1995 1996 1996
------------- --------- --------- -------------
<S> <C> <C> <C> <C>
Income before income taxes....................................... 12,076 8,790 12,283 15,569
Interest expense................................................. 9,825 7,370 7,370 9,825
Rental expense................................................... 1,022 843 1,070 1,249
------ --------- --------- ------
Earnings....................................................... 22,923 17,003 20,723 26,643
Rental expense................................................... 1,022 843 1,070 1,249
Interest expense................................................. 9,825 7,370 7,370 9,825
------ --------- --------- ------
Fixed charges.................................................. 10,847 8,213 8,440 11,074
Ratio of earnings to fixed charges............................... 2.11 2.07 2.46 2.41
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated January 26, 1996 on our audits of the consolidated financial
statements of Specialty Paperboard, Inc. We also consent to the reference to our
firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 6, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Specialty
Paperboard, Inc. on Form S-4 of our report dated February 29, 1996 (August 28,
1996 as to Note 13) on our audits of the financial statements of CPG Investors
Inc. as of December 31, 1994 and 1995, for the eight-week period from November
1, 1993 (commencement of operations) to December 26, 1993, and for the years
ended December 31, 1994 and 1995.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
-----------------------------------------------------------------------------
COOPERS & LYBRAND L.L.P.
Richmond, Virginia
January 31, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Specialty Paperboard, Inc. of our report
dated November 28, 1995, except for Note 14, which is as of August 28, 1996
relating to the consolidated financial statements of Arcon Holdings Corp., which
appears in such Prospectus. We also consent to the references to us under the
headings "Experts".
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Melville, New York
February 6, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Specialty Paperboard, Inc. of our report
dated August 28, 1996 relating to the statements of income and accumulated
deficit and of cash flows of Arcon Coating Mills Inc., which appears in such
Prospectus. We also consent to the references to us under the headings
"Experts".
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Melville, New York
February 6, 1997
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Specialty Paperboard, Inc.
We consent to the use of our report on the consolidated financial statements of
CPG Investors Inc. and subsidiaries as of and for the ten-month period ended
October 31, 1996 included herein and to the reference to our firm under the
heading "Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
February 6, 1997
<PAGE>
EXHIBIT 23.9
The Board of Directors
Specialty Paperboard, Inc.:
We consent to the use of our report on the consolidated financial statements of
Arcon Holdings Corp and subsidiary as of and for the year ended October 31, 1996
including herein and to the reference to our firm under the heading "Experts" in
the registration statement.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
February 6, 1997
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
TENDER OF 9 3/8% SENIOR NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
9 3/8% SENIOR NOTES DUE 2006, SERIES B
SPECIALTY PAPERBOARD, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 12,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). OLD NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
DELIVER TO THE EXCHANGE AGENT:
WILMINGTON TRUST COMPANY
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL OR BY OVERNIGHT COURIER: BY HAND:
Wilmington Trust Company Wilmington Trust Company
Attn: Jill Rylee c/o Harris Trust Co.
