THIS SOLICITATION IS BEING CONDUCTED TO OBTAIN SUFFICIENT ACCEPTANCES OF A
PLAN OF REORGANIZATION BEFORE FILING OF A VOLUNTARY REORGANIZATION CASE
UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE. BECAUSE A CHAPTER
11 CASE HAS NOT YET BEEN COMMENCED, THIS DISCLOSURE STATEMENT HAS NOT BEEN
APPROVED BY THE BANKRUPTCY COURT AS CONTAINING ADEQUATE INFORMATION WITHIN
THE MEANING OF SECTION 1125(a) OF THE BANKRUPTCY CODE. FOLLOWING THE
COMMENCEMENT OF ITS CHAPTER 11 CASE, UNITED STATES LEATHER, INC. EXPECTS
PROMPTLY TO SEEK ORDERS OF THE BANKRUPTCY COURT (I) APPROVING THIS
DISCLOSURE STATEMENT AS CONTAINING ADEQUATE INFORMATION AND THE
SOLICITATION OF VOTES AS BEING IN COMPLIANCE WITH SECTION 1126(b) OF THE
BANKRUPTCY CODE, AND (II) CONFIRMING ITS PLAN OF REORGANIZATION.
DISCLOSURE STATEMENT,
Dated March 31, 1998
Prepetition Solicitation of Ballots
With Respect to
The Financial Restructuring (the "Restructuring")
of
UNITED STATES LEATHER, INC.
("USL")
To the holders of United States Leather, Inc.'s
10.25% Senior Notes, due 2003, and
shares of common stock of United States Leather, Inc.,
Through a Prepackaged Chapter 11
Plan of Reorganization
This Disclosure Statement, the appendices and exhibits hereto,
the accompanying forms of Ballot, and the related materials delivered
herewith are being furnished by USL pursuant to section 1126(b) of the
United States Bankruptcy Code, in connection with the solicitation by it
of acceptances of the proposed plan of reorganization described herein
(the "Plan"). USL is soliciting such acceptances from all creditors and
holders of USL Common Stock that would be impaired under the Plan.
This prepetition solicitation of Ballots will expire at 5:00
p.m., Central Daylight Time, on May 6, 1998 (the "Voting Deadline"),
unless extended. Ballots to accept or reject the Plan may be revoked at
any time prior to the earlier of (i) the commencement of a reorganization
case under Chapter 11 of the Bankruptcy Code, and (ii) 5:00 p.m., Central
Daylight Time, on the Voting Deadline. Thereafter, Ballots may be revoked
only with the approval of the Bankruptcy Court.
THE NOTEHOLDERS AND STOCKHOLDERS SOLICITED HEREBY ARE ENCOURAGED
TO READ AND CONSIDER CAREFULLY ALL THE INFORMATION SET FORTH IN THIS
DISCLOSURE STATEMENT BEFORE SUBMITTING BALLOTS PURSUANT TO THE
SOLICITATION.
NO UNITED STATES BANKRUPTCY COURT HAS APPROVED THIS DISCLOSURE
STATEMENT OR THE MERITS OF THE CHAPTER 11 PLAN OF REORGANIZATION DESCRIBED
HEREIN.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT, THE LIQUIDATION ANALYSIS APPENDED HERETO AS EXHIBIT B, AND THE
FINANCIAL PROJECTIONS APPENDED HERETO AS EXHIBIT C IS BY ITS NATURE
FORWARD-LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS THAT
MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE RESULTS. (SEE "FORWARD-
LOOKING STATEMENTS.")
This Disclosure Statement is being furnished to each creditor of
USL known by USL to hold a claim against USL that would be impaired under
the Plan and each holder of USL Common Stock. This Disclosure Statement
is to be used solely by each such holder in connection with its evaluation
of the Plan. Use of this Disclosure Statement for any other purpose is
not authorized. Without the prior written consent of USL, this Disclosure
Statement may not be reproduced or provided to others (other than to those
advisors of a holder of an impaired Claim or Interest who need to know
such information in order to assist such holder in its evaluation of the
Plan).
USL has not commenced a case under Chapter 11 of the Bankruptcy
Code as of the date of this Disclosure Statement. In the event, however,
that USL receives properly completed Ballots (which are not timely
revoked) indicating acceptance of the Plan in sufficient number and amount
to meet the voting requirements prescribed by section 1126 of the
Bankruptcy Code, USL intends to file with the Bankruptcy Court a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code and to
seek as promptly thereafter as is practicable confirmation by the
Bankruptcy Court of the Plan. Consummation of the Plan is expected to
occur shortly following the entry of an order of confirmation (the
"Confirmation Order") of the Plan by the Bankruptcy Court.
The Board of Directors of USL has unanimously approved this
Disclosure Statement, the Solicitation, the Plan, and all the transactions
contemplated hereby and thereby and recommends that all impaired creditors
and all holders of USL Common Stock submit Ballots accepting the Plan and
the transactions contemplated thereby.
The Plan provides, among other things, for the cancellation of
all outstanding shares of USL Common Stock and the issuance of 10,000,000
shares of Reorganized USL common stock to be issued under the Plan (the
"New Common Stock"). Holders of USL's 10.25% Senior Notes, due 2003 (the
"Notes"), will receive 9,700,000 shares of New Common Stock in exchange
for the Notes. Based upon the outstanding principal balance of the Notes,
each such holder will receive 74.61538 shares of New Common Stock for each
$1,000 of principal amount of Notes owned by such holder (rounded to the
nearest whole number of shares). Holders of USL Common Stock will receive
300,000 shares of New Common Stock. Based upon the number of shares of
USL Common Stock expected to be outstanding as of the Petition Date, each
such holder will receive 100 shares of New Common Stock for each share of
USL Common Stock owned by such holder. The total voting power of
Noteholders and Stockholders is subject to dilution in the event that the
Post-Restructuring Board implements a Management Stock Incentive Program,
which is authorized under the Plan and which would allow up to 1,000,000
additional shares of New Common Stock to be issued for management stock
options. (For information about the Management Stock Incentive Program,
see section VII.D. "Certain Factors to Be Considered Potential
Dilution of Noteholder and Stockholder Voting Power as a Result of
Management Stock Incentive Program.")
DURING THE PENDENCY OF ANY BANKRUPTCY CASE THAT WILL BE FILED IN
CONNECTION WITH THE RESTRUCTURING, USL INTENDS TO REMAIN IN POSSESSION OF
AND TO OPERATE ITS BUSINESS IN THE ORDINARY COURSE AND (SUBJECT TO THE
APPROVAL OF THE BANKRUPTCY COURT) TO MAKE PAYMENT IN FULL ON A TIMELY
BASIS TO ALL OF ITS UNDISPUTED SECURED CREDITORS, TRADE CREDITORS, AND
EMPLOYEES. USL's secured creditors, trade creditors, and employees will
be unimpaired under the Plan, and USL intends to pay all allowed
prepetition claims of such creditors and employees in full. (See section
VI.B. C "Summary of the Plan C Treatment of the Classes Under the Plan.")
Members of an informal committee of holders of the Notes (the
"Informal Noteholders' Committee") have participated in the negotiation of
the proposed terms of the Plan, including the terms and distribution of
the New Common Stock among Noteholders and Stockholders. Counsel to the
Informal Noteholders' Committee has advised USL that members of the
Informal Noteholders' Committee and other Noteholders, collectively
holding over 50% of the outstanding principal amount of the Notes, have
indicated that they currently intend to approve the terms of the Plan
based on the information available to them as of the date hereof.
The Informal Noteholders' Committee has retained Wachtell,
Lipton, Rosen & Katz ("Wachtell, Lipton") as its legal adviser. USL is
paying the fees and expenses of Wachtell, Lipton. Each member of the
Informal Noteholders' Committee is acting exclusively on its own behalf
and not as a fiduciary or representative of any other person. Counsel for
the Informal Noteholders' Committee can be contacted at:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019-6150
Attention: Chaim J. Fortgang
Phone: (212) 403-1000
Fax: (212) 403-2000
The Bankruptcy Code generally requires acceptance of the Plan by
specified percentages, voting in separate classes, of all classes of
impaired claims and interests of the debtor (the "Requisite Acceptances").
For purposes of the Bankruptcy Code, each class of impaired claims is
considered to have accepted the Plan if the Plan is accepted by creditors
in such class that hold at least two-thirds (2/3) in aggregate dollar
amount and more than one-half (1/2) in number of the allowed claims of
such class held by those creditors that have timely voted on the Plan;
each class of equity interests is considered to have accepted the Plan if
the Plan is accepted by holders of equity interests in such class that
hold at least two-thirds (2/3) in aggregate amount of the interests in
such class held by holders that have timely voted on the Plan. UNDER THE
BANKRUPTCY CODE, ONLY THE VOTES ACTUALLY CAST TO ACCEPT OR REJECT THE PLAN
WILL BE COUNTED FOR PURPOSES OF DETERMINING THE ACCEPTANCE OR REJECTION OF
THE PLAN BY ANY IMPAIRED CLASS OF CLAIMS OR INTERESTS. Accordingly, the
Plan could be approved by any impaired class of claims with the
affirmative vote of significantly less than two-thirds in amount and one-
half in number of the claims of such class. If the Requisite Acceptances
are received, the Bankruptcy Court is otherwise satisfied that the
Solicitation and the Plan conform to the requirements of the Bankruptcy
Code, and the Plan is confirmed by the Bankruptcy Court and becomes
effective, all holders of impaired Claims and Interests (including those
who rejected or are deemed to have rejected the Plan and those who did not
submit Ballots to accept or reject the Plan) will be bound by the terms of
the Plan.
In the event that the Requisite Acceptances of any particular
Class are not received, or if received are timely revoked, in either case,
prior to the termination of the Solicitation, USL reserves the absolute
right to use any and all Ballots accepting the Plan that were received
pursuant to the Solicitation, and not timely revoked, to seek Confirmation
of the Plan (or of any modification thereof that does not adversely affect
the treatment of the Classes of Claims or Interests with respect to which
such Ballots were cast) pursuant to section 1129(b) of the Bankruptcy
Code.
NO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER FEDERAL OR STATE SECURITIES LAWS HAS
BEEN MADE BY USL WITH RESPECT TO ANY OF THE NEW SECURITIES CONTEMPLATED BY
THE PLAN THAT MAY BE DEEMED TO BE OFFERED BY VIRTUE OF THE SOLICITATION.
USL IS RELYING ON SECTIONS 3(a)(9) AND 4(2) OF THE SECURITIES ACT AND
SIMILAR STATE LAW PROVISIONS, AND/OR SECTION 1145(a) OF THE BANKRUPTCY
CODE TO EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAW THE OFFER OF ANY NEW SECURITIES THAT MAY
BE DEEMED TO BE MADE PURSUANT TO THE SOLICITATION.
THE NEW SECURITIES TO BE ISSUED PURSUANT TO THE PLAN WILL NOT BE
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION")
UNDER THE SECURITIES ACT OR UNDER ANY STATE SECURITIES OR "BLUE SKY" LAWS.
SUCH NEW SECURITIES WILL BE ISSUED IN RELIANCE UPON THE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS PROVIDED BY SECTION 1145(a) OF THE BANKRUPTCY CODE. TO THE EXTENT
SECTION 1145(a) DOES NOT SO EXEMPT THIS SOLICITATION OR SUCH ISSUANCE,
REORGANIZED USL WILL RELY ON EXEMPTIONS PROVIDED BY SECTIONS 3(a)(9) AND
4(2) OF THE SECURITIES ACT AND ON SIMILAR STATE LAW PROVISIONS. (SEE
SECTION XI. C "APPLICABILITY OF CERTAIN SECURITIES LAWS.")
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR
OWN EXAMINATION OF USL AND THE TERMS OF THE PLAN, INCLUDING THE MERITS AND
RISKS INVOLVED. NEITHER THE PLAN NOR THE NEW COMMON STOCK TO BE ISSUED
PURSUANT TO THE PLAN HAVE BEEN APPROVED OR DISAPPROVED BY ANY BANKRUPTCY
COURT, BY THE COMMISSION, OR BY ANY STATE SECURITIES COMMISSION, OR
SIMILAR PUBLIC, GOVERNMENTAL, OR REGULATORY AUTHORITY, NOR HAS ANY
BANKRUPTCY COURT, THE COMMISSION, OR ANY SUCH STATE SECURITIES COMMISSION
OR OTHER AUTHORITY PASSED UPON THE FAIRNESS OR MERITS OF THE PLAN OR UPON
THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS OR MAY BE A CRIMINAL
OFFENSE.
No person has been authorized to give any information or make
any representation with respect to USL or the Plan that is not contained
in this Disclosure Statement. If any such information or representation
is given or made, it must not be relied upon. The statements contained in
this Disclosure Statement are made as of the date hereof, and neither
delivery of this Disclosure Statement nor any exchange or issuance of New
Common Stock pursuant to the Plan will, under any circumstances, create
any implication that the information contained herein is correct at any
time subsequent to the date hereof.
Holders of impaired Claims and Interests should not construe the
contents of this Disclosure Statement as providing any legal, business,
financial, or tax advice. Each such holder should consult with its own
legal, business, financial, and tax advisors with respect to any such
matters concerning this Disclosure Statement, the Solicitation, the Plan,
and the transactions contemplated hereby and thereby.
FORWARD-LOOKING STATEMENTS
THIS DISCLOSURE STATEMENT INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS DISCLOSURE STATEMENT, INCLUDING, WITHOUT LIMITATION, PROJECTIONS
AND STATEMENTS REGARDING USL'S FUTURE FINANCIAL POSITION, BUSINESS
STRATEGY, BUDGETS, PROJECTED COSTS, AND PLANS AND OBJECTIVES OF MANAGEMENT
FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "EXPECT," "INTEND,"
"ESTIMATES," "ANTICIPATE," "BELIEVE," "SHOULD," "PLANS," OR "CONTINUE," OR
THE NEGATIVE THEREOF, OR VARIATIONS THEREON, OR SIMILAR TERMINOLOGY.
WITHOUT LIMITING THE FOREGOING, FORWARD-LOOKING STATEMENTS ARE SET FORTH
HEREIN UNDER THE CAPTIONS "BUSINESS AND OPERATIONS OF USL," "ANTICIPATED
EVENTS BEFORE AND DURING THE CHAPTER 11 CASE," "APPENDIX B UNITED STATES
LEATHER, INC. LIQUIDATION ANALYSIS," AND "APPENDIX C UNITED STATES
LEATHER, INC. PROJECTED FINANCIAL DATA." ALTHOUGH USL BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE,
IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN
CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM USL'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED
UNDER "CERTAIN FACTORS TO BE CONSIDERED" AND ELSEWHERE IN THIS DISCLOSURE
STATEMENT. ALL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE
TO USL, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF WISCONSIN
In re:
United States Leather, Inc.,
a Wisconsin corporation, Case No. __________________
Honorable _________________
Chapter 11
Debtor.
Employer ID No. 13-3503310
DISCLOSURE STATEMENT DATED MARCH 31, 1998.
Thomas L. Shriner, Jr.
Andrew J. Wronski
Foley & Lardner
777 E. Wisconsin Avenue
Milwaukee, WI 53202-5367
Telephone: (414) 271-2400
Fax: (414) 297-4900
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . v
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Summary of the Plan . . . . . . . . . . . . . . . . . . . . . 1
B. Summary of Post-Consummation Operations . . . . . . . . . . . 3
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DISCLOSURE STATEMENT WITH RESPECT TO USL'S PLAN OF
REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A. Notice to Holders of Claims and Interests . . . . . . . . . . 14
B. Solicitation Package . . . . . . . . . . . . . . . . . . . . 15
C. Voting Procedures, Ballots, and Voting Deadlines (for Holders of
Impaired Claims) . . . . . . . . . . . . . . . . . . . . . . 16
D. USL's Legal and Financial Advisors . . . . . . . . . . . . . 17
II. COMPONENTS AND SUMMARY EXPLANATION OF THE PLAN . . . . . . . . . . 18
A. Distribution of New Common Stock . . . . . . . . . . . . . . 18
B. Consequences of the Plan on Holders of Impaired Claims and
Interests . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1. Consequences of Plan on Noteholders . . . . . . . . . . 18
2. Consequences of Plan on Holders of USL Common Stock . . 19
C. Consequences of Plan on Holders of Trade Claims . . . . 19
III. KEY EVENTS LEADING TO THE SOLICITATION AND DECISION TO COMMENCE
A CHAPTER 11 REORGANIZATION . . . . . . . . . . . . . . . . . 19
A. The Leveraged Buyout . . . . . . . . . . . . . . . . . . 19
B. The 1996 Holding Company Recapitalization . . . . . . . 19
C. Liquidity Problems . . . . . . . . . . . . . . . . . . . 20
D. Formation of, and Negotiations with, the Informal
Noteholders' Committee . . . . . . . . . . . . . . . . . 21
E. The Banks, the Refinancing, and the Prepetition Credit
Facility . . . . . . . . . . . . . . . . . . . . . . . . 22
IV. BUSINESS AND OPERATIONS OF USL . . . . . . . . . . . . . . . 24
A. General Information . . . . . . . . . . . . . . . . . . 24
B. The Leather Manufacturing Process . . . . . . . . . . . 25
C. Sales . . . . . . . . . . . . . . . . . . . . . . . . . 26
1. Furniture Group . . . . . . . . . . . . . . . . . . . . 26
2. Footwear and Specialty Leather Group . . . . . . . . . . 27
3. Automotive Group . . . . . . . . . . . . . . . . . . . . 28
4. International Sales . . . . . . . . . . . . . . . . . . 28
5. Major Customers . . . . . . . . . . . . . . . . . . . . 29
6. Other . . . . . . . . . . . . . . . . . . . . . . . . . 29
D. Raw Materials . . . . . . . . . . . . . . . . . . . . . 29
E. Research and Development . . . . . . . . . . . . . . . . 30
F. Employees . . . . . . . . . . . . . . . . . . . . . . . 30
G. Properties . . . . . . . . . . . . . . . . . . . . . . . 31
H. Legal Proceedings . . . . . . . . . . . . . . . . . . . 32
I. Business and Operations of Reorganized USL . . . . . . . 32
V. ANTICIPATED EVENTS BEFORE AND DURING THE CHAPTER 11 CASE . . 32
A. Merger of New Holding Company and USLH Into USL . . . . 32
B. Commencement of the Chapter 11 Case . . . . . . . . . . 33
C. Administration of the Chapter 11 Case . . . . . . . . . 33
D. Creditors' Committee . . . . . . . . . . . . . . . . . . 33
E. DIP Credit Facility and Emergence Credit Facility . . . 33
F. Confirmation Hearing . . . . . . . . . . . . . . . . . . 34
G. Bar Date . . . . . . . . . . . . . . . . . . . . . . . . 34
VI. SUMMARY OF THE PLAN . . . . . . . . . . . . . . . . . . . . . 35
A. Overall Structure of the Plan . . . . . . . . . . . . . 35
B. Treatment of the Classes Under the Plan . . . . . . . . 36
C. Treatment of Trade Creditors and Employees Under
the Plan . . . . . . . . . . . . . . . . . . . . . . . 40
1. Provisions for Trade Creditors . . . . . . . . . . . . . 40
2. Provisions for Employees . . . . . . . . . . . . . . . . 40
D. Post-Restructuring Board . . . . . . . . . . . . . . . . 41
E. Restated Articles of Incorporation and By-Laws . . . . . 41
F. Procedures Pertaining to Distributions . . . . . . . . . 41
G. Corporate Action . . . . . . . . . . . . . . . . . . . . 42
H. Retiree Benefits . . . . . . . . . . . . . . . . . . . . 42
I. Executory Contracts and Unexpired Leases . . . . . . . . 42
1. Executory Contracts and Unexpired Leases Assumed
Unless Specifically Rejected . . . . . . . . . . . . . . 43
2. Officers' and Directors' Indemnification Rights . . . . 43
3. Compensation and Benefit Programs . . . . . . . . . . . 43
J. Conditions Precedent to the Effective Date . . . . . . . 44
K. Effects of Plan Confirmation . . . . . . . . . . . . . . 46
1. Discharge of USL . . . . . . . . . . . . . . . . . . . . 46
2. Revesting . . . . . . . . . . . . . . . . . . . . . . . 46
3. Injunction . . . . . . . . . . . . . . . . . . . . . . . 46
4. Releases . . . . . . . . . . . . . . . . . . . . . . . . 46
L. Exculpation . . . . . . . . . . . . . . . . . . . . . . 48
M. Retention of Jurisdiction . . . . . . . . . . . . . . . 48
N. Amendments to Plan/Revocation or Withdrawal . . . . . . 48
VII. CERTAIN FACTORS TO BE CONSIDERED . . . . . . . . . . . . . . 49
A. General Considerations . . . . . . . . . . . . . . . . . 49
B. Certain Bankruptcy Considerations . . . . . . . . . . . 49
C. Inherent Uncertainty of Financial Projections . . . . . 49
D. Potential Dilution of Noteholder and Stockholder Voting
Power as a Result of Management Stock Incentive Program 50
E. Market for New Common Stock . . . . . . . . . . . . . . 51
F. Competition . . . . . . . . . . . . . . . . . . . . . . 51
G. Environmental Matters . . . . . . . . . . . . . . . . . 52
1. Toronto, Ontario Facility . . . . . . . . . . . . . . . 53
2. Wastewater Discharges . . . . . . . . . . . . . . . . . 53
3. Off-Site Liabilities . . . . . . . . . . . . . . . . . . 54
H. Financial Condition of USL . . . . . . . . . . . . . . . 56
I. Disruption of Operations . . . . . . . . . . . . . . . . 57
J. Considerations Relating to Acceptance of the Plan . . . 58
1. Risk of Non-Confirmation of the Plan . . . . . . . . . . 58
2. Risk That Plan Will Not Be Consummated . . . . . . . . . 58
VIII. ALTERNATIVES TO THE PLAN . . . . . . . . . . . . . . . . . . 59
IX. CONFIRMATION OF THE PLAN . . . . . . . . . . . . . . . . . . 59
A. Disclosure and Solicitation . . . . . . . . . . . . . . 59
B. Acceptance of the Plan . . . . . . . . . . . . . . . . . 60
C. Best-Interests Test . . . . . . . . . . . . . . . . . . 61
D. Financial Feasibility . . . . . . . . . . . . . . . . . 63
E. Estimated Expense of Administration . . . . . . . . . . 63
X. DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . 63
A. General . . . . . . . . . . . . . . . . . . . . . . . . 63
B. New Common Stock . . . . . . . . . . . . . . . . . . . . 64
C. Preferred Stock . . . . . . . . . . . . . . . . . . . . 64
D. Certain Statutory Provisions . . . . . . . . . . . . . . 64
E. Restated Articles of Incorporation and Restated By-Laws 65
XI. APPLICABILITY OF CERTAIN SECURITIES LAWS . . . . . . . . . . 66
A. Initial Issuance of New Common Stock . . . . . . . . . . 66
B. Resale of New Common Stock . . . . . . . . . . . . . . . 66
XII. VOTING REQUIREMENTS AND PROCEDURES . . . . . . . . . . . . . 68
A. Voting on the Plan . . . . . . . . . . . . . . . . . . . 68
1. Who May Vote . . . . . . . . . . . . . . . . . . . . . . 68
2. Voting Procedures for Holders of Impaired Claims and
Interests on the Record Date . . . . . . . . . . . . . . 68
3. Beneficial Owners of Notes . . . . . . . . . . . . . . . 69
4. Brokerage Firms, Banks, and Other Nominees . . . . . . . 70
5. Voting Deadline and Extensions . . . . . . . . . . . . . 70
6. Withdrawal or Change of Votes on the Plan . . . . . . . 70
B. Surrender of Notes . . . . . . . . . . . . . . . . . . . 71
XIII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . 71
A. Federal Income Tax Consequences to USL . . . . . . . . . 71
1. Discharge of Indebtedness . . . . . . . . . . . . . . . 71
2. Use of Tax Attributes . . . . . . . . . . . . . . . . . 72
B. Federal Income Tax Consequences to Holders of Claims . . 73
1. Holders of Unimpaired Claims . . . . . . . . . . . . . . 73
2. Holders of Notes . . . . . . . . . . . . . . . . . . . . 73
XIV. MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 75
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
EXECUTIVE SUMMARY
United States Leather, Inc. ("USL") has not yet commenced a case
under Chapter 11 of the United States Bankruptcy Code as of the date of
this Disclosure Statement. USL is conducting this prepetition
Solicitation in order to obtain sufficient acceptances of a plan of
reorganization (the "Plan") before filing a Chapter 11 case. The Plan,
which is included herewith as Appendix A, sets forth how Claims against
and Interests in USL will be treated following USL's emergence (as
"Reorganized USL") from Chapter 11. This Disclosure Statement describes
certain aspects of the Plan, USL's business operations, significant events
precipitating the proposed Restructuring, and related matters. This
Executive Summary is intended solely as a summary of the distribution
provisions of the Plan and certain matters relating to USL's business.