Corporate Trust & of New York as Agent
Administration Window 75 Water Street
1100 North Market Street New York, NY 10004
Rodney Square North
Wilmington, DE 19890-0001
</TABLE>
BY FACSIMILE:
Wilmington Trust Company
(302) 651-1079
CONFIRM BY TELEPHONE: (302) 651-8869
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated February 11, 1997 (the "Prospectus") of Specialty Paperboard, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the Company's offer (the "Exchange Offer") to exchange its
9 3/8% Senior Notes due October 15, 2006, Series B (the "New Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which the Prospectus is a part,
for a like principal amount of its issued and outstanding 9 3/8% Senior Notes
due October 15, 2006, Series A (the "Old Notes"). Capitalized terms used but not
defined herein have the respective meaning given to them in the Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date in which the Exchange Offer is extended. The
Company shall notify the holders of the Old Notes of any extension by oral or
written notice prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by a Holder of Old Notes either if
original Old Notes are to be forwarded herewith or if delivery of Old Notes, if
available, is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in the Prospectus under the
caption "The Exchange Offer-Book-Entry Transfer." Holders of Old Notes whose Old
Notes are not immediately available, or who are unable to deliver their Old
Notes and all other documents required by this Letter of Transmittal to the
Exchange Agent on or prior to the Expiration Date, or who are unable to complete
the procedure for book-entry transfer on a timely basis, must tender their Old
Notes according to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer-Guaranteed Delivery
Procedures." See Instruction 1. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
<PAGE>
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
Holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space below is inadequate, list the registered numbers and principal amounts on
a separate signed schedule and affix the list to this Letter of Transmittal.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES TENDERED
AGGREGATE
PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S), AMOUNT
EXACTLY AS NAME(S) APPEAR(S) ON OLD NOTES REPRESENTED BY
(PLEASE FILL IN, IF BLANK) REGISTERED NUMBERS* NOTE(S)**
<S> <C> <C>
TOTAL
<CAPTION>
DESCRIPTION OF OLD NOTES TENDER
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S),
EXACTLY AS NAME(S) APPEAR(S) ON OLD NOTES PRINCIPAL AMOUNT
(PLEASE FILL IN, IF BLANK) TENDERED
<S> <C>
</TABLE>
*
Need not be completed by book-entry Holders.
**
Unless otherwise indicated, any tendering Holder of Old Notes will be
deemed to have tendered the entire aggregate principal amount represented
by such Old Notes. All tenders must be in integral multiples of $1,000.
/ / CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE
INSTITUTIONS ONLY):
Name of Tendering Institution: ___________________________________________
Account Number: __________________________________________________________
Transaction Code Number: _________________________________________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR USE BY
ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Old Notes:
________________________________________________________________________________
Date of Execution of Notice of Guaranteed Delivery: ______________________
Window Ticket Number (if available): ______________________________________
Name of Eligible Institution that Guaranteed Delivery:
________________________________________________________________________________
Account Number (if delivered by book-entry transfer):
________________________________________________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
<PAGE>
Name: ____________________________________________________________________
Address: _________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, it acknowledges that the Old Notes were
acquired as a result of market-making activities or other trading activities and
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Old Notes
indicated above. Subject to and effective upon the acceptance for exchange of
the principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned hereby exchanges, assigns and transfers to the
Company all right, title and interest in and to the Old Notes tendered for
exchange hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent, the agent and attorney-in-fact of the undersigned (with full
knowledge that the Exchange Agent also acts as the agent of the Company in
connection with the Exchange Offer) with respect to the tendered Old Notes with
full power of substitution to (i) deliver such Old Notes, or transfer ownership
of such Old Notes on the account books maintained by the Book-Entry Transfer
Facility, to the Company and deliver all accompanying evidences of transfer and
authenticity, and (ii) present such Old Notes for transfer on the books of the
Company and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Old Notes, all in accordance with the terms of the Exchange
Offer. The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby and to acquire the New Notes issuable upon the exchange of such
tendered Old Notes, and that the Company will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim, when the same are accepted
for exchange by the Company.
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission") that the New Notes issued in exchange for the Old Notes pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holders' business and such Holders are not engaging
in and do not intend to engage in a distribution of the New Notes and have no
arrangement or understanding with any person to participate in a distribution of
such New Notes. The undersigned hereby further represent(s) to the Company that
(i) any New Notes acquired in exchange for Old Notes tendered hereby are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not the undersigned, (ii) neither the undersigned nor any such
other person is engaging in or intends to engage in a distribution of the New
Notes, (iii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes, and (iv) neither the Holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company or,
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
<PAGE>
If the undersigned or the person receiving the New Notes is a broker-dealer
that is receiving New Notes for its own account in exchange for Old Notes that
were acquired as a result of market-making activities or other trading
activities, the undersigned acknowledges that it or such other person will
deliver a prospectus in connection with any resale of such New Notes; however,
by so acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that the undersigned or such other person is an "underwriter"
within the meaning of the Securities Act. The undersigned acknowledges that if
the undersigned is participating in the Exchange Offer for the purpose of
distributing the New Notes (i) the undersigned cannot rely on the position of
the staff of the Commission in certain no-action letters and, in the absence of
an exemption therefrom, must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes, in which case the registration statement
must contain the selling security holder information required by Item 507 or
Item 508, as applicable, of Regulation S-K of the Commission, and (ii) failure
to comply with such requirements in such instance could result in the
undersigned incurring liability under the Securities Act for which the
undersigned is not indemnified by the Company.
If the undersigned or the person receiving the New Notes is an "affiliate"
(as defined in Rule 405 under the Securities Act), the undersigned represents to
the Company that the undersigned understands and acknowledges that the New Notes
may not be offered for resale, resold or otherwise transferred by the
undersigned or such other person without registration under the Securities Act
or an exemption therefrom.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Old Notes
tendered hereby, including the transfer of such Old Notes on the account books
maintained by the Book-Entry Transfer Facility.
The undersigned understands and agrees that the Company reserves the right
not to accept tendered Old Notes from any tendering holder if the Company
determines, in its sole and absolute discretion, that such acceptance could
result in a violation of applicable securities laws.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Old Notes when, as and if the Company
gives oral or written notice thereof to the Exchange Agent. Any tendered Old
Notes that are not accepted for exchange pursuant to the Exchange Offer for any
reason will be returned, without expense, to the undersigned at the address
shown below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Old Notes pursuant to the procedures described under the caption "The
Exchange Offer--Procedures for Tendering" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the New Notes issued in exchange for the Old Notes accepted for exchange
and return any Old Notes not tendered or not exchanged, in the name(s) of the
undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions," please mail or deliver the New Notes issued in exchange for the
Old Notes accepted for exchange and any Old Notes not tendered or not exchanged
(and accompanying documents, as appropriate) to the undersigned at the address
shown below the undersigned's signature(s). In the event that both "Special
Issuance Instructions" and "Special Delivery Instructions" are completed, please
issue the New Notes issued in exchange for the Old Notes accepted for exchange
in the name(s) of, and return any Old Notes not tendered or not exchanged to,
the person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the Old
Notes so tendered for exchange.
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY (i) if Old Notes in a principal amount not tendered,
or New Notes issued in exchange for Old Notes accepted for exchange, are to be
issued in the name of someone other than the undersigned, or (ii) if Old Notes
tendered by book-entry transfer which are not exchanged are to be returned by
credit to an account maintained at the Book-Entry Transfer Facility. Issue New
Notes and/or Old Notes to:
Name(s): _____________________________________________________________________
(Please Type or Print)
Address:
______________________________________________________________________________
______________________________________________________________________________
Include Zip Code)
______________________________________________________________________________
(Tax Identification or Social Security No.)
(Complete Substitute Form W-9)
/ / Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility set forth below:
______________________________________________________________________________
(Book-Entry Transfer Facility Account Number, if applicable)
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
______________________________________________________________ ____________
Date
______________________________________________________________ ____________
Date
Area Code and Telephone Number: ______________________________________________
The above lines must be signed by the registered Holder(s) of Old Notes as
name(s) appear(s) on the Old Notes or on a security position listing, or by
person(s) authorized to become registered Holder(s) by a properly completed
bond power from the registered Holder(s), a copy of which must be transmitted
with this Letter of Transmittal. If Old Notes to which this Letter of
Transmittal relate are held of record by two or more joint Holders, then all
such Holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii)
unless waived by the Company, submit evidence satisfactory to the Company of
such person's authority so to act. See Instruction 5 regarding the completion
of this Letter of Transmittal, printed below.
Name(s): _____________________________________________________________________
(Please Type or Print)
Capacity: ____________________________________________________________________
Address:
______________________________________________________________________________
______________________________________________________________________________
(Include Zip Code)
<PAGE>
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
______________________________________________________________________________
(Authorized Signature)
______________________________________________________________________________
(Title)
______________________________________________________________________________
(Name of Firm)
______________________________________________________________________________
(Address, Include Zip Code)
______________________________________________________________________________
(Area Code and Telephone Number)
Dated: __________, 19__
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if Old Notes in a principal amount not tendered, or
New Notes issued in exchange for Old Notes accepted for exchange, are to be
mailed or delivered to someone other than the undersigned, or to the
undersigned at an address other than that shown below the undersigned's
signature.