FOR A COMPLETE UNDERSTANDING OF THE PLAN, YOU SHOULD READ THE DISCLOSURE
STATEMENT, THE PLAN, AND THE EXHIBITS AND SCHEDULES THERETO IN THEIR
ENTIRETY.
A. Summary of the Plan
The principal purpose of the Plan is to effectuate a
deleveraging of USL whereby approximately $139 million of principal and
interest owed by USL to holders of its 10.25% Senior Notes, due 2003 (the
"Notes"), will be converted to equity. Specifically, in exchange for a
discharge of USL's debt obligations under the Notes, USL will distribute
to the holders of the Notes 97% of the common stock of Reorganized USL
(the "New Common Stock") (subject to dilution if and when the Management
Stock Incentive Program is implemented). The Plan is the product of
months of negotiations with an informal committee of holders of the Notes
(the "Informal Noteholders' Committee") and has the support of the members
of that committee and other Noteholders, who, in the aggregate, are
believed to hold more than one-half in principal amount of the Notes. It
is contemplated that, except for the Claims of present and former holders
of the Notes, no creditors of USL holding Allowed Claims will be affected
or impaired by the Chapter 11 Case. The Plan impairs holders of USL
Common Stock as they will receive only 3% of the New Common Stock of
Reorganized USL (subject to dilution if and when the Management Stock
Incentive Program is implemented).
Under the Plan, Claims against and Interests in USL are divided
into seven Classes. (Administrative Expense Claims, in accordance with
section 1123(a)(1) of the Bankruptcy Code, have not been classified.) All
other Claims and all Interests are classified and will receive the
distributions and recoveries described in the table below.
The table summarizes the classification and treatment of the
prepetition Claims and Interests under the Plan. The classification and
treatment for all Classes are described in more detail in section VI.B.
"Summary of the Plan Treatment of the Classes Under the Plan." This
summary is qualified in its entirety by reference to the provisions of the
Plan, a copy of which is attached as Appendix A hereto.
Class Description Treatment Under the Plan
Class 1 Priority Tax Claims - Not impaired
(if any)
- A holder of an Allowed Class
1 Claim will receive (i) Cash
equal to the amount of such
Allowed Class 1 Claim or (ii)
such other treatment as to
which USL and such holder will
have agreed in writing.
Class 2 Other Priority Claims - Not impaired
(if any)
- A holder of an Allowed Class
2 Claim will receive (i) Cash
equal to the amount of such
Allowed Class 2 Claim or (ii)
such other treatment as to
which USL and such holder will
have agreed in writing.
Class 3 Miscellaneous Secured - Not impaired
Claims (if any)
- A holder of an Allowed Class
3 Claim will be entitled, at
USL's option, to (i) receive
the allowed amount of such
Claim in full and in Cash, (ii)
have all its legal, equitable,
and contractual rights with
respect to its Allowed Class 3
Claim Reinstated, (iii) have
its collateral, to the extent
it secures the payment
obligations of USL to such
holder, returned to it, or (iv)
receive such other treatment as
to which USL and such holder
will have agreed in writing.
Class 4 Prepetition Credit - Not impaired
Agreement Claims
- A holder of an Allowed Class
4 Claim will be paid in full in
Cash the amount of its Allowed
Class 4 Claim on the Effective
Date.
Class 5 Note Claims - Impaired
- A holder of an Allowed Class
5 Claim will receive its pro
rata share of the 9,700,000
shares of New Common Stock to
be distributed to Noteholders
under the Plan.
Class 6 General Unsecured - Not impaired
Claims Against USL (which
includes claims of trade - A holder of an Allowed Class
creditors) 6 Claim will be paid in the
ordinary course of USL's
business and, accordingly, will
not be entitled to receive any
distribution under the Plan.
Such Allowed Claims, if not so
paid during the pendency of the
Chapter 11 Case, will be
Reinstated and paid in the
ordinary course of business
pursuant to the terms of the
applicable invoice or agreement
(if any) relating to such
Claims or as otherwise required
by applicable non-bankruptcy
law.
Class 7 Interests in Respect - Impaired
of USL Common Stock
- A holder of an Allowed 7
Interest will receive its pro
rata share of the 300,000
shares of New Common stock to
be distributed to Stockholders
under the Plan.
After careful review of USL's current business operations,
estimated recoveries in a liquidation scenario, and prospects as an
ongoing business, USL has concluded that the recovery to holders of Claims
and Interests will be maximized by USL's continued operation as a going
concern. USL believes that its business and assets have significant value
that would not be realized by liquidating USL either in whole or in
substantial part.
B. Summary of Post-Consummation Operations
As a result of Confirmation and Consummation of the Plan, USL
(as Reorganized USL) will continue to operate as an independent business.
Included herein as Appendix C is projected financial information that
forecasts the financial performance of Reorganized USL through December
31, 2000. These projections are based on the current business plan for
Reorganized USL. The ongoing post-Consummation operations of Reorganized
USL will be financed through the Prepetition Credit Facility. (See
section III.E "Key Events Leading to the Solicitation and Decision to
Commence a Chapter 11 Reorganization The Banks, the Refinancing, and the
Prepetition Credit Facility.")
DISCLAIMER
ALL NOTEHOLDERS AND STOCKHOLDERS ARE ADVISED AND ENCOURAGED TO
READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE
VOTING TO ACCEPT OR REJECT THE PLAN. PLAN SUMMARIES AND STATEMENTS MADE
IN THIS DISCLOSURE STATEMENT, INCLUDING THE PRECEDING EXECUTIVE SUMMARY,
ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN, OTHER EXHIBITS
AND APPENDICES ANNEXED TO THE PLAN, AND THIS DISCLOSURE STATEMENT AS A
WHOLE. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE
ONLY AS OF THE DATE HEREOF, AND THERE CAN BE NO ASSURANCE THAT THE
STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER THE DATE
HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH
SECTION 1126(b) OF THE BANKRUPTCY CODE AND RULE 3018(b) OF THE FEDERAL
RULES OF BANKRUPTCY PROCEDURE. THIS DISCLOSURE STATEMENT HAS NOT BEEN
APPROVED OR DISAPPROVED BY ANY BANKRUPTCY COURT OR BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), NOR HAS ANY BANKRUPTCY COURT OR
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS
CONTAINED HEREIN. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING,
SELLING, OR TRANSFERRING SECURITIES OF USL SHOULD NOT RELY UPON THIS
DISCLOSURE STATEMENT FOR SUCH PURPOSES AND SHOULD EVALUATE THIS DISCLOSURE
STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH THEY WERE
PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS, AND OTHER
ACTIONS OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT
CONSTITUTE OR BE CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY,
STIPULATION, OR WAIVER, BUT RATHER AS A STATEMENT MADE IN SETTLEMENT
NEGOTIATIONS.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS
INCLUDED HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN AND MAY
NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE ON
THE PLAN. THE DESCRIPTION SET FORTH HEREIN OF THE ACTIONS, CONCLUSIONS,
OR RECOMMENDATIONS OF USL OR ANY OTHER PARTY IN INTEREST HAVE BEEN
SUBMITTED TO OR APPROVED BY SUCH PARTY, BUT NO SUCH PARTY (OTHER THAN USL)
MAKES ANY REPRESENTATION REGARDING SUCH DESCRIPTIONS.
THIS DISCLOSURE STATEMENT SHALL NOT BE ADMISSIBLE IN ANY NON-
BANKRUPTCY PROCEEDING INVOLVING USL OR ANY OTHER PARTY.
HOLDERS OF IMPAIRED CLAIMS AND INTERESTS SHOULD NOT CONSTRUE THE
CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS,
FINANCIAL, OR TAX ADVICE. EACH SUCH HOLDER SHOULD CONSULT WITH ITS OWN
LEGAL, BUSINESS, FINANCIAL, AND TAX ADVISORS WITH RESPECT TO ANY SUCH
MATTERS CONCERNING THIS DISCLOSURE STATEMENT, THE SOLICITATION, THE PLAN,
AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY.
DEFINITIONS
Rules of Interpretation. As used herein, the following terms
have the respective meanings specified below, and such meanings shall be
equally applicable to both the singular and plural, and masculine and
feminine, forms of the terms defined. Captions and headings to articles,
sections, and exhibits are inserted for convenience of reference only, and
they are not intended to be part of or to affect the interpretation of
this Disclosure Statement. The rules of construction set forth in section
102 of the Bankruptcy Code shall apply. Any capitalized term used herein
that is not defined herein but that is defined in the Bankruptcy Code or
in the Plan shall have the meaning ascribed to that term in the Bankruptcy
Code or in the Plan.
1. Administrative Expense Claim means a Claim for payment of
an administrative expense of a kind specified in section 503(b) of the
Bankruptcy Code and entitled to priority pursuant to section 507(a)(1) of
the Bankruptcy Code, including, without limitation, any Claims of the
Prepetition Lenders or the Banks arising under the DIP Credit Facility,
the actual, necessary costs and expenses incurred after the Petition Date
of preserving the Estate and operating the business of USL, including
wages, salaries, or commissions for services rendered after the
commencement of the Chapter 11 Case, Professional Fees, and all fees and
charges assessed against the Estate under section 1930 of title 28 of the
United States Code.
2. Allowed means (i) with respect to a Claim (other than an
Administrative Expense Claim), any such Claim, proof of which was timely
and properly filed or, if no proof of claim was filed, that has been or
hereafter is listed by USL on its Schedules as liquidated in amount and
not disputed or contingent, and, in either case, a Claim as to which no
objection to the allowance thereof, or motion to estimate for purposes of
allowance, shall have been filed on or before any applicable period of
limitation that may be fixed by the Bankruptcy Code, the Bankruptcy Rules,
or the Bankruptcy Court, or as to which any objection, or any motion to
estimate for purposes of allowance, shall have been so filed, to the
extent allowed by a Final Order; and (ii) with respect to an
Administrative Expense Claim, any such Administrative Expense Claim as to
which no objection to the allowance thereof has been interposed on or
before any applicable period of limitation that may be fixed by the
Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court, or as to
which any objection has been so interposed, to the extent allowed by a
Final Order. Except as otherwise provided in the Plan, no amounts
accruing from and after the Petition Date, including, without limitation,
principal, interest, fees, and expenses, shall be Allowed with respect to
any Claim.
3. Allowed Class . . . Claim means an Allowed Claim in the
particular Class described.
4. Ballot means (i) the form of master ballot provided for use
by brokers, banks, proxy intermediaries, or other nominees that hold Notes
as of record on behalf of one or more beneficial owners, (ii) the form of
ballot provided to beneficial owners of Notes in order to permit such
holders to vote on the Plan, and (iii) the form of ballot provided to
beneficial owners of USL Common Stock in order to permit such holders to
vote on the Plan.
5. Bankruptcy Code means the Bankruptcy Reform Act of 1978, as
amended from time to time, as applicable to the Chapter 11 Case, set forth
in sections 101 et seq. of title 11 of the United States Code.
6. Bankruptcy Court means the United States Bankruptcy Court
for the Eastern District of Wisconsin, or such other court that exercises
jurisdiction over the Chapter 11 Case or any proceeding therein, including
the United States District Court for the Eastern District of Wisconsin, to
the extent reference of the Chapter 11 Case or any proceeding therein is
withdrawn.
7. Bankruptcy Rules means the Federal Rules of Bankruptcy
Procedure, as amended from time to time, as applicable to the Chapter 11
Case, including the local rules and standing orders of the Bankruptcy
Court.
8. Banks means any banks or other lenders, other than the
Prepetition Lenders, that may extend, or become parties to agreements,
instruments, or other documents extending, the DIP Credit Facility or the
Emergence Credit Facility.
9. Bar Date has the meaning given in section 7.14 of the Plan.
10. Business Day means a day other than a Saturday, Sunday, or
other day on which banks in New York, New York are authorized or required
by law to be closed.
11. Cash means legal tender of the United States or its
equivalent.
12. Chapter 11 Case means the case under chapter 11 of the
Bankruptcy Code with respect to the USL, to be filed in the Bankruptcy
Court and administered as In re United States Leather, Inc.
13. Claim means a claim against USL, whether or not asserted,
as defined in section 101(5) of the Bankruptcy Code, including, without
limitation, (a) any right to payment from USL arising before the
Confirmation Date, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured or (b) any right to an
equitable remedy against USL for breach of performance if such breach
gives rise to a right of payment from USL, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured, or unsecured.
14. Class means a category of holders of Claims or Interests as
described in Article III of the Plan.
15. Commission means the Securities and Exchange Commission.
16. Confirmation means confirmation of the Plan pursuant to
section 1129 of the Bankruptcy Code.
17. Confirmation Date means the date on which the Confirmation
Order is entered on the docket of the Bankruptcy Court.
18. Confirmation Hearing means the hearing on confirmation of
the Plan under section 1128 of the Bankruptcy Code.
19. Confirmation Order means the order of the Bankruptcy Court
confirming the Plan in accordance with the provisions of chapter 11 of the
Bankruptcy Code.
20. Consummation means the satisfaction of all conditions to
the consummation of the Plan set forth in sections 11.01 and 11.02 of the
Plan or the waiver of such conditions as provided in section 11.03 of the
Plan.
21. Creditors' Committee means the official committee of
unsecured creditors appointed in the Chapter 11 Case by the United States
Trustee, if any, pursuant to section 1102 of the Bankruptcy Code, as
modified by the addition or removal of members from time to time.
22. Cure means the distribution of Cash, or such other property
as may be agreed upon by the parties and ordered by the Bankruptcy Court,
with respect to the assumption of an executory contract or unexpired
lease, pursuant to section 365(b) of the Bankruptcy Code, in an amount
equal to all unpaid monetary obligations, without interest, or such other
amount as may be agreed upon by the parties, under such executory contract
or unexpired lease, to the extent such obligations are enforceable under
the Bankruptcy Code and applicable non-bankruptcy law.
23. Debtor means USL, on and after the Petition Date, as debtor
and debtor-in-possession.
24. DIP Credit Facility means the revolving credit facility to
be provided to the Debtor pursuant to section 364 of the Bankruptcy Code
by either (i) the Banks, on such terms and conditions as to which the
Banks and the Debtor may agree or (ii) the Prepetition Lenders,
substantially in accordance with the terms set forth in Exhibit A-1 to the
Prepetition Credit Agreement, or such other terms to which the Debtor and
the Prepetition Lenders may agree, together with the agreements,
instruments, documents and orders of the Bankruptcy Court authorizing and
governing such facility.
25. Disallowed Claim means (a) a Claim, or any portion thereof,
that has been disallowed by a Final Order, or (b) a Claim as to which a
Bar Date has been established by the Bankruptcy Code, Bankruptcy Rules, or
a Final Order of the Bankruptcy Court, but no proof of Claim has been
filed or deemed timely filed with the Bankruptcy Court pursuant to either
the Bankruptcy Code, Bankruptcy Rules, or any Final Order of the
Bankruptcy Court.
26. Disclosure Statement means this Disclosure Statement of
United States Leather, Inc., dated March 31, 1998, as amended,
supplemented, or modified from time to time, pertaining to the Plan.
27. Disputed Claim means any Administrative Expense Claim,
Claim, or portion thereof, as to which USL or any other party in interest
has interposed a timely objection or request for estimation in accordance
with the Bankruptcy Code and Bankruptcy Rules, which objection or request
has not been withdrawn or determined by a Final Order or otherwise settled
as provided in section 6.02 of the Plan. As of any date of determination,
any Claim that is an Allowed Claim or a Disallowed Claim, or that has been
withdrawn, will not be considered a Disputed Claim.
28. Effective Date means the first Business Day on which all of
the conditions set forth in sections 11.01 and 11.02 of the Plan have been
satisfied or waived as provided in section 11.03 of the Plan.
29. Emergence Credit Facility means the revolving credit
facility to be provided to Reorganized USL pursuant to an agreement, to be
dated as of the Effective Date, (i) among Reorganized USL and the Banks on
such terms and conditions as to which the Banks and Reorganized USL may
agree or, as the case may be, (ii) among Reorganized USL and the
Prepetition Lenders, substantially in accordance with the terms set forth
in Exhibit A-2 to the Prepetition Credit Agreement, or such other terms as
to which Reorganized USL and the Prepetition Lenders may agree, together
with the agreements, instruments, and other documents governing such
facility.
30. Estate means the estate of USL in the Chapter 11 Case,
created pursuant to section 541 of the Bankruptcy Code.
31. Final Order means an order or judgment entered by the
Bankruptcy Court or any other court exercising jurisdiction over the
subject matter and the parties (a) that has not been reversed, stayed,
modified, or amended, (b) as to which no appeal, certiorari proceeding,
reargument, or other review or rehearing has been requested or is still
pending, and (c) as to which the time for filing a notice of appeal,
petition for certiorari, or request for reargument or further review or
rehearing shall have expired.
32. Indenture means the Indenture, dated as of August 2, 1993,
entered into by and between USL and M&I First National Bank, as trustee,
relating to the Notes.
33. Informal Noteholders' Committee means the informal and
unofficial committee of Noteholders formed prior to the commencement of
the Chapter 11 Case.
34. Informal Noteholders' Committee Expenses means the fees and
expenses outstanding on the Effective Date incurred by the Informal
Noteholders' Committee on behalf of holders of the Allowed Note Claims
(including, without limitation, the fees and expenses of counsel) in
connection with the negotiation and documentation of the Plan, the Plan-
related documents, and the Chapter 11 Case.
35. Interest means any equity interest in USL represented by
USL Common Stock.
36. New Common Stock means the common stock of Reorganized USL,
$.01 par value per share, authorized for issuance under the Plan.
37. Note Claims means all Claims directly or indirectly arising
from or under, or relating in any way to, the Notes, including Claims for
accrued but unpaid interest, and the Informal Noteholders' Committee
Expenses.
38. Notes means United States Leather, Inc.'s 10.25% Senior
Notes, due 2003.
39. Noteholders means holders of the Notes as of the Record
Date.
40. Other Priority Claim means a Claim for an amount entitled
to priority in right of payment under section 507(a)(3), (4), (5), or (6)
of the Bankruptcy Code.
41. Person means an individual, a corporation, a partnership,
an association, a joint stock company, a joint venture, an estate, a
trust, an unincorporated organization, a government or any political
subdivision thereof, or any other entity.
42. Petition Date means the date on which USL will file its
petition for relief commencing the Chapter 11 Case.
43. Plan means the plan of reorganization, substantially in the
form attached hereto as Appendix A, as the same may be amended, modified,
or otherwise supplemented from time to time.
44. Post-Restructuring Board means the Board of Directors of
Reorganized USL as of the Effective Date.
45. Prepetition Credit Agreement means the Loan and Security
Agreement, dated as of January 14, 1998, among USL and the Prepetition
Lenders, together with all agreements, instruments, and other documents
related thereto or entered into in connection therewith, each as amended,
modified, or supplemented from time to time, including, without
limitation, under Amendment No. 1 To Loan and Security Agreement.
46. Prepetition Credit Agreement Claims means all Claims of the
Prepetition Lenders arising under or related to the Prepetition Credit
Agreement, which, for purposes of the Plan, shall be deemed to be an
Allowed Claim and a Secured Claim in an amount equal to the excess of (a)
all "Obligations" (as such term is defined in the Prepetition Credit
Agreement) under the Prepetition Credit Agreement over (b) the sum of all
payments made in Cash by the Debtor to the Prepetition Lenders prior to
the Effective Date on account of such Prepetition Credit Agreement Claims
pursuant to any order of the Bankruptcy Court authorizing and approving
the DIP Credit Facility.
47. Prepetition Credit Facility means the credit facility
extended by the Prepetition Lenders to USL pursuant to the Prepetition
Credit Agreement.