Mail or deliver New Notes and/or Old Notes to:
Name: ________________________________________________________________________
(Please Type or Print)
Address:
______________________________________________________________________________
______________________________________________________________________________
(Include Zip Code)
______________________________________________________________________________
(Tax Identification or Social Security No.)
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes or Book-Entry
Confirmations. All physically delivered Old Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Old Notes tendered by book-entry transfer (a "Book-Entry
Confirmation"), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof, and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. The method of delivery of the tendered Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder and, except as otherwise provided below, the
delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. Instead of delivery by mail, it is recommended that the Holder
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to the Company.
2. Guaranteed Delivery Procedures. Holders who wish to tender their Old
Notes and (a) whose Old Notes are not immediately available, or (b) who cannot
deliver their Old Notes, this Letter of Transmittal or any other documents
required hereby to the Exchange Agent prior to the Expiration Date or (c) who
are unable to complete the procedure for book-entry transfer on a timely basis,
must tender their Old Notes according to the guaranteed delivery procedures set
forth in the Prospectus. Pursuant to such procedures: (i) such tender must be
made by or through a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers Inc. or a
commercial bank or a trust company having an office or correspondent in the
United States (an "Eligible Institution"); (ii) prior to the Expiration Date,
the Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder of the Old Notes, the registration number(s) of such Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three (3) New York Stock Exchange, Inc.
("NYSE") trading days after the Expiration Date, this Letter of Transmittal (or
facsimile hereof) together with the Old Notes (or a Book-Entry Confirmation) in
proper form for transfer, must be received by the Exchange Agent within three
(3) NYSE trading days after the Expiration Date; and (iii) the certificates for
all physically tendered shares of Old Notes, in proper form for transfer, or
Book-Entry Confirmation, as the case may be, and all other documents required by
this Letter are received by the Exchange Agent within three (3) NYSE trading
days after the date of execution of the Notice of Guaranteed Delivery.
Any Holder of Old Notes who wishes to tender Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice
of Guaranteed Delivery will be sent to Holders who wish to tender their Old
Notes according to the guaranteed delivery procedures set forth above.
See "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus.
3. Tender by Holder. Only a Holder of Old Notes may tender such Old Notes in
the Exchange Offer. Any beneficial Holder of Old Notes who is not the registered
Holder and who wishes to tender should arrange with the registered Holder to
execute and deliver this Letter of Transmittal on his behalf or must, prior to
completing and executing this Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such Holder's name or obtain a properly completed bond power from the
registered Holder.
4. Partial Tenders. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the third column of the box entitled "Description of Old Notes" above. The
entire principal amount of Old Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated. If the entire principal
amount of all Old Notes is not tendered, then Old Notes for the principal amount
of Old Notes not tendered and New Notes issued in exchange for any Old Notes
accepted will be sent to the Holder at his or her registered address, unless a
different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Old Notes are accepted for exchange.
<PAGE>
5. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Medallion Guarantee of Signatures. If this Letter of Transmittal (or facsimile
hereof) is signed by the record Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever. If this Letter
of Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the Holder of the Old Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Old Notes listed and tendered hereby and the New
Notes issued in exchange therefor is to be issued (or any untendered principal
amount of Old Notes is to be reissued) to the registered Holder, the said Holder
need not and should not endorse any tendered Old Notes, nor provide a separate
bond power. In any other case, such Holder must either properly endorse the Old
Notes tendered or transmit a properly completed separate bond power with this
Letter of Transmittal, with the signatures on the endorsement or bond power
guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder or Holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers, in each case
signed as the name of the registered Holder or Holders appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes of bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered holder(s) of the Old Notes tendered herewith (or by a
participant in the Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of the tendered Old Notes) and the issuance of New
Notes (and any Old Notes not tendered or not accepted) are to be issued directly
to such registered holder(s) (or, if signed by a participant in the Book-Entry
Transfer Facility, any New Notes or Old Notes not tendered or not accepted are
to be deposited to such participant's account at such Book-Entry Transfer
Facility) and neither the box entitled "Special Delivery Instructions" nor the
box entitled "Special Registration Instructions" has been completed, or (ii)
such Old Notes are tendered for the account of an Eligible Institution. In all
other cases, all signatures on this Letter of Transmittal must be guaranteed by
an Eligible Institution.
6. Special Registration and Delivery Instructions. Tendering holders should
indicate, in the applicable box or boxes, the name and address (or account at
the Book-Entry Transfer Facility) to which New Notes or substitute Old Notes for
principal amounts not tendered or not accepted for exchange are to be issued or
sent, if different from the name and address of the person signing this Letter
of Transmittal. In the case of issuance in a different name, the taxpayer
identification or social security number of the person named must also be
indicated.
7. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, New Notes or Old Notes for principal amounts not tendered or accepted
for exchange are to be delivered to, or are to be registered or issued in the
name of, any person other than the registered Holder of the Old Notes tendered
hereby, or if tendered Old Notes are registered in the name of any person other
than the person signing this Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with this Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES LISTED IN THIS LETTER OF
TRANSMITTAL.
<PAGE>
8. Tax Identification Number. Federal income tax law required that a holder
of any Old Notes which are accepted for exchange must provide the Company (as
payor) with its correct taxpayer identification number ("TIN"), which, in the
case of a holder who is an individual in his or her social security number. If
the Company is not provided with the correct TIN, the Holder may be subject to a
$50 penalty imposed by Internal Revenue Service. (If withholding results in an
over-payment of taxes, a refund may be obtained.) Certain holders (including,
among others, all corporations and certain foreign individuals) are not subject
to these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
the actual owner, see the enclosed "Guidelines for Certification of Taxpayer
Identification Number of Substitute Form W-9 for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Company's obligation regarding backup
withholding.
9. Validity of Tenders. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of tendered Old Notes will be
determined by the Company, in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any and all Old
Notes not validly tendered or any Old Notes, the Company's acceptance of which
would, in the opinion of the Company or its counsel, be unlawful. The Company
also reserves the right to waive any conditions of the Exchange Offer or defects
or irregularities in tenders of Old Notes as to any ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer. The interpretation of the
terms and conditions of the Exchange Offer (includes this Letter of Transmittal
and the instructions hereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine. The
Company will use reasonable efforts to give notification of defects or
irregularities with respect to tenders of Old Notes, but shall not incur any
liability for failure to give such notification.
10. Waiver of Conditions. The Company reserves the absolute right to waive,
in whole or part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
11. No Conditional Tender. No alternative, conditional, irregular or
contingent tender of Old Notes on transmittal of this Letter of Transmittal will
be accepted.
12. Mutilated, Lost, Stolen or Destroyed Old Notes. Any Holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated above for further instructions.
13. Requests for Assistance or Additional Copies. Requests for assistance or
for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
14. Acceptance of Tendered Old Notes and Issuance of New Notes; Return of
Old Notes. Subject to the terms and conditions of the Exchange Offer, the
Company will accept for exchange all validly tendered Old Notes as soon as
practicable after the Exchange Date and will issue New Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted tendered Old Notes when, as and if the Company has given
written and oral notice thereof to the Exchange Agent. If any tendered Old Notes
are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Notes will be returned, without expense, to the undersigned at
the address shown above (or credited to the undersigned's account at the
Book-Entry Transfer Facility designated above) or at a different address as may
be indicated under the box entitled "Special Delivery Instructions."
15. Withdrawal. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer--Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE OLD NOTES) WHICH MUST BE DELIVERED BY BOOK-ENTRY TRANSFER OR
IN ORIGINAL HARD COPY FROM) OR THE NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION TIME.
<PAGE>
<TABLE>
<S> <C> <C>
(TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5))
PAYER'S NAME: WILMINGTON TRUST COMPANY
SUBSTITUTE PART I--Taxpayer Identification No.--For all ac-
FORM W-9 counts, enter your taxpayer identification Security Social Number
DEPARTMENT OF THE number in the appropriate box. For most OR
TREASURY individuals and sole proprietors, this is your
INTERNAL REVENUE SERVICE social security number. For other entities, it Employer Identification
is your Employer Identification Number. If you Number
do not have a number, see How to Obtain a TIN in
the enclosed Guidelines. Note: If the account is (If awaiting TIN write
in more than one name, see Employer "Applied For")
Identification Number the chart on page 2 of the
enclosed Guidelines to determine what number to
enter.