48. Prepetition Lenders means BankAmerica Business Credit,
Inc., as agent and lender, PNC Bank National Association and LaSalle
Business Credit, Inc., as lenders, pursuant to the Prepetition Credit
Agreement, the DIP Credit Facility, and/or the Emergence Credit Facility,
as the case may be, and their respective successors and assigns, and any
other lenders that may become parties to any of the foregoing credit
facilities.
49. Priority Tax Claim means a Claim, other than an
Administrative Claim, of a governmental unit of the kind entitled to
priority under section 507(a)(8) of the Bankruptcy Code.
50. Professional Fees means a Claim of a professional, retained
in the Chapter 11 Case, pursuant to sections 327 and 1103 of the
Bankruptcy Code or otherwise, for compensation or reimbursement of costs
and expenses relating to services incurred prior to and including
Confirmation, when and to the extent any Claim described above is approved
by a Final Order entered pursuant to section 330, 331, 503(b), or 1103 of
the Bankruptcy Code.
51. Record Date means, with respect to the Notes, March 27,
1998 and, with respect to USL Common Stock, April 30, 1998.
52. Registration Rights Statement means the agreement, to be
entered into on or before the Effective Date and in form reasonably
acceptable to the Debtor and the Informal Noteholders' Committee, pursuant
to which Reorganized USL shall grant certain "shelf" and/or "demand"
rights with respect to registration of the New Common Stock under the
Securities Act to the holders of New Common Stock.
53. Reinstated or Reinstatement means leaving unaltered the
legal, equitable, and contractual rights to which a Claim entitles the
holder of such Claim, so as to leave such Claim unimpaired, in accordance
with section 1124 of the Bankruptcy Code, thereby entitling the holder of
such Claim to, but not more than, (a) reinstatement of the original
maturity of the obligations on which such Claim is based and (b) payment,
as provided herein, of an amount of Cash consisting solely of the sum of
(i) matured but unpaid principal installments, without regard to any
acceleration of maturity, accruing prior to the Effective Date, (ii)
accrued but unpaid interest as of the Effective Date, and (iii) reasonable
fees, expenses, and charges, to the extent such fees, expenses, and
charges are allowed under the Bankruptcy Code and are provided for in the
agreement or agreements on which such Claim is based.
54. Reorganized USL means USL from and after the Effective
Date.
55. Requisite Acceptances means, with respect to each Class of
Claims entitled to vote on the Plan, acceptance of the Plan, in the form
of a vote on a Ballot in favor of the Plan, by at least two-thirds (2/3)
in aggregate dollar amount and more than one-half (1/2) in number of the
Allowed Claims of such Class held by those holders of Claims in such Class
that have timely voted on the Plan and, with respect to each Class of
Interests entitled to vote on the Plan, acceptance of the Plan, in the
form of a vote on a Ballot in favor of the Plan, by at least two-thirds
(2/3) in aggregate amount of the Interests of such Class held by those
holders of Interests in such Class that have timely voted on the Plan.
56. Restated Articles of Incorporation means the Restated
Articles of Incorporation of United States Leather, Inc., substantially in
the form of Appendix E hereto.
57. Restated By-Laws means the By-Laws of United States
Leather, Inc., substantially in the form of Appendix F hereto.
58. Restructuring means USL's proposal, including, but not
limited to, the terms described in the Plan and in this Disclosure
Statement, for the resolution of USL's outstanding Claims and Interests.
59. Schedules means, collectively, the schedules of assets and
liabilities and the statement of financial affairs to be filed by USL with
the Bankruptcy Court, pursuant to section 521 of the Bankruptcy Code and
Rule 1007 of the Bankruptcy Rules, as the same may be amended or
supplemented from time to time.
60. Secured Claim means any Claim against USL held by any
entity, including a subsidiary, affiliate, or judgment creditor of USL, to
the extent such Claim constitutes a secured Claim under sections 506(a) or
1111(b) of the Bankruptcy Code, other than a Claim that is an
Administrative Expense Claim, a Class 1 Claim, or a Class 2 Claim.
61. Securities Act means the Securities Act of 1933, as amended
from time to time.
62. Solicitation means USL's prepetition solicitation,
including, but not limited to, dissemination of this Disclosure Statement,
of acceptances of the Plan from Noteholders and Stockholders.
63. Stockholders means holders of Interests in USL Common
Stock, as of the Record Date.
64. USL means United States Leather, Inc., a Wisconsin
corporation.
65. USL Common Stock means the common stock of USL, $.01 par
value per share.
66. Voting Deadline means May 6, 1998, or such later date as
USL may determine, on which USL's prepetition solicitation of Ballots will
expire.
DISCLOSURE STATEMENT WITH RESPECT
TO USL'S PLAN OF REORGANIZATION
I. INTRODUCTION
United States Leather, Inc., a Wisconsin corporation, hereby
transmits this Disclosure Statement pursuant to section 1126(b) of the
United States Bankruptcy Code and Rule 3018(b) of the Federal Rules of
Bankruptcy Procedure for use in its prepetition Solicitation of votes on
its proposed plan of reorganization (the "Plan"). A copy of the Plan is
attached to this Disclosure Statement as Appendix A.
This Disclosure Statement sets forth certain information
regarding USL's prepetition history, significant events leading up to the
Chapter 11 Case, and the anticipated organization and operations of
Reorganized USL after Consummation of the Plan and USL's emergence (as
"Reorganized USL") from Chapter 11. This Disclosure Statement also
describes the Plan, alternatives to the Plan, effects of Confirmation of
the Plan, certain risk factors associated with the New Common Stock to be
issued to Noteholders and Stockholders under the Plan, and the manner in
which distributions will be made under the Plan. In addition, this
Disclosure Statement discusses the confirmation process and the voting
procedures that holders of Claims and Interests in impaired Classes must
follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS
PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND
INTERESTS IN USL, PLEASE SEE SECTION VI. "SUMMARY OF THE PLAN" AND
SECTION VII. "CERTAIN FACTORS TO BE CONSIDERED."
THIS DISCLOSURE STATEMENT SUMMARIZES CERTAIN PROVISIONS OF THE
PLAN, STATUTORY PROVISIONS, DOCUMENTS RELATED TO THE PLAN, AND OTHER
EVENTS AND FINANCIAL INFORMATION. ALTHOUGH USL BELIEVES THAT THE PLAN AND
RELATED DOCUMENT SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE
QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH
DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT HAS BEEN PROVIDED BY USL'S MANAGEMENT, EXCEPT WHERE
OTHERWISE SPECIFICALLY NOTED. USL IS UNABLE TO WARRANT OR REPRESENT THAT
THE INFORMATION CONTAINED HEREIN, INCLUDING THE FINANCIAL INFORMATION, IS
WITHOUT ANY INACCURACY OR OMISSION.
NOTHING CONTAINED HEREIN SHALL CONSTITUTE AN ADMISSION OF ANY
FACT OR LIABILITY BY ANY PARTY, BE ADMISSIBLE IN ANY NON-BANKRUPTCY
PROCEEDING INVOLVING USL OR ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE
ADVICE ON THE TAX, SECURITIES, OR OTHER LEGAL EFFECTS OF THE RESTRUCTURING
AS TO HOLDERS OF CLAIMS OR INTERESTS. YOU SHOULD CONSULT YOUR PERSONAL
COUNSEL OR TAX ADVISOR ON ANY QUESTIONS OR CONCERNS RESPECTING TAX,
SECURITIES, OR OTHER LEGAL EFFECTS OF THE RESTRUCTURING AS TO HOLDERS OF
CLAIMS OR INTERESTS.
A. Notice to Holders of Claims and Interests
This Disclosure Statement is being transmitted to (1) the
holders of USL's 10.25% Senior Notes, due 2003, as of the Record Date (the
"Noteholders"), as the only holders of Claims in an impaired Class of
Claims and (2) the holders of USL Common Stock as of the Record Date (the
"Stockholders") as the only holders of Interests in an impaired Class of
Interests.
Section 1125 of the Bankruptcy Code requires that disclosure of
adequate information be made in connection with the solicitation of
acceptances of a plan of reorganization. Section 1125(a) of the
Bankruptcy Code defines adequate information as "information of a kind,
and in sufficient detail, as far as is reasonably practicable in light of
the nature and history of the debtor and the condition of the debtor's
books and records, that would enable a hypothetical reasonable investor
typical of holders of claims and equity interests of the relevant class to
make an informed judgment about the plan . . . ." The primary purpose of
this Disclosure Statement is to provide Noteholders and Stockholders with
adequate information so that they can make a reasonably informed decision
with respect to the Plan prior to exercising their right to vote to accept
or reject the Plan.
Pursuant to the provisions of the Bankruptcy Code, only classes
of claims or equity interests that are "impaired" are entitled to vote to
accept or reject the Plan. (For a complete description of the
requirements for acceptance of the Plan, see section IX. - "Confirmation
of the Plan.") The following Classes of Claims and Interests are impaired
under the Plan: Classes 5 and 7. (See section VI.B. - "Summary of the
Plan - Treatment of the Classes Under the Plan" for a description of these
Classes.) USL is seeking acceptance of the Plan by Noteholders and
Stockholders holding Claims and Interests in these Classes. All other
Classes are unimpaired, and holders of Claims in such Classes are
conclusively presumed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code.
WHEN CONFIRMED BY THE BANKRUPTCY COURT, THE PLAN WILL BIND ALL
HOLDERS OF CLAIMS AGAINST AND INTERESTS IN USL, WHETHER OR NOT THEY ARE
ENTITLED TO VOTE OR DID VOTE ON THE PLAN, AND WHETHER OR NOT THEY RECEIVE
OR RETAIN ANY DISTRIBUTIONS OR PROPERTY UNDER THE PLAN. THUS, YOU ARE
ENCOURAGED TO READ THIS DISCLOSURE STATEMENT CAREFULLY. IN PARTICULAR,
ALL HOLDERS OF IMPAIRED CLAIMS AGAINST USL AND ALL HOLDERS OF INTERESTS IN
USL ARE ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND ITS APPENDICES
CAREFULLY AND IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE
PLAN. This Disclosure Statement contains important information about the
Plan, USL's business and operations, and considerations pertinent to
acceptance or rejection of the Plan.
NO STATEMENT OR REPRESENTATION CONCERNING USL, THE DISCLOSURE
STATEMENT, OR THE PLAN, OTHER THAN AS SET FORTH IN THIS DISCLOSURE
STATEMENT, HAS BEEN AUTHORIZED BY USL TO BE USED IN CONNECTION WITH THE
SOLICITATION OF VOTES ON THE PLAN OR FOR ANY OTHER PURPOSE. No
solicitation of votes may be made until distribution of this Disclosure
Statement, and no person has been authorized to distribute any information
concerning USL other than the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT IS BY ITS NATURE FORWARD-LOOKING AND CONTAINS ESTIMATES,
ASSUMPTIONS, AND PROJECTIONS THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL
FUTURE RESULTS. (SEE "FORWARD-LOOKING STATEMENTS.")
The statements contained in this Disclosure Statement are made
as of the date hereof, unless another time is specified. Neither the
delivery of this Disclosure Statement nor Consummation of the Plan will
create any implication that the information contained herein is correct at
any time subsequent to such date. Except with respect to the projected
financial information set forth in Appendix C hereto (the "Projections")
and except as otherwise specifically and expressly stated herein, this
Disclosure Statement does not reflect any events that may occur subsequent
to the date hereof. Such events may have a material impact on the
information contained in this Disclosure Statement. USL and Reorganized
USL do not intend to up-date the Projections. Thus, the Projections will
not reflect the impact of any subsequent events not already accounted for
in the assumptions underlying the Projections. Further, USL does not
anticipate that any amendments or supplements to this Disclosure Statement
will be distributed to reflect such occurrences. Accordingly, the
delivery of this Disclosure Statement shall not, under any circumstances,
imply that the information herein is correct or complete as of any time
subsequent to the date hereof.
All statements made in this Disclosure Statement concerning the
amounts, nature, or ownership of Claims against or Interests in USL are
made without prejudice to USL's rights to dispute any such Claims or
Interests.
B. Solicitation Package
Accompanying this Disclosure Statement are copies of the Plan
(Appendix A hereto) and, for voting on the Plan by Noteholders and
Stockholders, who comprise the only Classes that are impaired and entitled
to receive a distribution under the Plan, and thus are the only Persons
permitted to vote on the Plan, as appropriate, (a) with respect to
Noteholders, either (i) a form of master Ballot for use by brokers, banks,
proxy intermediaries, or other nominees that hold Notes as of record on
behalf of one or more beneficial owners or (ii) a form of beneficial owner
Ballot for use by beneficial owners of Notes, or (b) with respect to
beneficial owners of USL Common Stock, a form of Ballot to be used in
voting to accept or to reject the Plan.
C. Voting Procedures, Ballots, and Voting Deadlines (for Holders of
Impaired Claims)
After carefully reviewing the Plan, this Disclosure Statement,
and the detailed instructions accompanying your Ballot, please indicate
your acceptance or rejection of the Plan by checking the appropriate box
on the enclosed Ballot. Please complete and sign your original Ballot
(copies will not be accepted) and return it in the envelope provided so
that it is RECEIVED by the Voting Deadline (as defined below). Please
note that if you hold the Notes evidencing your Claim through a broker or
other financial intermediary, you may have to return your Ballot to such
broker or financial intermediary sufficiently in advance of the Voting
Deadline so as to permit such broker or financial intermediary to fill out
and return a master Ballot by the Voting Deadline. NOTEHOLDERS SHOULD
REFER TO SECTION XII. "VOTING REQUIREMENTS AND PROCEDURES" FOR FURTHER
INFORMATION REGARDING VOTING PROCEDURES.
IN ORDER FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE
PROPERLY COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING
INSTRUCTIONS ON THE BALLOT AND RECEIVED NO LATER THAN MAY 6, 1998 AT 5:00
P.M., CENTRAL DAYLIGHT TIME (THE "VOTING DEADLINE"), OR SUCH LATER DATE TO
WHICH THIS SOLICITATION MAY BE EXTENDED BY USL. DO NOT RETURN NOTES OR
STOCK CERTIFICATES WITH YOUR BALLOT.
ANY BALLOTS RECEIVED THAT DO NOT INDICATE EITHER AN ACCEPTANCE
OR A REJECTION OF THE PLAN SHALL BE DEEMED AN ACCEPTANCE OF THE PLAN.
BALLOTS TO ACCEPT OR REJECT THE PLAN MAY BE REVOKED ANY TIME
PRIOR TO THE EARLIER OF (A) THE COMMENCEMENT OF USL'S CHAPTER 11 CASE, AND
(B) 5:00 P.M., CENTRAL DAYLIGHT TIME, ON THE VOTING DEADLINE. THEREAFTER,
BALLOTS MAY BE REVOKED ONLY WITH THE APPROVAL OF THE BANKRUPTCY COURT.
THE SOLICITATION PURSUANT TO THIS DISCLOSURE STATEMENT WILL
EXPIRE ON MAY 6, 1998. USL RESERVES THE RIGHT TO EXTEND THIS SOLICITATION
FOR SUCH PERIOD OR PERIODS AS IT MAY DETERMINE. USL WILL MAKE A PUBLIC
ANNOUNCEMENT OF ANY SUCH EXTENSION BY RELEASE TO THE DOW JONES NEWS
SERVICE PRIOR TO 9:00 A.M., NEW YORK CITY TIME, ON THE NEXT BUSINESS DAY
FOLLOWING THE PREVIOUSLY SCHEDULED VOTING DEADLINE.
If you did not receive a Ballot in your package and believe that
you should have, did not receive the appropriate Ballot, received a
damaged Ballot or lost your Ballot, wish to receive additional copies of
this Disclosure Statement at your own expense, or if you have any
questions about the procedures for voting your Claim or Interest, or with
respect to the packet of materials that you have received, please contact:
Foley & Lardner
777 East Wisconsin Avenue, Suite 3800
Milwaukee, Wisconsin 53202
Attention: Andrew J. Wronski
Phone: (414) 297-5518
Fax: (414) 297-4900
USL BELIEVES THAT THE PLAN PROVIDES GREATER RECOVERY AND VALUE
TO NOTEHOLDERS AND STOCKHOLDERS THAN WOULD LIQUIDATION OR OTHER AVAILABLE
ALTERNATIVES. USL, THEREFORE, BELIEVES THAT ACCEPTANCE OF THE PLAN IS IN
THE BEST INTERESTS OF EACH AND EVERY CLASS OF CLAIMS AND INTERESTS AND
RECOMMENDS THAT ALL NOTEHOLDERS AND STOCKHOLDERS VOTE TO ACCEPT THE PLAN.
THE PLAN HAS THE SUPPORT OF EVERY MEMBER OF THE INFORMAL
NOTEHOLDERS' COMMITTEE, EACH OF WHICH PRESENTLY INTENDS TO VOTE TO ACCEPT
THE PLAN. THE INFORMAL NOTEHOLDERS' COMMITTEE, THEREFORE, UNANIMOUSLY
RECOMMENDS THAT ALL OTHER NOTEHOLDERS VOTE TO ACCEPT THE PLAN.
D. USL's Legal and Financial Advisors
USL's legal and financial advisors are Foley & Lardner and
Houlihan, Lokey, Howard & Zukin Capital, respectively. They can be
contacted at:
Foley & Lardner Houlihan, Lokey, Howard & Zukin
777 E. Wisconsin Avenue Capital
Suite 3800 31 West 52nd Street, 11th Floor
Milwaukee, Wisconsin 53202 New York, New York 10019
Phone: (414) 271-2400 Attn: Michael A. Kramer
Fax: (414) 297-4900 David R. Hilty
Attn: Thomas L. Shriner, Jr.
Andrew J. Wronski
II. COMPONENTS AND SUMMARY EXPLANATION OF THE PLAN
The principal purpose of the Plan is to effectuate a substantial
deleveraging of the indebtedness of USL. In particular, approximately
$139 million of principal and interest owed by USL to the holders of the
Notes will be exchanged for 97% of the New Common Stock of Reorganized USL
(subject to dilution if and when the Management Stock Incentive Program is
implemented). It is contemplated that, except for (i) Class 5 Noteholders
Claims and (ii) Class 7 Interests of holders of USL Common Stock, no Class
of Claims against or Interests in USL will be impaired by the Plan.
A. Distribution of New Common Stock
On the Effective Date, the Noteholders will each receive their
pro rata share of 9,700,000 shares of the New Common Stock of Reorganized
USL. On the Effective Date, as part of the distribution to Class 5, USL
will pay the reasonable and actual costs and expenses of the Informal
Noteholders' Committee, including, without limitation, the fees of counsel
for the Informal Noteholders' Committee.
On the Effective Date, the holders of USL Common Stock will
receive their pro rata share of 300,000 shares of the New Common Stock of
Reorganized USL.
B. Consequences of the Plan on Holders of Impaired Claims and
Interests
The Plan, provided that USL receives the Requisite Acceptances
and that the Effective Date occurs, will have the following consequences
on holders of impaired Claims and Interests.
1. Consequences of Plan on Noteholders
Upon the Effective Date, each holder of an Allowed Class 5
Noteholders Claim will receive its pro rata share of the 9,700,000 newly
issued shares of New Common Stock of Reorganized USL to be distributed to
Noteholders under the Plan. Specifically, each such holder will receive
74.61538 shares of New Common Stock for each $1,000 of principal amount of
Notes owned by such holder (rounded to the nearest whole number of
shares). The overall interest and voting power of holders of Allowed
Class 5 Noteholders Claims in Reorganized USL is subject to dilution in
the event that the Management Stock Incentive Program is adopted. The
Management Stock Incentive Program would permit up to 1,000,000 shares of
the New Common Stock of Reorganized USL to be issued to key employees of
Reorganized USL in the form of options or as determined by the Post-
Restructuring Board of Directors. (See section VII.D. "Certain Factors
To Be Considered Potential Dilution of Noteholder and Stockholder Voting
Power as a Result of Management Stock Incentive Program.")
On the Effective Date, non-accepting Noteholders will not be
permitted to retain their Notes under the Plan. All of the Notes will be
exchanged for New Common Stock, the Indenture will be eliminated, and any
and all obligations of USL with respect to the Notes will be discharged,
except that the Notes shall represent the right, to the extent that a
Class 5 Note Claim is Allowed, to participate in the distributions
contemplated by the Plan.
2. Consequences of Plan on Holders of USL Common Stock
Upon the Effective Date, each holder of an Allowed Class 7
Interest will receive its pro rata share of the 300,000 shares of New
Common Stock of Reorganized USL to be distributed to Stockholders under
the Plan. Specifically, each such holder will receive 100 shares of New
Common Stock for each share of USL Common Stock owned by such holder. The
overall interest and voting power of Stockholders who will receive New
Common Stock under the Plan is also subject to dilution in the event that
the Management Stock Incentive Program is implemented. (See section
VII.D. "Certain Factors To Be Considered Potential Dilution of
Noteholder and Stockholder Voting Power as a Result of Management Stock
Incentive Program.") On the Effective Date, the USL Common Stock will be
extinguished.
C. Consequences of Plan on Holders of Trade Claims
Holders of trade Claims that are Allowed will retain all legal,
equitable, and contractual rights under the Plan. Such trade creditors
will not be required to file proofs of claim or, absent further order of
the Bankruptcy Court, take other action in the Chapter 11 Case. Pursuant
to the Plan, the Allowed Claims of USL's trade creditors will be paid in
full in the ordinary course of USL's business. Trade Claims, if not so
paid during the pendency of the Chapter 11 Case, will become the
obligations of Reorganized USL and be paid pursuant to the terms of the
applicable invoice or agreement (if any) relating to such Claims.
III. KEY EVENTS LEADING TO THE SOLICITATION AND DECISION TO COMMENCE A
CHAPTER 11 REORGANIZATION
A. The Leveraged Buyout
USL was formed in December 1988 for the purpose of acquiring
Lackawanna Leather Company, Inc., Pfister & Vogel Tanning Co., and A. L.
Gebhardt, Inc. in a leveraged buyout sponsored by Bear Stearns Acquisition
Corp. VII ("BSAC VII"), an affiliate of The Bear Stearns Companies, Inc.
B. The 1996 Holding Company Recapitalization
In a series of transactions completed in 1993, USL was
reorganized into a corporate structure consisting of USL and two new
holding companies: United States Leather Holdings, Inc. ("USLH"), which
owned 100% of the capital stock of USL, and U.S. Leather Holdings, Inc.
("Old Holdings"), which, in turn, owned 100% of the capital stock of USLH.
Old Holdings also carried, as of April 9, 1996, $86.0 million aggregate
principal amount of 15% Senior Debentures Due 2004 (the "Old Holdings
Debentures"), approximately 87% of which were owned by The Equitable Life
Assurance Society of the United States and certain of its affiliates and
13% of which were owned by First Plaza Group Trust (the "Former Holding
Company Debenture Holders"). The Old Holdings Debentures were secured by
the capital stock of USLH.
A default occurred with respect to the Old Holdings Debentures
due to the noncompliance, as of December 31, 1995, of Old Holdings with a
financial covenant contained in the Old Holdings Debentures. Old Holdings
was unable to cure the default; however, the default did not give rise to
any cross-defaults or other recourse to the Notes or the $65 million
revolving credit facility in place at the time (the "Old Credit
Facility").
On April 9, 1996, a series of transactions was completed, with
the consent of Old Holdings, USLH, and USL, which resulted in the Former
Holding Company Debenture Holders foreclosing on their security (the "1996
Holding Company Recapitalization"). Such foreclosure resulted in the
cancellation of the Old Holdings Debentures and the contribution of all
USLH capital stock to Leather U.S., Inc. (the "New Holding Company"), a
company wholly owned by the Former Holding Company Debenture Holders. The
foreclosure also resulted in the elimination of any ownership interest in
USLH or USL by the previous equity holders. The nominees of the previous
equity holders resigned from the Board of Directors of USL and were
replaced by nominees of the New Holding Company. The 1996 Holding Company
Recapitalization did not cause a default under any of the existing debt of
USL, nor did it constitute a change of control or default under the Notes
or the Old Credit Facility.
Upon the consummation of the 1996 Holding Company
Recapitalization, USL became a wholly-owned subsidiary of USLH, which, in
turn, became a wholly-owned subsidiary of the New Holding Company. The
New Holding Company and USLH had no assets other than the shares of their
respective subsidiary and had no independent operations. USL owns all of
its operating assets directly, except those owned by A.R. Clarke, Ltd.
("A.R. Clarke"), USL's wholly-owned subsidiary. USL's principal
indebtedness is the Notes and obligations owed under the Prepetition
Credit Facility.
C. Liquidity Problems
USL's ongoing liquidity requirements arise principally from its
indebtedness and working capital needs. Such requirements are primarily
driven by mandatory interest and principal payments and fluctuations in
raw material costs. Cattlehide suppliers generally require selling terms
of cash on delivery. USL, therefore, borrows under its revolving credit
facilities to meet its working capital needs.
USL experienced severe liquidity problems in 1997, due primarily
to operating losses and high debt service costs. On December 31, 1997,
USL's aggregate indebtedness was $173.5 million (compared with $162.1
million in 1996), consisting of $135.6 million of principal and accrued
interest on the Notes and $37.9 million due under a $65 million credit
facility that replaced the Old Credit Facility (the "Replacement Credit
Facility"). In January 1998, USL refinanced the Replacement Credit
Facility (see E of this section - "The Banks, the Refinancing, and the
Prepetition Credit Facility"). On January 31, 1998, however, USL
suspended making payments on the Notes because it did not have sufficient
liquidity to make such payments.
D. Formation of, and Negotiations with, the Informal Noteholders'
Committee
In May 1997, USL retained Houlihan, Lokey, Howard, and Zukin
Capital ("Houlihan, Lokey") as financial advisor and Foley & Lardner as
restructuring counsel to advise it with respect to restructuring USL's
capital structure. In September 1997, at a special meeting between USL
and certain Noteholders, USL announced its intention to restructure the
Notes.
In October 1997, the Informal Noteholders' Committee was formed
to negotiate the terms and conditions of a restructuring of USL that would
primarily affect the Noteholders and Stockholders. The Informal
Noteholders' Committee represented holders of in excess of 50% of the
principal amount of the Notes. The Informal Noteholders' Committee
retained the law firm of Wachtell, Lipton, Rosen & Katz ("Wachtell,
Lipton") as legal advisors. USL agreed, at the request of the Informal
Noteholders' Committee, to pay, and has in fact paid to date, the
reasonable fees and expenses of Wachtell, Lipton incurred in connection
with the representation of the Informal Noteholders' Committee.
During late 1997 and the early part of 1998, USL and its legal
and financial advisors met with the advisors to the Informal Noteholders'
Committee to discuss a potential restructuring. In March 1998, USL and
the Informal Noteholders' Committee reached an agreement on the general
terms of a restructuring of the Notes. The terms of the restructuring
proposal - which are reflected in the Plan - provide for the cancellation
of all outstanding shares of USL Common Stock and, subsequent to
Confirmation and Consummation of a Chapter 11 plan of reorganization, the
issuance of 10,000,000 new shares of Reorganized USL. Noteholders will
receive 9,700,000 shares of New Common Stock in exchange for the Notes.
Holders of USL Common Stock will receive the remaining 300,000 shares of
New Common Stock. USL and the Informal Noteholders' Committee also agreed
that the Post-Restructuring Board of Directors could authorize the
issuance of 1,000,000 additional shares of New Common Stock for management
stock options to be administered by a compensation committee of the Post-
Restructuring Board of Directors. All of USL's other creditors holding
Allowed Claims, including trade suppliers, would be paid in full in the
ordinary course of USL's business or as otherwise provided in the Plan.
USL and the Informal Noteholders' Committee also agreed as to
the composition of the Board of Directors of Reorganized USL (the "Post-
Restructuring Board of Directors"). Under the agreement, as well as the
Plan, the Post-Restructuring Board of Directors will consist of five
members, four of whom will be appointed by the Informal Noteholders'
Committee and one of whom will be nominated by management of Reorganized
USL.
USL, on behalf of Reorganized USL, also undertook to make
reasonable efforts to develop a public market for the trading of New
Common Stock, including, but not limited to, issuing appropriate releases
of information and otherwise complying with the requirements of Rule
144(c) of the Securities Act, conducting informational meetings with
potential investors and research analysts, registering the New Common
Stock under the Securities Exchange Act of 1934 so that Reorganized USL
will be a public reporting company, and obtaining, if reasonably possible,
the listing of the New Common Stock on a national securities exchange,
such as NASDAQ. Moreover, USL agreed to enter into the Registration
Rights Agreement on or before the Effective Date, pursuant to which any
Noteholder or Stockholder who would be deemed, post-Confirmation, to be an
"affiliate" of Reorganized USL by reason of such Person's equity holdings
in the company or otherwise will be granted certain "shelf" and/or
"demand" registration rights.
Finally, the restructuring proposal provided that releases would
be granted to USL, its parents, affiliates, directors, and officers, and
to Noteholders and Stockholders, among others. The Plan and the
Disclosure Statement incorporate the terms of the restructuring proposal.
E. The Banks, the Refinancing, and the Prepetition Credit Facility
In November 1996, USL entered into a $65 million asset-based
revolving credit facility (the "Replacement Credit Facility") that
replaced the Old Credit Facility. By its amended terms, the Replacement
Credit Facility matured on December 31, 1997. Borrowing availability
under the Replacement Credit Facility was based on accounts receivable and
inventory balances, less certain exclusions, amounts already borrowed, and
letters of credit issued under the facility. From February to November
1997, the Replacement Credit Facility was amended a number of times to,
among other things, modify certain financial covenants. By December 31,
1997, USL had exhausted all but $0.5 million of availability under the
Replacement Credit Facility, exacerbating the company's liquidity
problems, and still had not adequately resolved financial covenants under
that facility. As a result of the limited availability under the
Replacement Credit Facility, as well as pricing and operational issues, in
October 1997, USL began discussions with various financial institutions
relating to alternate credit facilities.
On or about January 14, 1998, these discussions culminated in a
new $55 million revolving credit facility (the "Prepetition Credit
Facility"). On or about that date, USL entered into a Loan and Security
Agreement with the lenders party thereto and BankAmerica Business Credit,
Inc., as agent (the "Prepetition Credit Agreement"). Pursuant to the
Prepetition Credit Agreement, the Prepetition Lenders have agreed to
extend USL $70,000,000 of debtor-in-possession financing and $70,000,000
of post-Chapter 11 emergence financing in accordance with the terms and
conditions set forth in the Prepetition Credit Agreement and the debtor-
in-possession and emergence financing term sheets attached thereto. Under
those terms, the proceeds of any debtor-in-possession facility extended by
the Prepetition Lenders will first be used to repay all amounts owing
under the Prepetition Credit Facility and, thereafter, for USL's working
capital needs during the Chapter 11 Case, subject to the terms and
conditions of such facility. In turn, the proceeds of any emergence
financing facility extended by the Prepetition Lenders will first be used
to repay all amounts owing under any debtor-in-possession financing
extended by the Prepetition Lenders, to pay Administrative Expense Claims
under the Plan, up to an agreed amount, to fund certain transaction costs
and expenses, and to fund Reorganized USL's working capital needs, subject
to the terms and conditions of such facility. Loan availability under the
Prepetition Credit Facility, as well as under the debtor-in-possession and
emergence credit facilities made available by the Prepetition Lenders, is
based on USL's accounts receivable and inventory after certain exclusions.
The Prepetition Credit Facility, as well as the debtor-in-
possession and emergence credit facilities made available by the
Prepetition Lenders, provide USL with greater availability than did the
Replacement Credit Facility. In addition, the Prepetition Credit Facility
does not test financial covenants until the fiscal quarter of USL ending
December 31, 1998. The Prepetition Credit Facility also offers more
favorable pricing than the Replacement Credit Facility, and, importantly,
provides for Chapter 11 debtor-in-possession and post-Chapter 11 emergence
financing on terms that USL considers attractive. In addition, the
debtor-in-possession and emergence credit facilities made available by the
Prepetition Lenders also provide USL with $5.5 million of additional
availability over that in the Prepetition Credit Facility due to the
elimination of an availability reserve, in that same amount (subject to
adjustment), that the Prepetition Lenders required prepetition. As
discussed further in the Projections (Appendix C), USL believes that this
additional availability, coupled with the discharge of its obligations
under the Notes, as provided in the Plan, will provide USL with sufficient
liquidity and working capital to successfully emerge from Chapter 11.
USL presently expects that the Prepetition Lenders will extend
the DIP Credit Facility and the Emergence Credit Facility in accordance
with the terms described above. It is possible, however, that as a result
of future events, another lender or group of lenders might provide such
facilities on terms that USL considers more favorable than the facilities
offered by the Prepetition Lenders. In such event, USL would first use,
upon Bankruptcy Court approval, the proceeds of the DIP Credit Facility to
repay all "Obligations" owed to the Prepetition Lenders under the
Prepetition Credit Agreement and then to fund its working capital needs
during the Chapter 11 Case. The proceeds of the Emergence Credit Facility
will, in turn, be used to pay all amounts owed under the DIP Credit
Facility, and then to fund USL's working capital needs after the Effective
Date.
IV. BUSINESS AND OPERATIONS OF USL
THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR
SUGGESTED BY ANY SUCH STATEMENT. (SEE "FORWARD-LOOKING STATEMENTS.")
A. General Information
USL is one of the largest and most diversified producers of
leather in North America and a leading leather producer for the domestic
upholstery and footwear markets. USL produces and sells a broad line of
finished leather and related products that are sold to a diverse customer
base in the United States and internationally.
Furniture Group. USL, under the trade name Lackawanna Leather,
is a leading supplier of upholstery leather to the furniture industry.
Furniture Group sales were approximately $70.2 million in 1997 and
approximately $95.0 million in 1996.
Footwear and Specialty Leather Group. USL is a leading producer
of finished leather for footwear, personal accessories, sporting goods,
apparel, and other personal leather goods. Selling under the brand names
Pfister & Vogel, A. L. Gebhardt, A. R. Clarke, and Caldwell Moser, the
Group's sales totaled approximately $181.7 million in 1997 and $181.0
million in 1996.
Automotive Group. USL is an emerging producer of finished
leather for use in automobile interiors. Automotive Group sales were
$50.4 million in 1997 and $18.2 million in 1996.
USL also sells unfinished hides, partially finished hides, and
leather by-products to other leather producers, although these sales
generate only a small portion of USL's overall sales revenue. The USL
Trading Division ("Trading") traded hides and sold partially finished
leather and unwanted or excess hides. This division was discontinued in
1996. Prior thereto, Trading's 1996 sales were $7.4 million. USL also
operated a branch in Germany that procured partially finished hides from
outside sources (principally from South America), contracted for them to
be finished, and sold the finished leather to furniture manufacturers in
Europe. This operation was also discontinued in 1996, prior to which its
1996 sales were approximately $4.2 million.
USL also produced collagen, a protein extracted from
cattlehides, for sale to food manufacturers. Prior to discontinuing this
operation in 1997, collagen sales were approximately $3.2 million,
compared with $6.0 million for all of 1996.
Prior to 1996, USL, while reporting as an integrated company,
operated as a series of stand-alone divisions or subsidiaries with
separate financial statements and management teams for each unit. During
1996, USL eliminated this divisional structure and reorganized its
management structure along functional lines, and its business structure
(i.e., segment financial reporting) along the lines of markets served.
While USL has preserved Lackawanna Leather, Pfister & Vogel, A.L.
Gebhardt, Caldwell-Moser, and A.R. Clarke as valued trade names and has
preserved the corporate existence of A.R. Clarke, Ltd. as a wholly-owned
subsidiary, USL no longer evaluates or reports business results according
to these designations.
B. The Leather Manufacturing Process
The leather manufacturing process begins with the conversion of
raw cattle hides into "wet blue" leather through soaking and agitation in
alkaline and chromium solutions that dissolve the hair and preserve the
hide. The term "wet blue" is derived from the fact that this initial
tanning process turns the hides a bluish color.
After bluing, hides are split and shaved to obtain uniform
thicknesses and separated into classifications referred to as grain (the
outside portion of the split hide, which is considered the more desirable
and is used to make higher quality finished leathers) and splits (the
interior portion of the hide used to make less expensive suedes and other
leathers). Grains are further sorted according to the quality of the
tanned hide, based on such criteria as appearance, the number of surface
defects, and weight. Hides are then colored with dyes, treated with fat
liquors to soften and smooth the leather, and dried and finished through a
variety of sophisticated processes that improve the appearance and
performance of the grain and, in some cases, add such properties as water
resistance. Finally, hides are electronically measured and packaged for
shipment to customers who, with the exception of certain automotive
customers, cut the finished leather for their products. In the case of
certain automotive customers, USL cuts the leather into prescribed
patterns (known as "cut sets") and sells such sets to seating
manufacturers.
As with any manufacturing process that involves organic
materials, such as cattlehides, which vary from lot to lot and season to
season, both art and science go into the successful production of quality
leathers. The manufacturing process must consistently generate finished
leathers with the distinctive properties that customers require. The
process also requires a selection of hides in order to manufacture the
array of products that customers demand.
By its nature, leather manufacturing regularly generates excess
and off-quality products. Excess inventories may be created by changes in
leather fashions, overestimation of customer requirements for a particular
leather product, or customer returns. Hide defects, equipment
malfunctions, or manufacturing mistakes may create off-quality
inventories. Historically, USL held such inventories for rework and/or
resale into other finished markets. This practice, however, consumed
manufacturing capacity and sales effort and often required such stocks to
remain idle in inventory until a suitable opportunity to rework or sell
the products arose. In 1996, USL changed its policy in order to dispose
of these inventories more quickly. USL now writes such inventories down
to a lower estimated net realizable value and attempts to sell them more
promptly. The new policy calls for less rework, fewer small-lot sales
(which require extensive time and effort from the sales force), and more
bulk sales to leather brokers, particularly those offshore.
C. Sales
The following table summarizes USL's sales (in millions of
dollars) in its three principal lines of business for the past three
years:
Year Ended December 31,
1997 1996 1995
Furniture Group $ 70.2 $ 95.0 $121.2
Footwear and
Specialty
Leather Group $181.7 $181.0 $191.7
Automotive Group $ 50.4 $ 18.2 $ 9.3
Other $ 3.2 $ 17.6 $ 38.5
----- ------ ------
Total Net Sales $305.5 $311.8 $360.7
===== ====== ======
USL sells its products in markets that tend to be cyclical.
Furniture Group sales are affected by housing starts, competition,
interest rates, consumer confidence levels, and overall economic
conditions. Footwear and Specialty Leather Group sales tend to be
functions of retail and fashion trends and can also be affected by
international markets, since the majority of footwear is now manufactured
overseas. Likewise, Automotive Group sales are influenced by automobile
sales and the economic and social factors that influence such sales.
1. Furniture Group
The Furniture Group was founded as Lackawanna Leather in 1896
and continues to sell under the Lackawanna trade name today. The Group
produces and markets finished leather for the furniture industry and, to a
lesser extent, the aircraft seat manufacturing industry. Group sales in
1997 were $70.2 million, which accounted for 23.0% of USL's net sales in
1997, and were $95.0 million in 1996, which accounted for 30.5% of USL's
1996 net sales.
Finished upholstery leather is sold primarily to furniture
manufacturers, generally at three different price categories:
promotional, mainstream and upscale. Under the Lackawanna trade name, USL
is a leader in the mainstream and upscale categories and has a substantial
share of the promotional price market. Selling such brands as Regency,
Passport, Captiva, Rustica, and Commanche, the Group has built on its
strength in these categories to develop and sell new leathers at
competitive prices, thus helping to satisfy consumer demand for quality
leather furniture at affordable prices. To maintain its leading market
position, the Group works closely with its customers to develop and refine
its leather upholstery products in a variety of fashion-oriented colors
and textures.
The Furniture Group receives tanned and partially tanned hides
primarily from USL's tanneries in Omaha, Nebraska and Milwaukee,
Wisconsin, although it also acquires tanned hides and finished leather
from other international tanneries. The Group finishes the hides and then
packages and ships them from its plant in Conover, North Carolina.
2. Footwear and Specialty Leather Group
USL markets finished leather to the footwear and specialty
leather industries under the trade names of the companies originally
acquired to form the Footwear and Specialty Leather Group - Pfister &
Vogel, A.L. Gebhardt, A.R. Clarke, and Caldwell Moser. The Group is a
leading producer of finished leathers used to make high quality dress and
casual footwear, rugged outdoor and athletic footwear, leather apparel,
sporting goods, and personal accessories such as gloves, belts, and
handbags. Under the Caldwell Moser trade name, the Group produces leather
for shoelaces and harder, more durable, leathers for such applications as
shoe soles, saddles, and animal collars. The Group also provides contract
tanning and finishing services to other small leather producers and sells
finished splits, wet blue, and various leather by-products. Group sales
in 1997 were $181.7 million, which accounted for 59.5% of USL's 1997 net
sales. Sales were $181.0 million in 1996, which accounted for 58.1% of
USL's net sales that year.
The diversity of the Group's product line, enhanced regularly by
the introduction of new products, is the source of USL's competitive
strength in the footwear and specialty leather market. Under the Pfister
& Vogel trade name alone, USL markets over 100 types of shoe leather, each
with its own distinct combination of color, finish, and texture. Examples
are Durashu, the standard penny loafer shoe leather since the 1950's;
Raindance, a highly water-resistant shoe leather used in outdoor hiking
and boat shoes; Thunderhead, a heavy oil, water-resistant outdoor leather
used in outdoor hiking shoes; and Cyclone, a heavy oil, pull-up leather
used in men's casual footwear. The color, texture, and consistency of its
various products have been developed through a process that USL considers
to be proprietary in nature.
The Footwear and Specialty Leather Group manufactures finished
leather at facilities located in Milwaukee, Wisconsin, New Albany,
Indiana, and Toronto, Ontario. Through the diversity and flexibility of
these facilities, USL is able to (a) produce a wide variety of leather
products, including waterproof and water-resistant leathers, as well as
splits and other by-products, (b) support a customer base numbering in
excess of 1,000, (c) productively utilize the different selections of
leather each lot of hides produces, and (d) support, as needed, the
tanning needs of USL's Furniture and Automotive Groups.
Export sales are an increasingly important aspect of the
international footwear market, as manufacturers continue to shift
production from domestic facilities to overseas operations, especially in
the Far East. In addition to exporting finished products into these
markets, USL had also contracted for certain leather tanning and finishing
in China to support the growing demand for such operations in closer
proximity to shoe manufacturers' overseas operations. In 1997, USL
concluded that this method of serving Asian markets was ineffective and
discontinued this operation.
USL supports its footwear and specialty leather sales through a
direct sales and marketing force augmented by manufacturers'
representatives in Europe, Asia, Canada, and the United States. USL also
maintains a sales office in Taiwan to support its Far East sales
operations.
3. Automotive Group
USL formed the Automotive Group in 1992 to supply finished
leather to the worldwide automotive leather interior market, which USL
believes to be over $1.0 billion per year. Until 1996, the Group's sales
consisted almost exclusively of finished hides sold to original equipment
manufacturers and aftermarket suppliers. In 1996, however, the Group
began selling cut sets to seating manufacturers that supply a major
domestic automobile manufacturer. Of the Group's $18.2 million of 1996
sales, approximately 37% were sold as cut sets. Approximately 75% of the
Group's $54.0 million in 1997 sales were sold as cut sets, consisting of
sales on 14 cut-to-pattern contracts.
USL manufactures its Automotive Group leather at its facilities
in Omaha, Nebraska. The Automotive Group markets its products through
automotive manufacturer's representatives located in the United States,
Canada, and Asia.
4. International Sales
International sales include export sales from USL's domestic
operations, and sales by A.R. Clarke, Ltd. (USL's Canadian subsidiary and
a part of the Footwear and Specialty Leather Group) to markets other than
the United States, and sales, prior to discontinuation, from USL's German
operations. International sales (in millions of dollars) for the years
1997, 1996, and 1995 were as follows:
Year Ended December 31,
1997 1996 1995
Asia $ 61.5 $ 46.5 $ 53.6
Europe $ 15.3 $ 17.1 $ 16.8
Americas $ 43.9 $ 44.9 $ 49.0
------ ------ ------
Total
International
Sales $120.7 $108.5 $119.4
====== ====== ======
5. Major Customers
USL had no customer that accounted for more than 10% of its
combined net sales in 1997.