Payer's Request for PART II--For Payees Exempt From Backup Withholding (see enclosed Guide-
Taxpayer Identification lines)
Number
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), and either
(a) I have mailed or delivered an application to receive a taxpayer
identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to
mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within sixty (60)
days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number;
(2) I am not subject to backup withholding either because (a) I am exempt
from backup withholding, or (b) I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject
to backup withholding; and
(3) Any other information provided on this form is true, correct and
complete.
SIGNATURE Date
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO THE NEW NOTES. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 9 3/8% SENIOR NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
9 3/8% SENIOR NOTES DUE 2006, SERIES B
SPECIALTY PAPERBOARD, INC.
This form or one substantially equivalent hereto must be used by a holder to
accept the Exchange Offer of Specialty Paperboard, Inc., a Delaware corporation
(the "Company"), who wishes to tender 9 3/8% Senior Notes due 2006, Series A
(the "Old Notes") to the Exchange Agent pursuant to the guaranteed delivery
procedures described in "The Exchange Offer--Guaranteed Delivery Procedures" of
the Company's Prospectus, dated February 11, 1997 (the "Prospectus") and in
Instruction 2 to the related Letter of Transmittal. Any holder who wishes to
tender Old Notes pursuant to such guaranteed delivery procedures must ensure
that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the
Expiration Date (as defined below) of the Exchange Offer. Capitalized terms used
but not defined herein have the meanings ascribed to them in the Prospectus or
the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH
12, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). OLD NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
WILMINGTON TRUST COMPANY
By Registered or Certified
Mail or by Overnight Courier: By Hand:
Wilmington Trust Company Wilmington Trust Company
Attn: Jill Rylee c/o Harris Trust Company
Corporate Trust & of New York, as Agent
Administration Window 75 Water Street
1100 North Market Street New York, NY 10004
Rodney Square North
Wilmington, DE 19890-0001
<PAGE>
EXHIBIT 99.2
PAGE 2
BY FACSIMILE:
WILMINGTON TRUST COMPANY
(302) 651-1079
CONFIRM BY TELEPHONE:
(302) 651-8869
------------------------
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED BOX ON THE
LETTER OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES.
<PAGE>
EXHIBIT 99.2
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Old Notes listed below:
CERTIFICATE NUMBER(S) AGGREGATE AGGREGATE
(IF KNOWN) OF OLD NOTES OR PRINCIPAL PRINCIPAL
ACCOUNT NUMBER AT THE AMOUNT AMOUNT
BOOK-ENTRY FACILITY REPRESENTED TENDERED
- ------------------------------ ------------ ----------
PLEASE SIGN AND COMPLETE
Signatures of Registered
Holder(s) or Authorized
Signatory:
<TABLE>
<S> <C>
Date:
- -------------------------------------------- --------------------------------------------
Address:
- -------------------------------------------- --------------------------------------------
Name(s) of Registered
--------------------------------------------
Holder(s):
--------------------------------------------
Area Code and Telephone No.:
- --------------------------------------------
- -------------------------------------------- --------------------------------------------
</TABLE>
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Old Notes or on a security position
listing as the owner of Old Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
<PAGE>
PLEASE PRINT NAME(S) AND ADDRESS(ES)
<TABLE>
<S> <C>
Names(s):
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
Capacity:
- --------------------------------------------
Address(es):
- --------------------------------------------
- --------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 99.2
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Old Notes tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility described in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" and in the Letter of Transmittal and any other required documents,
all by 5:00 p.m., New York City time, within five New York Stock Exchange
trading days following the Expiration Date.
<TABLE>
<S> <C>
Name of Firm:
- -------------------------------------------- --------------------------------------------
(AUTHORIZED SIGNATURE)
Address: Name:
- -------------------------------------------- --------------------------------------------
(INCLUDE ZIP CODE)
Title:
--------------------------------------------
Area Code and Tel. Number: (PLEASE TYPE OR PRINT)
Date: -------------------------------, 19
- -------------------------------------------- ----
</TABLE>
DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE>
EXHIBIT 99.2
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Old Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Old Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Old Notes, the signature must correspond with the
name shown on the security position listing as the owner of the Old Notes.
If this Notice of Guaranteed Delivery is signed by a person other than
the registered holder(s) of any Old Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appears on the Old Notes or signed as the name of the participant
shown on the Book-Entry Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery 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 submit with the Letter of Transmittal
evidence satisfactory to the Company of such person's authority to so act.
3. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.
<PAGE>
EXHIBIT 99.3
LETTER TO BROKERS
FOR
TENDER OF 9 3/8% SENIOR NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
9 3/8% SENIOR NOTES DUE 2006, SERIES B
SPECIALTY PAPERBOARD, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 12, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer by
Specialty Paperboard, Inc. (the "Company"), a Delaware corporation, to exchange
its 9 3/8% Senior Notes Due 2006, Series B (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for a like principal amount of its issued and outstanding 9 3/8% Senior Notes
Due 2006, Series A (the "Old Notes") upon the terms and subject to the
conditions set forth in the Company's Prospectus, dated , 1996, and the
related Letter of Transmittal (which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated February 11, 1997;
2. Letter of Transmittal (together with accompanying Substitute Form W-9
Guidelines);
3. Notice of Guaranteed Delivery; and
4. Letter which may be sent to your clients for whose account you hold
Old Notes in your name or in the name of your nominee, with space
provided for obtaining such client's instruction with regard to the Exchange
Offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such New Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
New Notes for its own account in exchange for Old Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such New Notes and (iv) neither the undersigned nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
New Notes for its own account in exchange for Old Notes, it represents that such
Old Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that
<PAGE>
it will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes, the undersigned
is not deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or to
any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 7 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
WILMINGTON TRUST COMPANY
<PAGE>
EXHIBIT 99.4
LETTER TO CLIENTS
FORF
TENDER OF 9 3/8% SENIOR NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
9 3/8% SENIOR NOTES DUE 2006, SERIES B
SPECIALTY PAPERBOARD, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 12, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Our Clients:
We are enclosing herewith a Prospectus, dated February 11, 1997, of
Specialty Paperboard, Inc. (the "Company"), a Delaware corporation, and a
related Letter of Transmittal (which together constitute the "Exchange Offer")
relating to the offer by the Company, to exchange its 9 3/8% Senior Notes Due
2006, Series B (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like principal
amount of its issued and outstanding 9 3/8% Senior Notes Due 2006, Series A (the
"Old Notes"), upon the terms and subject to the conditions set forth in the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
We are the holder of record of Old Notes held by us for your own account. A
tender of such Old Notes can be made only by us as the record holder and
pursuant to your instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to tender Old Notes held by us
for your account.
We request instructions as to whether you wish to tender any or all of the
Old Notes held by us for your account pursuant to the terms and conditions of
the Exchange Offer. We also request that you confirm that we may on your behalf
make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such New Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
New Notes for its own account in exchange for Old Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such New Notes and (iv) neither the undersigned nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
New Notes for its own account in exchange for Old Notes, it represents that such
Old Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes, the undersigned is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Very truly yours,
<PAGE>
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK
ENTRY TRANSFER PARTICIPANT FROM BENEFICIAL OWNER
FOR
TENDER OF 9 3/8% SENIOR NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
9 3/8% SENIOR NOTES DUE 2006, SERIES B
NATIONAL FIBERSTOCK CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 12, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO
THE EXPIRATION DATE.