6. Other
In 1997, USL discontinued the manufacture and sale of food-
quality collagen at its facilities in Omaha, Nebraska. Although the
business was modestly profitable, it created significant operating
challenges and inefficiencies because the process required fresh hides to
be soaked immediately upon receipt and because of the need to maintain
manufacturing standards regulated by the U.S. Food and Drug
Administration. These obstacles and the non-strategic nature of this by-
product prompted USL to close this operation in July 1997. Prior to
discontinuation, collagen sales were $3.2 million, $6.0 million, and $5.9
million in 1997, 1996, and 1995, respectively.
In 1996, USL discontinued its USL Trading Division and the
German operations of its Furniture Group. These operations consisted
mostly of buying and selling activities, rather than the core
manufacturing competencies for which USL has become best known. Neither
operation produced a material strategic or financial benefit or was
expected to produce such a benefit in the foreseeable future.
In 1997, USL placed its operations in New Albany, Indiana
(Caldwell Moser) and Berlin, Wisconsin (Berlin Leather) up for sale. No
suitable buyers for these operations emerged and, in January 1998, USL
took them off the market. USL has since closed its finishing plant in
Berlin, Wisconsin and transferred products finished at this location to
other facilities.
D. Raw Materials
The single largest component of the cost of finished leather is
the cost of cattlehide. Hide costs in each of the past three years have
accounted for approximately 60% of USL's cost of goods sold. USL
purchases approximately 5% of all the hides taken from cattle slaughtered
in the United States and is among the largest U.S. buyers of raw domestic
cattle hides. The three largest domestic meat packers account for
approximately 70% of the total number of U.S. cattle slaughtered for
commercial purposes and, accordingly, are also USL's largest hide
suppliers. USL purchases most of its raw cattle hides domestically on a
spot basis. Such hides are readily available, and the concentration of
hide supplies among a limited number of meat packers has not historically
had a material effect on USL's ability to source raw hides.
In 1997, imported cattlehides in the form of partially tanned
and finished leather constituted approximately 13% of USL's manufacturing
material requirements. Most of those imports came from tanners in
Thailand and Argentina.
USL's diverse product line enables it to utilize a wide variety
of hide grades and types. Consequently, USL is able to purchase large
quantities of varied hides and use substantially all of the hides
contained in each shipment. This, in turn, enables USL to centralize its
raw hide purchasing. USL does, from time to time, however, resell hides
it is unable to use. Since such resales also occur on a spot basis, USL
may incur gains or losses in connection with reselling hides.
Hides are a by-product of the cattle slaughtered to meet the
worldwide demand for beef and beef products. Prices are subject to
cyclical, seasonal, and other market fluctuations. In the past, USL has
generally been able to pass raw material price increases through to
customers, except when the demand for finished leather was weak. The
customer price increases required to pass through increased raw materials
costs take time to implement. Thus, when cattlehide prices have risen
significantly in a short period of time, USL's margins have suffered until
price increases could be fully implemented. Price increases, however, may
also lessen demand for leather goods by prompting customers to consider
alternative materials, especially in the furniture and automotive
segments. Changes in hide prices immediately impact USL's cost of goods
sold because USL recognizes such changes immediately through its LIFO
method of accounting. Given the delays in passing such changes through to
selling prices for finished products, hide price fluctuations have had and
may continue to have a material impact on USL's reported financial
results.
From time to time, in an effort to improve the selection and
yield of hides, USL has built hide inventories during the fall for use
during the winter season. Such hide buys benefit USL because the hides
have fewer defects and less hair than those purchased in winter and, as a
result, cost less to tan and generally produce higher quality leathers.
USL did not execute such a hide buy in 1996 or 1997.
Other materials consumed in leather tanning and finishing, such
as chemicals and dyes, typically constitute less than 13% of USL's total
cost of goods sold. Such materials are readily available from a variety
of suppliers.
E. Research and Development
USL's research and development activities are directed toward
leather product development and improvement designed to meet the specific
requirements of its customers. They involve both the formulation of
proprietary processes and the development of new leather finishes. USL
works closely with its customers in its product development initiatives.
USL spent approximately $1.9 million, $2.3 million, and $2.4 million for
research and development in 1997, 1996, and 1995, respectively.
F. Employees
As of March 1, 1998, USL employed approximately 1,800 full-time
employees, approximately 92% of whom were engaged in manufacturing, with
the remaining 8% engaged in sales, marketing, and administrative
activities. Approximately 900 employees engaged in manufacturing
activities as of March 1, 1998 were covered by collective bargaining
agreements. One agreement covering approximately 415 employees
represented by the United Food and Commercial Workers Union (the "UFCWU")
expires on May 60, 1998. USL and the UFCWU began negotiating a new
contract in mid-March 1998, and the USL expects to have a new agreement in
place by the May 60, 1998 expiration of the existing agreement, although
no assurance can be given as to when such an agreement will be reached.
G. Properties
As of March 1, 1998, USL operated 16 manufacturing facilities in
North America. Nine were located in Wisconsin, three were located in
Nebraska, and one each was located in North Carolina, Indiana, Texas, and
Ontario. In addition, USL owned a manufacturing facility in Berlin,
Wisconsin, which it closed in January 1998. USL owns all but two of its
facilities. The leased facilities are subject to customary commercial
leases. The lease term for the Omaha facility expires in 2000; the lease
for the El Paso facility has a month-to-month term. The aggregate floor
area of these facilities is approximately 1.5 million square feet, as
follows:
Approximate Principal
Area Owned or Purpose
Location (in sq. ft.) Leased of Facility
Milwaukee, WI 340,000 Owned Manufacturing
Milwaukee, WI 140,000 Owned Manufacturing
Conover, NC 175,000 Owned Manufacturing
Toronto, Ontario 130,000 Owned Mfg./Warehouse
New Albany, IN 120,000 Owned Manufacturing
Omaha, NE 108,000 Owned Manufacturing
Milwaukee, WI 81,000 Owned Admin./Warehouse
Milwaukee, WI 70,000 Owned Manufacturing
Milwaukee, WI 70,000 Owned Mfg./Warehouse
Milwaukee, WI 50,000 Owned Admin./Warehouse
Omaha, NE 50,000 Owned Manufacturing
Berlin, WI 40,000 Owned Manufacturing
Milwaukee, WI 26,000 Owned Warehouse
Omaha, NE 24,000 Leased Manufacturing
Milwaukee, WI 22,000 Owned Warehouse
El Paso, TX 1,600 Leased Warehouse
Berlin, WI (Closed) 80,000 Owned Manufacturing
USL considers its plant and equipment to be in generally good
condition. In addition to capital expenditures to replace worn out or
obsolete equipment, USL incurred expenses to maintain and repair its plant
and equipment of $9.3 million, $10.2 million, and $10.5 million in 1997,
1996, and 1995, respectively.
H. Legal Proceedings
In May 1995, USL received a request for information from the
United States Customs Service (the "Customs Service") concerning the
classification and duties paid on a series of importations of Russian and
Romanian wet blue from 1991 to 1993. Upon review of the Harmonized Tariff
Schedules in effect in 1991, 1992, and 1993, USL determined that it had
paid less than the proper import duty and thereupon paid approximately
$164,000 in additional duty. In April and September 1996, the Customs
Service issued a total of three penalty notices related to this matter.
One of the penalty cases relating to such notices has been settled for
less than $12,000. The two remaining cases are pending, with a total
potential exposure of approximately $680,000. Petitions for relief from
the two remaining penalty cases have been filed, and a final
administrative determination is expected by the end of 1998. USL believes
it has adequately reserved for any additional duties or penalties.
USL is also involved in other litigation and proceedings. Based
on current information, management believes that future costs, if any, in
excess of insurance coverage, with respect to such litigation and
proceedings will not be material to USL's financial position or results of
operations.
I. Business and Operations of Reorganized USL
There can be no assurance that the business and operations of
Reorganized USL following the Consummation of the Plan will not change in
a material way as compared to the business and operations of USL as
conducted on the date of this Disclosure Statement.
V. ANTICIPATED EVENTS BEFORE AND DURING THE CHAPTER 11 CASE
THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR
SUGGESTED BY ANY SUCH STATEMENT. (SEE "FORWARD-LOOKING STATEMENTS.")
A. Merger of New Holding Company and USLH Into USL
The provisions of the Plan assume that, prior to the Petition
Date, the New Holding Company and USLH will have been merged into USL.
USL will be the surviving corporation and remain a Wisconsin corporation.
The capital stock of the New Holding Company will be replaced with capital
stock of USL. Specifically, 3,000 shares of USL Common Stock will be
issued to the Former Holding Company Debenture Holders in the same
proportion in which the Former Holding Company Debenture Holders owned the
common stock of the New Holding Company.
B. Commencement of the Chapter 11 Case
If the Solicitation results in the acceptance of the Plan by
holders of the requisite number of Claims and Interests, USL intends to
commence the Chapter 11 Case. Following the Petition Date, USL will
continue to operate its business and manage its properties as debtor and
debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy
Code.
C. Administration of the Chapter 11 Case
Operational Matters. On the Petition Date, USL will request
that the Bankruptcy Court enter a series of orders designed to minimize
any disruption of business operations and to facilitate the Restructuring.
Payment of Debt Incurred in the Ordinary Course of Business.
The objective of the Chapter 11 Case is to restructure the outstanding
indebtedness to Noteholders and the USL Common Stock held by Stockholders.
It is essential to the Plan that relationships with trade vendors and
other holders of debt incurred in the ordinary course of business, and
relationships with employees and consultants, not be disrupted or
impaired. Consequently, USL, promptly after the Petition Date, will
request that the Bankruptcy Court enter an order authorizing USL to pay,
in its discretion, all undisputed indebtedness and obligations (other than
the indebtedness or liabilities that are impaired and to be restructured
under the Plan) incurred in the ordinary course of business as such
indebtedness and obligations mature in accordance with their terms, or as
otherwise provided by applicable non-bankruptcy law, and to pay salaries,
wages, benefits, and other amounts owed to employees and consultants.
These include obligations that were, or may have been, incurred prior to
the Petition Date.
Cash Management. USL will request that the Bankruptcy Court
enter an order authorizing USL to continue its current cash management
system. The order would allow USL to fund its day-to-day obligations,
such as payroll, taxes, employee benefits, and insurance.
D. Creditors' Committee
Pursuant to section 1102 of the Bankruptcy Code, the United
States Trustee is required to appoint a committee of creditors holding
unsecured claims. In light of the prepackaged nature of the Plan, the
existence and likely continued functioning of the Informal Noteholders'
Committee, and USL's request for an order authorizing it to pay
prepetition ordinary course liabilities (with certain exceptions), it is
possible that the United States Trustee may elect, in the exercise of its
discretion, not to appoint a statutory committee of unsecured creditors.
E. DIP Credit Facility and Emergence Credit Facility
On the Petition Date, USL will seek, among other things, an
order(s) from the Bankruptcy Court approving the extension of the DIP
Credit Facility on an interim and final basis. Although USL presently
expects that the DIP Credit Facility will be provided by the Prepetition
Lenders pursuant to the terms of the Prepetition Credit Agreement and the
debtor-in-possession financing term sheet attached thereto, it is possible
that the DIP Credit Facility could be provided by another lender or group
of lenders. In either event, the proceeds of the DIP Credit Facility will
first be used to pay all "Obligations" owed to the Prepetition Lenders
under the Prepetition Credit Agreement and then to fund USL's working
capital needs during the Chapter 11 Case.
During the pendency of the Chapter 11 Case, USL will also
negotiate the terms and conditions of an agreement, to be executed as of
the Effective Date, pursuant to which the Emergence Credit Facility will
be extended. Although USL presently expects that the Prepetition Lenders
will provide the Emergence Credit Facility pursuant to the terms of the
Prepetition Credit Agreement and the emergence financing term sheet
attached thereto, it is possible that the Emergence Credit Facility could
be provided by another lender or group of lenders. In either event, the
proceeds of the Emergence Credit Facility will first be used to pay all
undisputed amounts owed under the DIP Credit Facility and then to fund
Reorganized USL's working capital needs after the Effective Date.
F. Confirmation Hearing
USL anticipates that as soon as practicable after commencing the
Chapter 11 Case, it will seek an order of the Bankruptcy Court scheduling
the hearing to consider Confirmation of the Plan. USL anticipates that
notice of the hearing will be published in the Wall Street Journal
(National Edition) and the New York Times, and will be mailed to all known
holders of Claims and Interests, at least twenty-five days before the date
by which objections must be filed with the Bankruptcy Court.
G. Bar Date
In accordance with the provisions of the Bankruptcy Code and the
Bankruptcy Rules, USL will request that the Bankruptcy Court enter an
order (the "Bar Date Order") establishing the last date and time by which
proofs of Claims (other than Claims of governmental authorities) against,
and proofs of Interests in, USL must be filed (the "Bar Date").
Additionally, USL expects that it will request that the Bar Date Order
provide that, unless otherwise ordered by the Bankruptcy Court, Claims
arising from the rejection of executory contracts and unexpired leases
subsequent to the Bar Date are to be filed no later than twenty days after
the later of (a) notice of entry of an order approving such rejection or
(b) notice of entry of the Confirmation Order. USL anticipates that a
notice of the Bar Date will be published in the Wall Street Journal
(National Edition) and the New York Times, and that a proof of claim form
or proof of equity interest form, as the case may be, and instructions for
its completion will be mailed to all known holders of Claims and Interests
subject to the Bar Date Order, at least twenty days before the Bar Date.
VI. SUMMARY OF THE PLAN
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE AND MEANS FOR
IMPLEMENTATION OF THE PLAN AND OF THE CLASSIFICATION AND TREATMENT OF
CLAIMS AND INTERESTS UNDER THE PLAN AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT AS
APPENDIX A, AND TO THE EXHIBITS ATTACHED THERETO.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE
SUMMARIES OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS
REFERRED TO THEREIN. THE STATEMENTS CONTAINED IN THIS DISCLOSURE
STATEMENT DO NOT PURPORT TO BE PRECISE OR COMPLETE STATEMENTS OF ALL THE
TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS REFERRED TO THEREIN, AND
REFERENCE SHOULD BE MADE TO THE PLAN AND TO SUCH DOCUMENTS FOR THE FULL
AND COMPLETE STATEMENT OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN CONTROL
THE ACTUAL TREATMENT OF CLAIMS AGAINST AND INTERESTS IN USL UNDER THE PLAN
AND WILL, UPON THE EFFECTIVE DATE, BE BINDING UPON HOLDERS OF CLAIMS
AGAINST AND INTERESTS IN USL, REORGANIZED USL, AND OTHER PARTIES IN
INTEREST.
A. Overall Structure of the Plan
Promptly following the commencement of the Chapter 11 Case, USL
expects to seek orders of the Bankruptcy Court (i) approving this
Disclosure Statement as containing adequate information and the
solicitation of votes as being in compliance with section 1126(b) of the
Bankruptcy Code and (ii) confirming the Plan, in order to allow USL to
emerge promptly from chapter 11, thereby preserving its going-concern
value. USL believes that in the competitive industry in which it
operates, a lengthy chapter 11 case could impair USL's financial condition
and value and dim the prospects for a successful reorganization. USL
believes that the Plan, as described below, provides the best possible
recovery to creditors, Noteholders, and Stockholders consistent with the
establishment of a viable financial basis for Reorganized USL's future
operations. The Plan will remove over $139 million of unsecured
indebtedness from USL's balance sheet. This deleveraging of the company
is the keystone of the Plan and will provide USL with the financial
flexibility necessary to compete in the highly competitive leather
manufacturing and processing industry.
Under the Plan, Claims against and Interests in USL are divided
into different Classes. If the Plan is confirmed by the Bankruptcy Court
and consummated, on the Effective Date, and at certain times thereafter,
as Claims are resolved, liquidated, or otherwise allowed, USL will
distribute Cash, New Common Stock, and other property in respect of
certain Classes of Claims and Interests as provided in the Plan. The
Classes of Claims against and Interests in USL created under the Plan, the
treatment of those Classes under the Plan, and the New Common Stock and
other property to be distributed under the Plan are described below.
The terms of the Plan are based upon, among other things, USL's
assessment of its ability to achieve the goals of its current business
plan, make distributions pursuant to the Plan, and repay its continuing
obligations in a manner consistent with the working capital requirements
of Reorganized USL's business. In conjunction with the Plan, USL has
provided financial projections of earnings and cash flows for each of the
two and one-half year periods from July 1, 1998 through December 31, 2000,
based on its current business plan. The Projections are appended hereto
as Appendix C.
The Plan is intended to implement the Restructuring by providing
for the following transactions:
(a) The cancellation of all outstanding shares of USL
Common Stock and the issuance of 10,000,000 shares of New
Common Stock of Reorganized USL.
(b) The exchange of all outstanding Notes, plus all
accrued but unpaid interest through the Petition Date, for
9,700,000 shares of New Common Stock. As a result, each
$1,000 of principal amount of the Notes will be exchanged
for 74.61538 shares of New Common Stock.
(c) The exchange of all outstanding shares of USL
Common Stock for the remaining 300,000 shares of New Common
Stock. As a result each outstanding share of USL Common
Stock will be exchanged for 100 shares of New Common Stock.
(d) The appointment of the Post-Restructuring Board
of Directors by the Informal Noteholders' Committee, which
shall appoint four directors, and management of Reorganized
USL, which shall nominate one director.
If the Plan is accepted, non-accepting Noteholders will not be
permitted to retain their Notes. All of the Notes would be exchanged for
New Common Stock, and the Indenture would be eliminated.
B. Treatment of the Classes Under the Plan
A chapter 11 plan of reorganization (i) divides claims and
interests into separate classes; (ii) specifies the treatment of each such
class under the plan in satisfaction of the claims or interests in that
class; and (iii) contains other provisions to implement the reorganization
of the debtor.
A chapter 11 plan may specify that certain classes of claims or
interests are either to be paid in full upon effectiveness of the plan or
are to remain unchanged by the reorganization effectuated by the plan.
Such classes are referred to as "unimpaired" and are deemed to accept the
plan. It is not necessary to solicit votes from such classes.
The following is a more detailed description of the Classes into
which the Plan divides all Claims and Interests and the treatment offered
each Class. This description is qualified in its entirety by reference to
the Plan, the body of which is attached hereto as Appendix A.
Administrative Expense Claims (Unclassified)
Description. Administrative Expense Claims are any Claims for
payment of an administrative expense of a kind specified in section 503(b)
of the Bankruptcy Code and entitled to priority pursuant to section
507(a)(l) of the Bankruptcy Code.
Treatment. As provided in section 2.01 of the Plan, each holder
of an Allowed Administrative Expense Claim will be paid in full in Cash as
soon as practicable after (but in any event within 30 days of) the later
of (a) the Effective Date and (b) the date such Administrative Expense
Claim becomes Allowed, unless such holder shall agree to a different
treatment (including any different treatment that may be provided for in
the documentation governing such Claim); provided however, that Allowed
Administrative Expense Claims with respect to liabilities and obligations
incurred by USL in the ordinary course of business during the Chapter 11
Case (including, without limitation, such Claims of vendors and suppliers
in respect of goods sold and services furnished to USL in the ordinary
course of USL's business) may be assumed by Reorganized USL and be paid in
full in Cash by Reorganized USL in accordance with the terms and
conditions of the particular transaction and any agreements and
instruments related thereto; provided further, however, that any Claims of
the Prepetition Lenders or, as the case may be, the Banks arising under
the DIP Credit Facility shall be paid in full in Cash on the Effective
Date.
Class 1: Priority Tax Claims (Unimpaired)
Description. The Class 1 Claims consist of all Claims, other
than Administrative Expense Claims, of a governmental unit of the kind
entitled to priority under section 507(a)(8) of the Bankruptcy Code.
Treatment. As provided in section 4.01 of the Plan, Class 1
will not be impaired and will be deemed to have accepted the Plan. Each
holder of an Allowed Class 1 Claim shall receive payment in full in Cash
of the amount of its Allowed Class 1 Claim as soon as practicable after
(but in any event within 30 days of) the later of (a) the Effective Date
and (b) the date such Class 1 Claim becomes Allowed, unless such holder
shall agree to a different treatment.
Class 2: Other Priority Claims (Unimpaired)
Description. The Class 2 Claims consist of all Claims for
amounts entitled to priority in right of payment under sections 507(a)(3),
(4), (5) or (6) of the Bankruptcy Code.
Treatment. As provided in section 4.02 of the Plan, Class 2
will not be impaired and will be deemed to have accepted the Plan. Each
holder of an Allowed Class 2 Claim shall be paid in full in Cash the
amount of its Allowed Class 2 Claim as soon as practicable after (but in
any event within 30 days of) the later of (a) the Effective Date and (b)
the date such Class 2 Claim becomes Allowed, unless such holder shall
agree to a different treatment (including any different treatment that may
be provided for in the documentation governing such Claim).
Class 3: Miscellaneous Secured Claims (Unimpaired)
Description. The Class 3 Claims consist of all Claims secured
by a security interest in or lien upon property of USL, other than Claims
in Class 4.
Treatment. As provided in section 4.03 of the Plan, Class 3
will not be impaired and will be deemed to have accepted the Plan. Unless
the holder of an Allowed Class 3 Claim agrees to a different treatment,
such Claim shall receive one of the following alternative treatments, at
the election of USL and Reorganized USL:
1. Reorganized USL shall pay such holder in full in Cash
the amount of its Allowed Class 3 Claim as soon as
practicable after (but in any event within 30 days of)
the later of (i) the Effective Date and (ii) the date
such Allowed Class 3 Claim becomes Allowed.
2. The Claim shall be Reinstated and all legal,
equitable, and contractual rights to which such
Allowed Class 3 Claim entitles the holder thereof
shall be unaltered by the Plan.
3. All collateral securing such Allowed Class 3 Claim
shall be transferred and surrendered to such holder,
without representation or warranty by or recourse
against Reorganized USL.
Class 4: Prepetition Credit Agreement Claims (Unimpaired)
Description. The Class 4 Claims consist of all Claims arising
under or related to the Prepetition Credit Agreement.
Treatment. As provided in section 4.04 of the Plan, Class 4
will not be impaired and will be deemed to have accepted the Plan. On the
Effective Date, each holder of an Allowed Class 4 Claim will be paid in
full in Cash the amount of its Allowed Class 4 Claim.
Class 5: Note Claims (Impaired)
Description. The Class 5 Claims consist of all Claims relating
to, arising under, in respect of, or in connection with the Notes,
including all Claims for accrued but unpaid interest.
Treatment. As provided in section 5.01 of the Plan, Class 5
will be impaired and will be entitled to vote on the Plan. On the
Effective Date, each holder of an Allowed Class 5 Claim will receive its
pro rata share of 9,700,000 shares of New Common Stock, which equals
74.61538 shares of New Common Stock for each $1,000 of principal amount of
Notes owned by such holder, rounded to the nearest whole number of shares.
No fractional shares of New Common Stock will be issued. In addition, as
part of the distribution to Class 5, the Informal Noteholders' Committee
Expenses will be paid in full in Cash on the Effective Date. No other
distribution will be made to holders of Allowed Class 5 Claims in respect
of their Allowed Class 5 Claims, including, without limitation, Claims for
accrued but unpaid interest on the Notes.
Class 6: General Unsecured Claims Against USL (Unimpaired)
Description. The Class 6 Claims consist of all Claims against
USL, other than Claims that are otherwise classified hereby or that are
Administrative Expense Claims.
Treatment. As provided in section 4.05 of the Plan, Class 6
will not be impaired and will be deemed to have accepted the Plan. Each
holder of an Allowed Class 6 Claim shall be paid in full in the ordinary
course of USL's business and, accordingly, will not receive any
distribution on the Effective Date under the Plan. Such Allowed Class 6
Claims, if not so paid during the pendency of the Chapter 11 Case, will be
Reinstated and paid in the ordinary course of Reorganized USL's business
pursuant to the terms of any applicable invoice or agreement relating to
such Claims or as otherwise required by applicable non-bankruptcy law.
Class 7: Interests in Respect of USL Common Stock (Impaired)
Description. Class 7 consists of all Interests in respect of
USL Common Stock.
Treatment. As provided in section 5.02 of the Plan, Class 7
will be impaired and will be entitled to vote on the Plan. On the
Effective Date, the holder of an Allowed Class 7 Interest shall receive
its pro rata share of 300,000 shares of New Common Stock, which equals 100
shares of New Common Stock for each share of USL Common Stock owned by
such holder. No other distribution will be made to holders of Allowed
Class 7 Interests in respect of their Allowed Class 7 Interests.
C. Treatment of Trade Creditors and Employees Under the Plan
1. Provisions for Trade Creditors
USL proposes that all Allowed Claims of its trade creditors will
not be impaired and will be paid in full.
If the Plan is confirmed, holders of trade Claims that are
Allowed or Scheduled will not be required to file proofs of claim with the
Bankruptcy Court, and the Bar Date will not be enforced as to such trade
Claims. Upon and after the Effective Date (subject to Bankruptcy Court
approval prior to the Effective Date), all trade Claims not already paid
will be paid in full in the ordinary course of business of Reorganized
USL. If USL or Reorganized USL dispute any trade Claim, such dispute will
be determined, resolved, or adjudicated, as the case may be, in the manner
in which such dispute would have been determined, resolved, or adjudicated
if the Chapter 11 Case had not been commenced and will survive
Consummation as if the Chapter 11 Case had not been commenced. At USL's
option, such dispute may be brought before, and resolved by, the
Bankruptcy Court.
Any Claim arising from the rejection of an executory contract or
unexpired lease under the Plan will be paid when such Claim is Allowed by
the Bankruptcy Court.
2. Provisions for Employees
To ensure the continuity of USL's workforce and further
accommodate the unimpaired treatment of employee benefits, promptly after
the Petition Date, USL will seek an order from the Bankruptcy Court
authorizing USL's banks to honor payroll checks outstanding as of the
Petition Date (or to issue replacement checks), to permit employees to
utilize paid vacation time accrued prior to the Petition Date (so long as
they remain employees of USL), and to continue paying medical and other
benefits under all applicable insurance plans. Employee Claims and
benefits not paid or honored prior to Consummation of the Plan will be
paid or honored upon the Effective Date or as soon thereafter as such
payment or other obligation becomes due or performable. Employees will
not be required to file proofs of claim on account of employee Claims with
the Bankruptcy Court, and the Bar Date will not be enforced as to such
Claims. Under the Plan, salaries or wages, as the case may be, accrued
paid vacation, health related benefits, severance benefits, field
management and executive/administrative management incentive plans, and
similar employee benefits with respect to USL employees will be
unaffected.
D. Post-Restructuring Board
On the Effective Date, the Board of Directors of Reorganized USL
shall consist of the Post-Restructuring Board, and the operation of
Reorganized USL shall become the general responsibility of the Post-
Restructuring Board in accordance with applicable non-bankruptcy law.
The Post-Restructuring Board will consist of five directors.
Four directors will be appointed by the Informal Noteholders' Committee.
One director will be nominated by the management of Reorganized USL.
E. Restated Articles of Incorporation and By-Laws
On the Effective Date, Reorganized USL shall be deemed to have
adopted the Restated Articles of Incorporation and Restated By-Laws. As
soon as practicable, on or after the Effective Date, Reorganized USL will
file its Restated Articles of Incorporation with the Department of
Financial Institutions of the State of Wisconsin. Except to the extent
inconsistent with the terms of the Plan, after the Effective Date,
Reorganized USL may further amend the Restated Articles of Incorporation
and may amend the Restated By-Laws as permitted by such Restated Articles
of Incorporation, such Restated By-Laws, and applicable state law.
F. Procedures Pertaining to Distributions
Only Allowed Claims - that is, Claims that are not disputed,
contingent, unliquidated, or the subject of a motion to estimate - are
entitled to receive distributions under the Plan. Any distribution to
which the holder of a Claim is otherwise entitled under the Plan shall not
be made unless and until the Claim becomes Allowed. Any estimates of
Claims or Interests set forth in this Disclosure Statement may vary from
the final amounts of Claims or Interests allowed by the Bankruptcy Court
and are provided without prejudice to USL's right to contest them.
USL reserves the right to contest and to object to any Claims,
including, without limitation, those Claims that are specifically
referenced in the Plan, are not listed in the Schedules, are listed in the
Schedules as disputed, contingent, or unliquidated in amount, or are
listed therein at a lesser amount than asserted by the holder of the
Claim. Objections will be litigated to a Final Order. However, USL may
compromise and settle any objections to Claims, subject to the approval of
the Bankruptcy Court, and may seek Bankruptcy Court estimation of disputed
Claims pursuant to section 502(c) of the Bankruptcy Code.
In general, distributions under the Plan (whether of Cash or New
Common Stock) will be made as soon as practicable after (but in any event
within 30 days of) the later of (a) the Effective Date and (b) the date
the pertinent Claim or Interest becomes Allowed, and upon surrender of the
Notes or other instruments or certificates, if any, pertaining to such
Claims or Interests. In the event that USL elects to Reinstate a Claim,
payments will be made pursuant to the terms of the documentation
underlying such Claim or as otherwise required by applicable non-
bankruptcy law.
A holder of an Allowed Claim who fails, within two years after
the Effective Date, to take the actions required under the Plan to receive
payment or any other distribution will forfeit all rights to such payment
or distribution.
Except as otherwise provided in the Plan, on the Effective Date
the Notes, the USL Common Stock, and all instruments and agreements
governing any Claims or Interests in Classes 5 or 7 will be deemed
cancelled and will not represent any Claim against or Interest in USL
(other than the right to receive distributions under the Plan). Except as
otherwise provided in the Plan or in section 1141(d) of the Bankruptcy
Code, the payments and distributions made under the Plan will be in full
and final satisfaction of all Claims and Interests.
G. Corporate Action
Upon entry of the Confirmation Order by the Clerk of the
Bankruptcy Court, all actions contemplated by the Plan shall be authorized
and approved in all respects (subject to the provisions of the Plan),
without the necessity of any further action on the part of USL's
shareholders or directors or on the part of Reorganized USL's shareholders
or directors.
H. Retiree Benefits
On and after the Effective Date, to the extent required by
section 1129(a)(13) of the Bankruptcy Code, Reorganized USL shall continue
to pay all retiree benefits (if any), as that term is defined in section
1114(a) of the Bankruptcy Code, maintained or established by USL prior to
the Confirmation Date, without prejudice to Reorganized USL's rights under
applicable non-bankruptcy law to modify, amend, or terminate the foregoing
arrangements.
I. Executory Contracts and Unexpired Leases
Subject to the approval of the Bankruptcy Court, the Bankruptcy
Code empowers USL to assume or reject executory contracts and unexpired
leases. As a general matter, an "executory contract" is a contract under
which material performance (other than payment of money) is due by each
party. If an executory contract or unexpired lease is rejected, the other
party to the agreement may file a claim for damages incurred by reason of
the rejection by USL. In the case of rejection of employment agreements
and leases of real property, such damage Claims are subject to certain
limitations imposed by the Bankruptcy Code. If an executory contract or
unexpired lease is assumed, USL must Cure any defaults (or provide
adequate assurance that it will promptly do so), and it must perform its
obligations thereunder in accordance with the terms of such agreement.
Failure to perform its obligations would result in a Claim for damages
that ordinarily would be entitled to Administrative Expense Claim status.
1. Executory Contracts and Unexpired Leases Assumed Unless
Specifically Rejected
On and as of the Effective Date, all executory contracts and
unexpired leases that exist between USL and any Person will be
specifically assumed, except for any executory contracts and unexpired
leases that have been specifically rejected with the approval of the
Bankruptcy Court on or before the Effective Date, or in respect of which a
motion for rejection has been filed with the Bankruptcy Court on or before
the Effective Date. Entry of the Confirmation Order by the Clerk of the
Bankruptcy Court shall constitute approval of such assumptions pursuant to
section 365(a) of the Bankruptcy Code. Claims created by the rejection of
executory contracts and unexpired leases must be filed with the Bankruptcy
Court no later than twenty days after entry of a Final Order authorizing
such rejection. Any such Claims not filed within such time shall be
forever barred from assertion against USL, Reorganized USL, and any of
their respective properties and estates.
2. Officers' and Directors' Indemnification Rights
For purposes of the Plan, USL's obligations to indemnify its or
its present or former parents', subsidiaries', or affiliates' present and
former directors, officers, and employees against any obligations,
liabilities, costs, or expenses pursuant to the articles of incorporation
or by-laws of USL or of such parents, subsidiaries, or affiliates,
applicable state law, specific agreement, or any combination of the
foregoing, shall not survive Confirmation of the Plan and shall be
discharged, regardless of whether indemnification is owed in connection
with an event occurring prior to, upon, or subsequent to the commencement
of the Chapter 11 Case.
Reorganized USL will, however, maintain in force for a period of
two years following the Effective Date policies of Directors' and
Officers' Liability Insurance, covering directors and officers of USL and
containing substantially the same provisions and limits of coverage as the
policies that were in force on the Petition Date. Reorganized USL will
also be responsible for paying the deductible or retention amounts under
such policies for such two-year period.
3. Compensation and Benefit Programs
All employment and severance agreements and policies, and all
employee compensation and benefit plans, policies, and programs of USL
applicable generally to its employees as in effect on the Effective Date,
including, without limitation, all savings plans, retirement plans, health
care plans, disability plans, severance benefit plans, incentive plans and
life, accidental death and dismemberment insurance plans, shall continue
in full force and effect, without prejudice to Reorganized USL's rights
under the terms of those arrangements or applicable non-bankruptcy law to
terminate or modify the foregoing arrangements.
J. Conditions Precedent to the Effective Date
Section 11.01 of the Plan provides that the Plan shall not be
confirmed unless the aggregate amount of Allowed Class 6 General Unsecured
Claims as of the date of the Confirmation Hearing, is less than
$25,000,000, unless this condition is waived pursuant to section 11.03 of
the Plan.
Section 11.02 of the Plan provides that the Plan shall not
become effective unless and until the following conditions have been
satisfied or waived pursuant to section 11.03 of the Plan:
1. The Confirmation Order shall have been entered in form and
substance reasonably acceptable to the Debtor, the Informal
Noteholders' Committee, and (i) the Prepetition Lenders,
provided that the Prepetition Lenders have extended the DIP
Credit Facility or, as the case may be, (ii) the Banks,
provided that the Banks have extended the DIP Credit
Facility.
2. The Confirmation Order shall have become a Final Order and
provide, among other things, that:
(a) The provisions of the Confirmation Order are non-severable
and mutually dependent.
(b) Except as expressly provided in the Plan, USL is
discharged, effective upon Confirmation, from any "debt"
(as that term is defined in section 101(12) of the
Bankruptcy Code), and USL's liability in respect thereof is
extinguished completely, whether reduced to judgment or
not, liquidated or unliquidated, contingent or non-
contingent, asserted or unasserted, fixed or unfixed,
matured or unmatured, disputed or undisputed, legal or
equitable, or known or unknown, or that arose from any
agreement of USL that has either been assumed or rejected
in the Chapter 11 Case or pursuant to the Plan, or
obligation of USL incurred before Confirmation, or from any
conduct of USL prior to Confirmation, or that otherwise
arose before Confirmation, including, without limitation,
all interest, if any, on any such debts, whether such
interest accrued before or after the Petition Date.
(c) The Plan does not provide for the liquidation of all or
substantially all of the property of USL, and its
Confirmation is not likely to be followed by the
liquidation of Reorganized USL or the need for further
financial reorganization.
(d) Any objection, not previously withdrawn or settled, to the
adequacy of the information contained in the Disclosure
Statement is overruled, and the information contained in
the Disclosure Statement was adequate for the purpose of
soliciting Ballots for Confirmation of the Plan.
3. The Post-Restructuring Board shall have been designated.
4. The Bankruptcy Court shall have entered one or more orders
(which may be the Confirmation Order) that have become Final
Orders, authorizing the assumption and assignment of all
unexpired leases and executory contracts that were not
expressly rejected.
5. No request for revocation of the Confirmation Order under
section 1144 of the Bankruptcy Code shall have been made or,
if made, shall remain pending.
6. All other actions required by Article VII of the Plan to
occur on or before the Effective Date shall have occurred.
7. None of USL's pension plans shall have been terminated.
8. The Emergence Credit Facility shall have been entered into
between Reorganized USL and the Prepetition Lenders or, as
the case may be, the Banks, and all agreements, instruments,
or other documents contemplated by the Emergence Credit
Facility shall have been executed by Reorganized USL and the
Prepetition Lenders or, as the case may be, the Banks, and
all of the conditions precedent to the effectiveness of such
agreements, instruments, and other documents (other than
Consummation of the Plan) shall have been satisfied in full
or duly waived.
9. The Debtor shall have concurrently satisfied all of its
obligations under the DIP Credit Facility, and the DIP Credit
Facility shall have been terminated.
10. The Debtor shall have entered into the Registration Rights
Agreement.
If one or more of the conditions specified in sections 11.01 or 11.02
of the Plan have not occurred or been duly waived as provided in Section
11.03 on or before 60 days after the Confirmation Date, upon notification
submitted by the Debtor to the Bankruptcy Court, to counsel for the
Informal Noteholders' Committee, and to counsel for the Prepetition
Lenders or the Banks, as appropriate under section 11.03 of the Plan, (a)
the Confirmation Order shall be vacated, (b) no distributions under the
Plan shall be made, (c) the Debtor and all holders of Claims and Interests
shall be restored to the status quo ante as of the day immediately
preceding the Confirmation Date as though the Confirmation Date never
occurred, and (d) the Debtor's obligations with respect to the Claims and
Interests shall remain unchanged and nothing contained herein shall
constitute or be deemed a waiver or release of any Claims or Interests by
or against the Debtor or any other person or to prejudice in any manner
the rights of the Debtor or any person in any further proceedings
involving the Debtor.
K. Effects of Plan Confirmation
1. Discharge of USL
Except as provided in the Plan, the entry of the Confirmation
Order shall, provided that the Effective Date occurs, discharge USL's
liabilities and terminate all rights and interests of USL's Noteholders,
Stockholders, and other creditors to the fullest extent authorized or
provided for by the Bankruptcy Code, including, without limitation,
sections 524 and 1141 thereof.
2. Revesting
Except as otherwise expressly provided in the Plan or in the
Confirmation Order, on the Effective Date, title to all property of USL
shall revest in Reorganized USL, free and clear of all Claims, liens,
encumbrances, charges, Interests, and other interests of Noteholders and
Stockholders arising on or before the Effective Date, and Reorganized USL
may operate its business, from and after the Effective Date, free of any
restrictions imposed by the Bankruptcy Code or by the Bankruptcy Court.
3. Injunction
The satisfaction, release, and discharge pursuant to the Plan
will also act as an injunction against any Person commencing or continuing
any action, employment of process, or act to collect, offset, or recover
any Claim or cause of action satisfied, released, or discharged under the
Plan to the fullest extent authorized or provided by the Bankruptcy Code,
including, without limitation, to the extent provided for or authorized by
sections 524 and 1141 thereof.
4. Releases
a. Release by Persons Accepting Distributions Under the
Plan
Pursuant to section 13.06 of the Plan, except as otherwise
specifically provided for by the Plan, any Person accepting any
distribution of Cash, New Common Stock, or any other property pursuant to
the Plan shall be presumed conclusively to have released USL, Reorganized
USL, and their current and former parents, subsidiaries, and affiliates
(the "Released Parties"), and the Released Parties' current and former
directors, officers, stockholders, employees, agents, representatives,
attorneys, accountants, advisors, financial advisors, and other
professionals retained by the Released Parties and their predecessors,
successors, and assigns, and any Person claimed to be liable derivatively
through any of the foregoing, from any and all claims, debts, actions, or
causes of action, whether known or unknown, and whether based upon facts
now known or unknown, direct or derivative, in law, equity, or bankruptcy,
that any such Person, and anyone claiming in a derivative capacity from
such Person, had, now has, or hereafter can, shall, or may have against
such Persons, from the beginning of the world to the Effective Date,
arising from, in connection with, or related to any act or omission
related to the Debtor, the Chapter 11 Case, or the Plan, except for
willful misconduct or gross negligence. The release described in the
preceding sentence shall be enforceable as a matter of contract law
against any Person that accepts any distribution pursuant to the Plan
(including each creditor whose Claim is unimpaired).
b. Release by Reorganized USL and Persons Accepting
Distributions Under the Plan
Pursuant to section 13.06 of the Plan, upon the Effective Date,
USL, Reorganized USL, and each Person accepting any distribution of Cash,
New Common Stock, or any other property under the Plan (including each
creditor whose Claim is unimpaired) will conclusively be deemed to have
released and discharged the following parties, their current and former
parents, subsidiaries, affiliates, directors, officers, stockholders,
employees, agents, representatives, attorneys, accountants, advisors,
financial advisors, and other professionals retained by such parties, and
their predecessors, successors, and assigns: (i) the Debtor, (ii) the
Creditors' Committee, if any, (iii) the Informal Noteholders' Committee,
(iv) the Prepetition Lenders, (v) the Banks, (vi) all holders of
Interests, and (vii) all Noteholders (collectively, the "Released
Persons") from any and all liability, claims, debts, actions, or causes of
action, whether known or unknown and whether based upon facts now known or
unknown, direct or derivative, in law, equity, or bankruptcy, which USL,
Reorganized USL, or any Person accepting any distribution under the Plan
had, now has, or hereafter can, shall, or may have against such Released
Persons, from the beginning of the world to the Effective Date, arising
from, in connection with, or related to any act or omission related to the
Notes, the Interests, the negotiation and prosecution of the Plan, or to
such Released Persons' past service with, for, or on behalf of USL,
including, but not limited to, prosecution of the Chapter 11 Case, except
for willful misconduct or gross negligence. The release described in the
preceding sentence shall be enforceable as a matter of contract law
against any Person that accepts any distribution pursuant to the Plan
(including each creditor whose Claim is unimpaired).
Notwithstanding anything contained herein, USL and Reorganized
USL are not releasing or waiving any counterclaim or right of setoff
either may have with respect to an Allowed Claim that is Reinstated under
the Plan.
L. Exculpation
Neither USL, Reorganized USL, the Informal Noteholders'
Committee, the Creditors' Committee, if any, the Prepetition Lenders, the
Banks, nor any of their respective parents, subsidiaries, or affiliates,
nor any of their respective members, officers, directors, employees,
agents, attorneys, accountants, or other advisors, shall have or incur any
liability to any holder of a Claim or Interest or Person accepting any
distribution of Cash, New Common Stock, or any other property under the
Plan (including each creditor whose Claim is unimpaired) for any act or
omission in connection with, or arising out of, the negotiation of the
Plan, pursuit of Confirmation of the Plan, the Consummation of the Plan,
or the administration of the Plan or the property to be distributed under
the Plan, except for willful misconduct or gross negligence, and in all
respects such Persons shall be entitled to rely upon the advice of counsel
with respect to their duties and responsibilities under the Plan and will
be fully protected in acting or in refraining from action in accordance
with such advice.
M. Retention of Jurisdiction
The Plan provides for the retention of jurisdiction by the
Bankruptcy Court over the Chapter 11 Case for the purpose of determining,
among other things, all disputes relating to Claims, all other issues
arising in connection with the interpretation, implementation, or
enforcement of the Plan, and all other matters pending on the Effective
Date.
N. Amendments to Plan/Revocation or Withdrawal
USL may alter, amend, or modify the Plan under section 1127 of
the Bankruptcy Code at any time or from time to time prior to or after the
Confirmation Date upon such notice and hearing as shall be required by the
Bankruptcy Code, the Bankruptcy Rules, or Final Order of the Bankruptcy
Court. In any event, USL shall provide notice of any proposed
alterations, amendments, or modifications to counsel for the Informal
Noteholders' Committee and counsel for the Creditors' Committee, if any.
USL also may revoke or withdraw the Plan prior to the
Confirmation Date. If USL revokes or withdraws the Plan prior to the
Confirmation Date, then the Plan will be deemed null and void. In such
event, nothing contained in the Plan shall be deemed to constitute a
waiver or release of any claims by or Claims against USL or any other
Person or to prejudice in any manner the rights of USL or any Person in
any further proceedings involving USL or to constitute an admission of any
sort by USL or any other Person.
VII. CERTAIN FACTORS TO BE CONSIDERED
Prior to deciding whether to vote to accept or reject the Plan,
each Noteholder and Stockholder should carefully consider all of the
information contained in this Disclosure Statement, especially the factors
described or cross-referenced in the following paragraphs.
A. General Considerations
The formulation of a reorganization plan is the principal
purpose of a chapter 11 case. The Plan sets forth the means for
satisfying the holders of Claims against and Interests in USL.
Reorganization of USL under the proposed Plan also avoids the potentially
adverse impact of a liquidation on USL employees, and many of its
customers, suppliers, and trade vendors.
B. Certain Bankruptcy Considerations
If the Plan is not confirmed and consummated, there can be no
assurance that the Chapter 11 Case will continue rather than be converted
to a chapter 7 liquidation, or that any alternative plan of reorganization
would be on terms as favorable to holders of Claims and Interests as the
terms of the Plan. If a liquidation or protracted reorganization were to
occur, the distributions to Noteholders under the Plan would be
significantly reduced. USL believes that in a chapter 7 liquidation,
before Noteholders received any distributions, additional administrative
expenses of a trustee and such trustee's attorneys, accountants, and other
professionals would cause a substantial diminution in the value of the
Estate. In addition, certain Claims would arise by reason of the
liquidation and from the rejection of unexpired leases and other executory
contracts in connection with the cessation of USL's operations. Moreover,
the Noteholders would receive substantially less because of the inability
to realize the greater going concern value of USL's assets in a
liquidation.
USL's liquidation analysis, prepared with Houlihan, Lokey's
assistance, is premised on a liquidation in a chapter 7 case and is
attached hereto as Appendix B. In the analysis, USL has taken into
account the nature, status, and underlying value of its assets, the
ultimate realizable value of its assets, and the extent to which such
assets are subject to liens and security interests. Based on this
analysis, it is likely that a liquidation of USL's operations would
produce less value for distribution to Noteholders than that recoverable
in each instance under the Plan. In the opinion of USL, the recoveries
projected to be available in liquidation are not likely to afford holders
of Claims and Interests as great a realization potential as does the Plan.
C. Inherent Uncertainty of Financial Projections
USL's financial projections are attached as Appendix C to this
Disclosure Statement. The Projections forecast USL's operations through
the period ending December 31, 2000. The Projections are based on
numerous assumptions that are an integral part of the Projections,
including Confirmation and Consummation of the Plan in accordance with its
terms, the anticipated future performance of Reorganized USL, industry
performance, general business and economic conditions, competition,
adequate financing, continued supply of hides and other raw materials at
assumed prices, and other matters, many of which are beyond the control of
Reorganized USL and some or all of which may not materialize. In
addition, unanticipated events and circumstances occurring subsequent to
the date of this Disclosure Statement may affect the actual financial
results of Reorganized USL's operations. Because the actual results
achieved throughout the periods covered by the Projections may vary from
the projected results, the Projections should not be relied upon as a
guaranty, representation, or other assurance of the actual results that
will occur.
D. Potential Dilution of Noteholder and Stockholder Voting Power as
a Result of Management Stock Incentive Program
On or after the Effective Date, the Post-Restructuring Board of
Directors may implement a Management Stock Incentive Program (the
"Program"). Under the Program, stock options for up to 1,000,000 shares
of New Common Stock could be issued to key employees of Reorganized USL.
If the Program is implemented, a Compensation Committee of the Post-
Restructuring Board of Directors will establish and administer the Program
and determine the terms and conditions under which any such management
stock options will vest. If implemented, the Program could, assuming that
stock options provided under the Program are exercised, reduce the
proportionate ownership represented by the New Common Stock distributed to
Noteholders and Stockholders under the Plan and dilute the voting power of
Noteholders and Stockholders.
Assuming the implementation of the Program and the exercise of
all the options issuable under the Program, the following table
illustrates the potential dilution to the proportionate ownership
represented by the New Common Stock to be distributed to Noteholders and
Stockholders under the Plan:
Plan Distribution Fully-Diluted
Shares % Ownership Shares % Ownership
Noteholders 9,700,000 97.0% 9,700,000 88.2%
Stockholders 300,000 3.0% 300,000 2.7%
Management 0 0.0% 1,000,000 9.1%
---------- ----- ---------- ------
10,000,000 100.0% 11,000,000 100.0%
E. Market for New Common Stock
There is no existing market for USL Common Stock, and there can
be no assurance that a trading market for the New Common Stock will
develop. Accordingly, no assurance can be given as to the liquidity of
the market for such securities or the price at which any sales may occur,
which will depend upon the number of holders thereof, the interest of
securities dealers in maintaining a market in such securities, and other
factors beyond the control of USL or Reorganized USL.
On or before the Effective Date, the Debtor or Reorganized USL
will enter into the Registration Rights Agreement, pursuant to which any
Noteholder or Stockholder who would be deemed, post-Confirmation, to be an
"affiliate" of Reorganized USL by reason of such Person's equity holdings
in the company or otherwise will be granted certain "shelf" and/or
"demand" registration rights. Reorganized USL will use its best efforts
to effectuate a listing of New Common Stock on a national securities
exchange or NASDAQ as of the Effective Date. In addition, Reorganized USL
will use its best efforts to cause to be filed with the Commission on the
Effective Date a registration statement on an appropriate form with
respect to New Common Stock and to maintain its status as a reporting
company under the Securities Exchange Act of 1934. While such
registration is expected to facilitate the trading of New Common Stock on
an national securities exchange such as NASDAQ, there can be no assurance
that such securities will be so listed or included or that an active
trading market for the securities will develop and continue. In addition,
there can be no assurance as to the degree of price volatility in any
market for the New Common Stock that does develop. Accordingly, no
assurance can be given that a holder of New Common Stock will be able to
sell such securities in the future or as to the price at which such sale
might occur. If such markets were to exist, the securities could trade at
prices higher or lower than the value ascribed to them in this Disclosure
Statement, depending upon many factors, including prevailing interest
rates, markets for similar securities, industry conditions, and the
performance of, and investor expectations for, Reorganized USL.
Under the Bankruptcy Code, the issuance of the New Common Stock
to be distributed pursuant to the Plan and the subsequent resale of such
New Common Stock by entities that are not "underwriters" (as defined in
section 1145(b) of the Bankruptcy Code) are not subject to the
registration requirements of Section 5 of the Securities Act. (See
section XI.C "Applicability of Certain Securities Laws.")
F. Competition
Each of USL's principal markets furniture, footwear and
specialty leather, and automotive is highly competitive, and certain of
USL's competitors may have greater financial or other resources than USL.
Competition is based on price, service, quality, and the ability to supply
customers in a timely manner with a diverse product line through
widespread marketing and distribution channels. USL has historically been
subject to both domestic and international competition. USL's efforts to
increase its international sales could be adversely affected by, among
other things, currency fluctuations.
Furniture Group. The Furniture Group competes with both foreign
and domestic leather manufacturers, domestic agents who represent foreign
tanneries, and companies that import leather in a partially tanned state
to finish and sell domestically. Foreign leather manufacturers with
significant domestic facilities include Elmo Leather of America, Inc., a
Swedish concern, Valdapone SPA, an Italian concern, and Louis Schweitzer
GmbH, a German concern that is represented by Arcona Trading Co., Inc.
Domestic manufacturers include Prime Tanning Company, Inc., Irving Tanning
Company, Inc., and Garden State Tanning, Inc. Agents located in the
United States that represent several small foreign tanneries domestically
include Americraft Leather, Inc. and Friitala of America, Inc. Arpel
Trading Co., Inc. represents foreign tanneries domestically and imports
foreign partially tanned hides to finish and sell in the United States.
Arpel also purchases partially tanned hides produced and rejected by
domestic leather manufacturers, including USL, to refinish and sell
domestically.
Footwear and Specialty Leather Group. Competition in the
footwear and specialty leather markets is highly fragmented. In the men's
footwear market, in which USL competes primarily under the Pfister & Vogel
trade name, its principal competitors include Prime Tanning Company, Inc.,
the Irving Tanning Company, Inc., S. B. Foot Tanning Company, and Dominion
Tanners (Canada), a division of United Canadian Shares, Limited.
Competitors in other market segments tend to be smaller tanneries with a
single or very limited product focus.
Automotive Group. Domestically, competitors that supply leather
products to the automotive industry include Eagle Ottawa Leather Company,
a division of Albert Trostel & Sons Company, Garden State Tanning, Inc.,
and Seton Leather Company. These competitors supply predominantly precut
leather to seat and interior manufacturers. Additional competition in the
United States comes from smaller foreign tanneries seeking to enter the
U.S. automotive market. Whole hide competition in international
automotive OEM markets typically comes from furniture leather
manufacturers, including those previously mentioned.
G. Environmental Matters
USL's leather manufacturing and finishing operations are subject
to numerous U.S. and Canadian federal, state, provincial, and local laws
and regulations governing the protection of the environment. These laws
and regulations establish specific requirements for the handling of
hazardous materials and wastes, impose limitations on the emission of air
and water pollutants, and establish administrative requirements for
permits and reporting. USL places a high priority on compliance with
environmental laws and regulations and believes that it has obtained all
material permits, licenses, orders, or agreements from appropriate
federal, state, provincial, and local regulators currently required for
its manufacturing operations. USL's Board of Directors has adopted
appropriate policies toward environmental compliance, and USL has a
designated corporate officer responsible for implementing such policies.
Except as set forth below, USL is not aware of any current
material environmental liabilities that exist at any of USL's facilities
because of prior leather manufacturing operations or waste management
practices. USL has also implemented appropriate programs designed to
minimize pollution and waste production.
1. Toronto, Ontario Facility
During 1997, USL discovered subsurface contamination of soil and
ground water with chlorinated hydrocarbons at its facility in Toronto,
Ontario. The contamination had crossed property boundaries to an adjacent
commercial property. USL has reported the contamination to the Ontario
Ministry of Environment and Energy, as required by law. Likewise, USL has
filed a claim against the previous owner of A.R. Clarke for restoration of
the site under the terms of an Asset Purchase Agreement between USL and
the previous owner. Options for on-site management and/or remediation are
under investigation.
2. Wastewater Discharges
USL believes that all of its facilities have either installed
appropriate pretreatment equipment and are in compliance in all material
respects with federal, state, provincial, and local pretreatment
categorical standards or are zero discharge facilities. Besides having to
comply with such categorical standards specific to the tanning industry,
each facility must also comply with local generic pretreatment standards
as a condition of discharge. Operational systems are subject to upsets
and equipment malfunctions, which may lead to occasional violations of
such discharge standards.
In 1995, one of USL's Milwaukee, Wisconsin facilities
experienced equipment malfunctions that caused chromium discharges in
excess of allowable limits. A Consent Order with the Milwaukee
Metropolitan Sewerage District ("MMSD") was signed, which provided for
daily sampling and a fine of less than $100,000. Although USL implemented
measures to provide additional redundancy and monitoring to reduce the
likelihood of a recurrence of such excess chromium discharges, and
although such recurrences have been reduced, they have not been
eliminated. In October 1996, USL received a Notice of Noncompliance from
the MMSD for two incidents of excess chromium discharges during the first
quarter of 1996, and in January 1997 USL self-reported two additional such
occurrences. These incidents were caused by cross-connections in the
facility's various effluent collection sewers. Corrective measures were
taken, and USL continues daily monitoring for chromium. No fines or
penalties were levied as a consequence of the 1996 or 1997 incidents.
USL received a Notice of Continuing Violation from the MMSD for
exceeding on September 26, 1996 the oil and grease discharge limits at
another of its Milwaukee, Wisconsin facilities. A subsequent Notice of
Noncompliance was issued following its exceeding such limits on January
14, 1997. USL implemented steps to improve controls over slug loads of
oil and grease discharged into the municipal sewer systems, including
increased sampling and testing. USL also petitioned the MMSD to revise
USL's Discharge Permits to allow it to use an alternate method for testing
discharge quantities. The proposed alternate method is easier to comply
with than the method previously specified by the Discharge Permit. The
controls over slug discharges were effective. In addition, the MMSD
approved the alternate testing method. As a result of these two
developments, the facility has been compliant since January 14, 1997, and
the MMSD has discontinued its enforcement action. No fines or penalties
were levied on USL relating to this action.
In July 1996, the U.S. Environmental Protection Agency ("EPA")
revised the categorical pH standard for tannery discharges to publicly
owned treatment works. This revised standard has allowed USL's facilities
in Milwaukee, Wisconsin and Omaha, Nebraska to discontinue costly pH
neutralization. Based on EPA's action, authorities in Toronto, Ontario
also modified pH standards, thus allowing USL's A.R. Clarke operation to
also cease such neutralization procedures.
3. Off-Site Liabilities
Under existing environmental laws, companies may be held liable
for cleanup costs if they arrange for the disposal or treatment of
hazardous substances that are subsequently released into the environment.
Accordingly, USL may be potentially liable for the cleanup of hazardous
substances at facilities to which USL shipped hazardous substances for
treatment or disposal. There are a number of solvents and other materials
containing hazardous substances that have been shipped from USL's
facilities for disposal or treatment.
In February 1998, USL received a notice from the EPA of the
opportunity to participate in a de minimis settlement at the Caldwell
Systems, Inc. site in North Carolina. USL believes that at least a
portion of any potential liability associated with this site should be
borne by Beatrice Companies, Inc. ("Beatrice") under the terms of the
Asset Purchase Agreement dated January 13, 1985 and has tendered the
defense and indemnification of the claim to Beatrice, which has not yet
responded to the tender. The EPA settlement would require a payment by
USL of $45,949.47, in exchange for a release from future liability at the
site related to specific issues. The settlement agreement contains some
exceptions for coverage, including liability for natural resource damages.
At this time, USL is evaluating the settlement offer. It is not possible
to determine what, if any, liability USL may have for any matters that are
not covered by the settlement agreement.
In August 1997, A.L. Gebhardt and Lackawanna Leather each
received information requests under section 104(e) of the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")
regarding the Peter Cooper Site in Gowanda, New York. Pursuant to the
terms of the Asset Purchase Agreement dated January 13, 1985, Beatrice has
agreed to defend and indemnify USL for any potential liability associated
with Lackawanna Leather at this site. Beatrice has agreed to defend USL
with respect to potential liability associated with of A.L. Gebhardt. At
this time, however, it is not possible to determine what, if any,
liability USL will have with respect to this site.
The North Carolina Department of Environment, Health and Natural
Resources ("DEHNR") identified USL's facilities at Conover, North Carolina
as a potentially responsible party ("PRP") that arranged for the disposal
or treatment of hazardous waste at the Seaboard Chemical facility in North
Carolina. During the Phase I Remediation process, USL was adjudged to be a
de minimis contributor to the site and, with its payment of $25,512, was
able to discharge its Phase I Remediation liability. USL joined a PRP
group consisting of 946 companies to negotiate the Phase II Remedial
Investigation and Feasibility Study with the DEHNR. This group negotiated
an Administrative Order of Consent with the DEHNR to conduct the remedial
investigation of the site. The Administrative Order contains a covenant
not to sue the members of the PRP group and provides signatories with
protection from contribution actions. Although there can be no
assurances, USL expects that (1) USL will continue to be identified as a
de minimis contributor to the site, (2) USL's share of the costs remaining
to clean up the site will aggregate less than $500,000, and (3) since
approximately 35% of the wastes in question were sent to the site during
ownership of the Conover facilities by Beatrice, it will assume its pro
rata share of the cleanup costs under the indemnity provisions of the
January 13, 1985 Asset Purchase Agreement that conveyed these facilities
to USL.
In March 1993 and December 1995, the EPA completed removal
actions at the Cherokee Oil Sites, a commercial waste treatment facility
located in Charlotte, North Carolina. USL had sent non-hazardous
wastewater from its facilities in Conover, North Carolina to these sites
between December 1988 and October 1990. EPA spent approximately $6.5
million to clean up and remove wastes from the sites and is now attempting
to recover costs from users of the facility. In March 1996, EPA sent USL
a CERCLA Section 104(e) Information Request relative to the wastes sent by
USL to the sites. USL responded to the request in May 6996 and, in order
to prevent the Department of Justice from filing a cost recovery action in
federal court, executed a Tolling Agreement along with other parties to
allow time to negotiate a settlement. In March 1997, USL and the EPA
tentatively agreed to settle USL's share of cleanup costs for
approximately $78,000. The resulting settlement Consent Decree has been
approved by a Federal District Court.
H. Financial Condition of USL
APPENDED HERETO AND INCORPORATED HEREIN AS APPENDIX D IS USL'S
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (THE "FORM 10-K").
THE FORM 10-K CONTAINS DETAILED INFORMATION ABOUT USL'S FINANCIAL
PERFORMANCE AND CONDITION AND USL'S BUSINESS AND OPERATIONS. WHAT FOLLOWS
IN THIS SECTION IS A SUMMARY OF SOME OF THE INFORMATION REPORTED IN THE
FORM 10-K. THIS SUMMARY IS NOT INTENDED AS A COMPREHENSIVE SUMMARY OF
THAT INFORMATION, NOR AS A SUBSTITUTE FOR THE FORM 10-K. NOTEHOLDERS AND
STOCKHOLDERS ARE ENCOURAGED TO REVIEW THE FORM 10-K IN ITS ENTIRETY, AS AN
INTEGRAL PART OF THIS DISCLOSURE STATEMENT, BEFORE VOTING ON THE PLAN.
USL reported net operating losses in each of the last two years.
Excluding non-recurring accounting adjustments, the principal reason for
these losses was USL's inability to generate sufficient operating income
to offset interest expenses. Other causes were decreased sales volume in
two of USL's three core businesses, higher and more volatile hide prices,
which USL was unsuccessful in fully passing through to customers,
increased costs associated with quality and delivery problems encountered
during 1996, and USL's unprofitable (to date) entry into the automotive
cut set manufacturing market. Also contributing to the losses incurred
during 1997 were adverse behaviors by customers and suppliers caused by
uncertainty about USL's announced plan of restructuring and whether it
will be successfully consummated. These losses impaired USL's ability to
fully meet all of its obligations.
USL did not make the interest payment on the Notes that was due
on January 31, 1998. As a result, USL has classified as of December 31,
1997 all of the amounts owed in respect of the Notes ($136.4 million,
including interest, as of January 31, 1998), as current liabilities,
resulting in a negative working capital position as of such date.
Excluding the foregoing amounts from current liabilities, USL's working
capital as of December 31, 1997, would have been $18.0 million.
USL's failure to make the interest payment on the Notes that
was due on January 31, 1998 constituted an event of default under the
Prepetition Credit Facility. Under the terms of the Prepetition Credit
Facility, such event of default gives the Banks the right to accelerate
any and all obligations due under the Prepetition Credit Facility and to
refuse to make any additional advances under the Prepetition Credit
Facility. The Banks have not, however, declared a default under the
Prepetition Credit Facility or invoked any of the remedies available to
the Banks under the terms of the Prepetition Credit Facility. USL
currently intends to continue to make all payments required under the
Prepetition Credit Facility to the extent that it is able.
USL used $3.9 million of net cash for operating activities
during 1997, principally because cash generated from improved working
capital efficiencies, most notably inventories, was insufficient to offset
operating losses, and because USL paid $13.2 million of interest on the
Notes in 1997. In light of current economic conditions, USL does not
believe that cash generated from its operating activities during 1998 will
be sufficient to satisfy its existing obligations under the Prepetition
Credit Facility and the Notes. In addition, as a result of USL's default
under the Notes, it is unlikely that USL would be able to obtain any
additional source of funds to meet its future expenses.
USL does not believe that it will be able to maintain operations
in the long term without consummating the Plan. USL has suffered a
significant downturn in its business as a result of a general downturn in
the leather industry and because of uncertainties surrounding USL's
financial condition. In the event that the Plan is not consummated, USL
believes that it will be unable to fund its working capital requirements
in the near term and that the difficulties it has faced in recent months
will worsen, including (i) an inability to make capital expenditures
necessary to maintain its production capabilities, (ii) the reluctance of
its customers to enter into contracts with a supplier whose viability and
ability to deliver products on a timely basis may be in question, (iii)
the reluctance of suppliers to ship hides and other supplies, or the
imposition of shortened payment or cash payment terms, (iv) an inability
to retain competent managers or to implement a strategic, long-term
business plan, (v) the need for management to devote a substantial amount
of its time and energy to the financial difficulties of USL, rather than
focusing upon business operations, and (vi) an inability to access capital
markets. While Consummation of the Plan will not assure that any or all
of such difficulties will be overcome, management believes that, if the
Plan is not consummated, such difficulties will cause the value of USL's
business to deteriorate further.
It is likely that USL will file for protection under chapter 11
of the Bankruptcy Code, whether or not the Requisite Acceptances to the
Plan are obtained. In addition, because events of default currently exist
under the Notes, it is possible that Noteholders could file an involuntary
petition seeking to place USL in bankruptcy. In a bankruptcy proceeding
that is not based upon the Plan, there is a substantial risk that, as a
result of the significant disruption to USL's business expected to be
caused thereby (including the probable loss of contracts and orders),
there would be no value available for distribution to Stockholders and
there would be materially less value available for distribution to
Noteholders than that proposed in the Plan.
Even if the Plan is consummated, USL's ability to meet its debt
service obligations in the future will depend upon a number of factors
outside USL's control, including the condition of the United States
economy. Although there are no principal repayment obligations under the
Prepetition Credit Facility, there can be no assurance that USL will be
able to satisfy its obligations after Consummation of the Plan.
I. Disruption of Operations
The Chapter 11 Case, even in connection with a consensual plan,
could adversely affect USL's relationships with its trade creditors,
employees, and customers. If such relationships are adversely affected,
USL's operations could be materially adversely affected.
J. Considerations Relating to Acceptance of the Plan
1. Risk of Non-Confirmation of the Plan
Even if all impaired Classes of Claims accept or are deemed to
have accepted the Plan, or, with respect to a Class that rejects the Plan,
the requirements for "cram down" are met, the Bankruptcy Court, which may
exercise substantial discretion, may choose not to confirm the Plan.
Section 1129 of the Bankruptcy Code requires, among other things, a
demonstration that the Confirmation of the Plan will not be followed by
liquidation or need for further financial reorganization of USL (the
"feasibility test") and that the value of distributions to creditors who
do not accept the Plan is not less than the value of distribution such
creditors would receive if USL were liquidated under chapter 7 of the
Bankruptcy Code (the "Best Interests Test"). Although USL believes that
the Plan will satisfy such tests (see section IX.C. "Confirmation of the
Plan Best-Interests Tests"), there can be no assurance that the
Bankruptcy Court will reach the same conclusion.
USL reserves the right to seek Confirmation of the Plan from the
Bankruptcy Court by employing the "cram down" procedure set forth in
section 1129(b) of the Bankruptcy Code if a Class of Claims votes to
reject the Plan. In order to confirm the Plan under section 1129(b), the
Bankruptcy Court must determine that, in addition to satisfying all other
requirements for Confirmation, the Plan "does not discriminate unfairly"
and is "fair and equitable" with respect to each impaired Class that has
not accepted the Plan. Again, in the event that USL employs the "cram
down" procedure, there can be no assurance that the Bankruptcy Court will
find that these additional requirements have been satisfied.
2. Risk That Plan Will Not Be Consummated
Consummation of the Plan is subject to several conditions. (See
section VI.J. "Summary of the Plan Conditions Precedent to the
Effective Date.") There can be no assurance that all these conditions
will be satisfied. Accordingly, even if the Plan is confirmed by the
Bankruptcy Court, there can be no assurance that the Plan will be
consummated or that the Effective Date will occur.
VIII. ALTERNATIVES TO THE PLAN
The Plan is the culmination of USL's efforts to solve its
financial difficulties by restructuring. That effort has entailed lengthy
discussions with the Informal Noteholders' Committee and USL Stockholders
and extensive input from legal and financial advisors.
The USL Board of Directors has determined that the Plan provides
the best basis on which to reorganize USL and accordingly recommends that
all Noteholders and Stockholders vote to accept the Plan.
If the Plan is not confirmed, other plans could be proposed by
USL or (if the Bankruptcy Court allows) other parties in interest. Given
the substantial and lengthy effort that has led to the present Plan and
the paramount importance of continuing USL's operations to preserve the
maximum value of USL's assets, USL greatly doubts that an alternative plan
could be formulated and confirmed without an extensive and costly delay in
the Chapter 11 Case and the attendant risk of significant disruption to
USL's business expected to be caused thereby (including the probable loss
of contracts and orders). In such circumstances, there would be no value
available for distribution to Stockholders, and there would be materially
less value available for distribution to Noteholders than that proposed by
the Plan. A discussion of the effect that a chapter 7 liquidation would
have on the recovery of the holders of Claims and Interests is set forth
herein. (See section IX.C. C "Confirmation of the Plan - Best-Interests
Test.")
IX. CONFIRMATION OF THE PLAN
Under chapter 11 of the Bankruptcy Code, confirmation is the
determination by the Bankruptcy Court that a plan of reorganization
satisfies the requirements of the Bankruptcy Code and will provide the
basis for the reorganization of the chapter 11 debtor. The principal
requirements for Confirmation of the Plan are summarized below. Parties in
interest will receive notice of the time fixed for the Confirmation
Hearing and will have the opportunity to object to Confirmation. If the
Plan is confirmed, each member of each Class will be bound by it,
regardless of whether that member voted to accept the Plan.
A. Disclosure and Solicitation
This Disclosure Statement is presented to the holders of Claims
and Interests in impaired Classes to satisfy the requirements of sections
1125 and 1126 of the Bankruptcy Code. Section 1125 of the Bankruptcy Code
requires that full disclosure be made to all holders of Claims and
Interests in impaired Classes at the time of, or before, solicitation of
acceptances of a plan of reorganization is commenced. Section 1126(b) of
the Bankruptcy Code provides that the holder of a Claim or Interest who
accepts a plan of reorganization before the commencement of a case under
chapter 11 of the Bankruptcy Code is filed is deemed to have accepted such
plan under the Bankruptcy Code so long as the solicitation of such
acceptance was made in accordance with applicable non-bankruptcy law
governing adequacy of disclosure in connection with such solicitation.
Upon the commencement of the Chapter 11 Case, USL will promptly
request that the Bankruptcy Court find that the solicitation of
acceptances from holders of Claims and Interests was in compliance with
sections 1125 and 1126 of the Bankruptcy Code and, therefore, that holders
of Claims and Interests that have accepted or rejected the Plan pursuant
to this Solicitation are deemed to have accepted or rejected the Plan for
purposes of Confirmation of the Plan under the Bankruptcy Code.
B. Acceptance of the Plan
In order to confirm the Plan, the Bankruptcy Court must conclude
that the Plan has been accepted by each Class that is "impaired" under the
Plan. A class is "impaired" under a plan unless the plan: (i) leaves
unaltered the legal, equitable, and contractual rights to which the claim
or interest entitles the holder of such claim or interest; (ii) Cures any
default and Reinstates the original terms of the obligation; or (iii)
provides that, on the effective date of the plan, the holder of the claim
or interest receives cash equal to the allowed amount of such claim or,
with respect to an interest, the greater of any fixed liquidation
preference to which such interest holder is entitled or any fixed price at
which the debtor may redeem the interest.
In the present instance, Classes 5 and 7 are impaired by the
Plan and are, therefore, entitled to vote on the Plan. Classes 1, 2, 3,
4, and 6 are not impaired under the Plan and, therefore, are conclusively
deemed to accept it.
The Bankruptcy Court must further conclude that at least one of
the impaired Classes of Claims that accepts the Plan has accepted the Plan
without counting any acceptance of the Plan by any "insider." Any Person
who is a director, officer, person in control, or general partner of USL
or one of its affiliates, any relative of any such Person, any subsidiary
of USL, or any partnership in which USL or one of its subsidiaries is a
general partner would be an insider for this purpose.
The Bankruptcy Code defines acceptance of a plan by a class of
claims as acceptance by holders of two-thirds (2/3) in dollar amount and
more than one-half (1/2) in number of the allowed claims of that class
that have timely voted on a plan. The Bankruptcy Code defines acceptance
of a plan by a class of interests as acceptance by holders of at least
two-thirds (2/3) in amount of the allowed interests of that class that
have timely voted on the plan. A vote may be disqualified if the
Bankruptcy Court determines, after notice and a hearing, that such
acceptance or rejection was not solicited or procured in good faith or in
accordance with the provisions of the Bankruptcy Code.
A VOTE TO ACCEPT OR REJECT THE PLAN CAN OCCUR ONLY BY PROPER
SUBMISSION OF A DULY EXECUTED BALLOT. FAILURE OF A HOLDER OF A CLAIM OR
INTEREST TO VOTE DOES NOT CONSTITUTE A VOTE TO REJECT THE PLAN BY SUCH
HOLDER.
C. Best-Interests Test
Before the Plan may be confirmed, the Bankruptcy Court must find
(with certain exceptions) that the Plan provides, with respect to each
impaired Class of Claims or Interests, that each member of such Class of
Claims or Interests either (a) has accepted the Plan or (b) will receive
or retain under the Plan property of a value, as of the Effective Date,
that is not less than the amount that such Person would receive or retain
if USL were liquidated on the Effective Date under chapter 7 of the
Bankruptcy Code.
To determine the value that holders of impaired Claims and
impaired Interests would receive if USL were liquidated, the Bankruptcy
Court would consider evidence concerning the dollar amount that would be
generated from the liquidation of USL's assets and properties in the
context of a chapter 7 liquidation case. The cash amount that would be
available for satisfaction of administrative expenses, priority claims,
unsecured claims, and equity interests would consist of the proceeds
resulting from the disposition of assets of USL augmented by the cash held
by USL at the time of the commencement of the chapter 7 case. In order to
dispose of USL's assets and properties in the most efficient and orderly
manner, a going-concern sale of USL or its business units would be
pursued. As part of a going-concern sale of USL or its business units, a
purchaser or purchasers would assume the necessary ongoing business
liabilities of USL, including accrued expenses such as payroll and
accounts payable to vendors. The assumption of the accounts payable to
vendors by a purchaser or purchasers would not have a material affect on
the liquidation analysis since significant amounts of these payables to
vendors are currently backed by letters of credit under the Prepetition
Credit Facility. This analysis assumes that no distribution of the net
proceeds is required to be paid on the ongoing business liabilities nor
will the letters of credit supporting the majority of these ongoing
business liabilities be drawn, since these liabilities would be assumed in
the sale or sales. Any such cash amount consisting of the proceeds from
the disposition of USL's assets would be reduced by the amount of any
claims secured by such assets, the costs and expenses of the liquidation,
and such additional administrative expenses and priority claims that might
result from the termination of USL's businesses and the use of chapter 7
for the purpose of liquidation. Next, any remaining cash would be
allocated to creditors and common shareholders in strict priority in
accordance with section 726 of the Bankruptcy Code.
USL's costs of liquidation under chapter 7 would include the
fees payable to a trustee in bankruptcy, as well as those payable to
attorneys and other professionals that such a trustee might engage,
including a financial advisor to market USL's assets for sale, plus any
unpaid expenses incurred by USL during a chapter 11 case and allowed in
the chapter 7 case, such as compensation for attorneys, financial
advisors, appraisers, accountants, and other professionals, and costs and
expenses of members of any committees appointed by the United States
Trustee. In addition, as described above, claims would arise by reason of
the breach or rejection of obligations incurred and executory contracts
entered into or assumed by USL during the pendency of a chapter 11 case.
Such claims, costs, expenses, and fees and such other claims
that might arise in a liquidation case or result from a pending chapter 11
case would be paid in full from the liquidation proceeds before the
balance of those proceeds would be made available to pay prepetition
priority claims and unsecured claims.
To determine if the Plan is in the best interests of each
impaired Class of Claims and Interests, the estimated present value of the
distributions from the proceeds of the liquidation of USL's assets and
properties, after subtracting the amounts attributable to the foregoing
Claims and any other Claims having priority under the Bankruptcy Code over
the Claims in such impaired Class, are then compared with the value of the
property offered to such impaired Class of Claims and Interests under the
Plan.
Distributions to Noteholders, other unsecured creditors, and
Stockholders would be made in accordance with the "absolute priority" rule
- with Noteholders and other unsecured creditors having to receive full
payment (including postpetition interest at the legal rate) before
Stockholders could receive any payment.
USL believes that liquidation would entail a diminution in the
total value available for distribution for a variety of reasons, including
the following:
1. Liquidation would entail substantial additional expense of
the bankruptcy proceeding arising from fees payable to a
trustee in bankruptcy and professional advisors to such
trustee.
2. Liquidation would entail the sale of USL's assets, in a
"forced sale" atmosphere of a publicized liquidation of
USL.
3. Liquidation would result in the loss of any potential value
realizable from the strategic initiatives currently being
implemented by USL, including a rationalization of
manufacturing for footwear, the reestablishment of
Lackawanna as a strong brand-name in the furniture
business, investments in new information systems, and the
inherent built-in profitability in the automotive business
as the lower margin contracts used to enter this market run
off.
4. The adverse effects on the salability of USL due to the
departure of key employees.
5. Any proceeds received from liquidation would likely be
reduced by amounts set aside to settle environmental
liabilities that would have priority over other unsecured
claims.
6. The substantial delay (and the attendant uncertainty)
inherent in a liquidation would itself reduce the present
value of distributions.
USL believes that it will be able to establish that the best-
interests test has been met, as supported by the liquidation analysis
attached as Appendix B hereto (the "Liquidation Analysis"). The
Liquidation Analysis is an estimate of the proceeds that may be generated
as a result of a hypothetical chapter 7 liquidation of the assets of USL.
This analysis is based upon a number of significant assumptions, which are
described therein, including effectuating the liquidation through a sale
of the business operations of USL as a going-concern. The Liquidation
Analysis does not purport to be a valuation of USL's assets and is not
necessarily indicative of the values that may be realized in an actual
liquidation.
D. Financial Feasibility
The Bankruptcy Code also requires that confirmation not be
likely to be followed by the liquidation of the debtor or the need for
further financial reorganization. USL believes that the Plan meets this
feasibility test. (See Appendix C for USL's projections of its post-
Consummation financial performance and operations.)
E. Estimated Expense of Administration
USL estimates that the expense of administering the Plan will be
approximately between $2,700,000 and $4,000,000, although that figure
could increase if there are significant contested matters.
X. DESCRIPTION OF CAPITAL STOCK
The terms of the New Common Stock (to be issued and distributed
to Classes 5 and 7) and the rights attendant thereto will be substantially
identical to the terms of the USL Common Stock and the rights attendant
thereto. Because the USL Common Stock will be cancelled as part of the
Plan, the New Common Stock will be the only class of capital stock of
Reorganized USL outstanding upon Consummation of the Plan. The following
is a summary of certain provisions of the authorized capital stock of USL
and Reorganized USL.
A. General
The authorized capital stock of USL consists of forty million
(40,000,000) shares of USL Common Stock, par value $.01 per share, and
five million (5,000,000) shares of Preferred Stock, par value $.01 per
share ("Preferred Stock"). For a description of the number of shares of
USL Common Stock beneficially owned by each holder of USL Common Stock as
of December 31, 1997, see Item 12 of the Form 10-K attached hereto as
Appendix D. Stockholders will suffer a very substantial dilution in their
ownership interest in Reorganized USL as a result of the distribution of
New Common Stock to Noteholders pursuant to the Plan.
Upon Consummation of the Plan, there are expected to be
approximately 10,000,000 shares of New Common Stock outstanding, and no
shares of Preferred Stock outstanding. The Restated Articles of
Incorporation, which will be adopted and deemed effective upon the
Effective Date, do not authorize the issuance of Preferred Stock. Hence,
Reorganized USL will only be authorized to issue the New Common Stock.
B. New Common Stock
The New Common Stock is entitled to such dividends as may be
declared from time to time by the Post-Restructuring Board of Directors in
accordance with applicable law and as limited by the Prepetition Credit
Facility. It is not contemplated that Reorganized USL will pay any cash
dividends on the New Common Stock in the foreseeable future.
Except as provided under Wisconsin law, only the holders of New
Common Stock will be entitled to vote for the election of directors of
Reorganized USL and on all other matters. The holders of New Common Stock
will be entitled to one vote for each share of New Common Stock held by
them, subject to section 180.1150 of the Wisconsin Statutes. (See section
X.D. C "Certain Statutory Provisions.") Holders of New Common Stock will
not have cumulative voting rights in connection with the election of
directors, which means that holders of shares entitled to exercise more
than 50% of the voting power represented at any meeting of shareholders
will be entitled to elect all of the directors to be elected at any such
meeting.
All shares of New Common Stock will be entitled to participate
equally in distributions in liquidation. Except as the Post-Restructuring
Board of Directors may in its discretion otherwise determine, holders of
New Common Stock will have no preemptive rights to subscribe for or to
purchase shares of Reorganized USL. There are no conversion rights,
sinking fund, or redemption provisions applicable to the New Common Stock.
The shares of New Common Stock to be issued pursuant to the Plan will be
fully paid and nonassessable, except as provided by section 180.0622(2)(b)
of the Wisconsin Statutes and judicial interpretations thereof relating to
personal liability of shareholders for all debts owing to employees of USL
for services performed (not to exceed six months' service in any one
case).
C. Preferred Stock
The Post-Restructuring Board of Directors will not have the
authority pursuant to USL's Restated Articles of Incorporation to issue
Preferred Stock. The New Common Stock is the only authorized class of
stock under the Restated Articles of Incorporation.
D. Certain Statutory Provisions
Section 180.1150 of the Wisconsin Statutes provides that the
voting power of shares held by any person or persons acting as a group
that is greater than 20% of the voting power in the election of directors
is limited to 10% of the full voting power of those shares. This
restriction does not apply to shares acquired directly from Reorganized
USL or in certain specified transactions or shares for which full voting
power has been restored pursuant to a vote of shareholders.
Sections 180.1140 to 180.1144 of the Wisconsin Statutes contain
certain limitations and special voting provisions applicable to specified
business combinations involving Reorganized USL and a significant
shareholder, unless the Board of Directors approves the business
combination or the shareholder's acquisition of shares before such shares
are acquired. Similarly, sections 180.1130 to 180.1133 of the Wisconsin
Statutes contain special voting provisions applicable to certain business
combinations, unless specified minimum price and procedural requirements
are met.
Following commencement of a takeover offer, section 180.1134 of
the Wisconsin Statutes imposes special voting requirements on certain
share repurchases effected at a premium to the market and on certain asset
sales by Reorganized USL, unless, as it relates to the potential sale of
assets, the corporation has at least three independent directors and a
majority of the independent directors vote not to have the provision apply
to the corporation.
The foregoing provisions of the Wisconsin Statutes could have
the effect of delaying, deterring, or preventing a change in control of
Reorganized USL.
E. Restated Articles of Incorporation and Restated By-Laws
Under the Restated Articles of Incorporation and Restated By-
Laws, the Post-Restructuring Board of Directors is comprised of five
members who, after the terms of the initial Directors (four of whom who
will be appointed by the Informal Noteholders' Committee and one of whom
will be appointed by management) expire, will be elected by the
shareholders for a one-year term at the annual meeting of shareholders.
(The Restated Articles of Incorporation are attached as Appendix E hereto.
The Restated By-Laws are attached as Appendix F hereto.) The Restated
Articles of Incorporation provide that any vacancies on the Post-
Restructuring Board of Directors shall be filled only by the affirmative
vote of a majority of the directors in office, even if less than a quorum.
Any director so elected will serve until the next election of directors
and until his or her successor is duly elected and qualified.
The Restated Articles of Incorporation provide that any director
may be removed from office with or without cause cause, but only by the
affirmative vote of more than one-half of all outstanding shares entitled
to vote in the election of directors.
The Restated By-Laws give the Post-Restructuring Board of
Directors discretion to postpone shareholder meetings, including, within
certain limits, special meetings of shareholders. Additionally, the
President or the Post-Restructuring Board of Directors (acting by
resolution) may adjourn a shareholder meeting at any time prior to the
transaction of business at such meeting. The Restated By-Laws also
contain strict time deadlines and procedures applicable to shareholders
seeking to nominate a person for election as a director or to otherwise
bring business before a regular meeting.
The provisions of Reorganized USL's Restated Articles of
Incorporation and Restated By-Laws summarized above could have the effect
of delaying, deterring, or preventing a change in control of USL.
XI. APPLICABILITY OF CERTAIN SECURITIES LAWS
The issuance of the shares of New Common Stock under the Plan
raises certain securities law issues under the Bankruptcy Code and federal
and state securities laws, which are discussed in this section. This
section should not be considered applicable to all situations or to all
Noteholders or Stockholders receiving shares of New Common Stock under the
Plan. Those Noteholders and Stockholder should note that there can be no
assurance that a market for the New Common Stock will develop. Holders of
the New Common Stock should consult their own legal counsel concerning the
facts and circumstances with respect to the transfer of shares of New
Common Stock in their particular case. USL has not sought a "no action"
letter from the Commission or any state securities commission with respect
to any matter discussed herein.
A. Initial Issuance of New Common Stock
Section 1145 of the Bankruptcy Code provides that the securities
registration and/or qualification requirements of federal and state
securities laws do not apply to the offer or sale of stock or other
securities of a debtor or its successor if the offer or sale occurs under
a plan of reorganization and the securities are transferred in exchange
(or principally in exchange) for a claim against or equity interest in a
debtor. Accordingly, the initial issuance of the shares of New Common
Stock by Reorganized USL will be exempt from the registration and/or
qualification requirements of federal and state law under section 1145 of
the Bankruptcy Code.
B. Resale of New Common Stock
Any Person who is not (i) an "underwriter" under section 1145 of
the Bankruptcy Code, (ii) an "affiliate" under Rule 144 ("Rule 144") of
the Securities Act, or (iii) a "dealer" as defined in the Securities Act,
and who resells shares of New Common Stock need not comply with the
registration requirements of the Securities Act or seek an exemption
therefrom in order to resell any New Common Stock distributed to such
Person under the Plan. In addition, on or before the Effective Date, the
Debtor will enter into the Registration Rights Agreement in a form
reasonably acceptable to the Debtor and the Informal Noteholders'
Committee.
BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF
WHETHER A PARTICULAR HOLDER OF NEW COMMON STOCK MAY BE AN UNDERWRITER, USL
MAKES NO REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF
THE NEW COMMON STOCK TO BE DISTRIBUTED UNDER THE PLAN.
Section 1145(b)(1) of the Bankruptcy Code provides:
(b)(1) Except as provided in paragraph (2) of this subsection
and except with respect to ordinary trading transactions of an entity that
is not an issuer, an entity is an underwriter under section 2(11) of the
Securities Act of 1933, if such entity -
(A) purchases a claim against, interest in, or claim for an
administrative expense in the case concerning, the debtor, if such
purchase is with a view to distribution of any security received or to be
received in exchange for such a claim or interest;
(B) offers to sell securities offered or sold under the plan
for the holders of such securities;
(C) offers to buy securities offered or sold under the plan
from the holders of such securities, if such offer to buy is -
(i) with a view to distribution of such securities; and
(ii) under an agreement made in connection with the plan, with
the consummation of the plan, or with the offer or sale of
securities under the plan; or
(D) is an issuer, as used in such section 2(11), with respect
to such securities.
(2) An entity is not an underwriter under section 2(11) of the
Securities Act of 1933 or under paragraph (1) of this subsection with
respect to an agreement that provides only for -
(A) (i) the matching or combining of fractional interests in
securities offered or sold under the plan into whole interests, or
(ii) the purchase or sale of such fractional interests from
or to entities receiving such fractional interests under the plan; or
(B) the purchase or sale for such entities of such fractional
or whole interests as are necessary to adjust for any remaining fractional
interests after such matching.
(3) An entity other than an entity of the kind specified in
paragraph (1) of this subsection is not an underwriter under section 2(11)
of the Securities Act of 1933 with respect to any securities offered or
sold to such entity in the manner specified in subsection (a)(1) of this
section.
USL RECOMMENDS THAT RECIPIENTS OF NEW COMMON STOCK UNDER THE PLAN
CONSULT WITH LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO
DISPOSE OF SUCH SECURITIES.
There can be no assurance that an active market for any of the New
Common Stock to be distributed under the Plan will develop and no
assurance can be given as to the prices at which the New Common Stock
might be traded.
XII. VOTING REQUIREMENTS AND PROCEDURES
A. Voting on the Plan
This Disclosure Statement and the appropriate Ballot are being
distributed to all holders of Claims and Interests who are entitled to
vote on the Plan. There are separate Ballots designated for each impaired
voting Class in order to facilitate vote tabulation; however, all Ballots
are substantially similar in form and substance and the term "Ballot" is
used without intended reference to the Ballot of any specific Class of
Claims or Interests or to any particular form of Ballot. The instructions
attached to the Ballot should be read in connection with this section of
the Disclosure Statement.
If you have any questions about the procedure for voting your
Claim or Interest or the packet of materials you received, please contact:
Foley & Lardner
777 East Wisconsin Avenue, Suite 3800
Milwaukee, WI 53202
Attention: Andrew J. Wronski.
Phone: (414) 297-5518
Fax: (414) 297-4900
1. Who May Vote
Holders of Claims and