To Registered Holder and/or Participant
of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated February
11, 1997 (the "Prospectus") of National Fiberstok Corporation, a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its 9 3/8% Senior Notes Due 2006, Series B (the
"New Notes") for all of its outstanding 9 3/8% Senior Notes Due 2006, Series A
(the "Old Notes"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (FILL IN AMOUNT):
$ of the 9 3/8% Senior Notes Due 2006, Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
/ / To TENDER the following Old Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED (IF ANY)):
$
/ / Not to TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized to make, on
behalf of the undersigned (and the undersigned, by its signature below, hereby
makes to you), the representation and warranties contained in the Letter of
Transmittal that are to be made with respect to the undersigned as a beneficial
owner, including, but not limited to, the representations, that (i) the New
Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the undersigned, (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to participate
in the distribution within the meaning of the Securities Act of 1933, as amended
(the "Securities Act") of such New Notes, (iii) if the
<PAGE>
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
New Notes for its own account in exchange for Old Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such New Notes and (iv) neither the undersigned nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
New Notes for its own account in exchange for Old Notes, it represents that such
Old Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes, the undersigned is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
SIGN HERE
Name of beneficial owner(s):____________________________________________________
Signature(s):___________________________________________________________________
Name(s) (please print):_________________________________________________________
Address:________________________________________________________________________
Telephone Number:_______________________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Date:___________________________________________________________________________
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
GIVE THE SOCIAL
FOR THIS TYPE OF ACCOUNT: SECURITY NUMBER OF:
- ----------------------------------------------------------------- ------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined funds,
any one of the individuals(1)
3. Husband and wife (joint account) The actual owner of the account or, if joint funds,
either person(1)
4. Custodian account of a minor (Uniform Gift to Minors The minor(2)
Act)
5. Adult and minor (joint account) The adult or, if the minor is the only contributor,
the minor(1)
6. Account in the name of guardian or committee for a The ward, minor, or incompetent person(3)
designated ward, minor or incompetent person
7. a. The usual revocable savings trust account (grantor The grantor-trustee(1)
is also trustee)
b. So-called trust account that is not a legal or The actual owner(1)
valid trust under state law
8. Sole proprietorship account The owner(4)
9. A valid trust, estate, or pension trust The legal entity (Do not furnish the identification
number of the personal representative or trustee
unless the legal entity itself is not designated in
the account title.)(5)
10. Corporate account The organization
11. Religious, charitable, or educational organization The corporation
account
12. Partnership account The partnership
13. Association, club or other tax-exempt organization The organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of Agriculture in the name The public entity
of a public entity (such as a State or local
government, school district, or prison) that
receives agricultural program payments
</TABLE>
- ------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE>
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
-A corporation.
-A financial institution.
-An organization exempt from tax under section 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), or an individual retirement
plan.
-The United States or any agency or instrumentality thereof.
-A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
-A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
-An international organization or any agency or instrumentality thereof.
-A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
-A real estate investment trust.
-A common trust fund operated by a bank under section 584(a) of the Code.
-An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a)(1) of the Code.
-An entity registered at all times under the Investment Company Act of 1940.
-A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
-Payments to nonresident aliens subject to withholding under section 1441 of
the Code.
-Payments to partnerships not engaged in a trade or business in the United
States and which have at least one nonresident partner.
-Payments of patronage dividends where the amount received is not paid in
money.
-Payments made by certain foreign organizations.
-Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
-Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
-Payments of tax-exempt interest (including exempt-interest dividends under
section 852 of the Code).
-Payments described in section 6049(b)(5) of the Code to non-resident
aliens.
-Payments on tax-free covenant bonds under section 1451 of the Code.
-Payments made by certain foreign organizations.
<PAGE>
-Payments made to a nominee.
EXEMPT PAYEES DESCRIBED ABOVE MUST STILL COMPLETE THE SUBSTITUTE FORM W-9
ENCLOSED HEREWITH TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE
SUBSTITUTE FORM W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER
IDENTIFICATION NUMBER ON PART III OF THE FORM, WRITE "EXEMPT" ON THE FACE OF THE
FORM AND SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044,
6045, 6049, 6050A, and 605ON of the Code and their regulations.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. Payers must be
given the numbers whether or not recipients are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividends, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
<PAGE>
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within sixty (60) days, 31%
of all payments with respect to the Old Notes or the New Notes made to me
thereafter will be withheld until I provide a number.
SIGNATURE ______________________________________ Date __________________________
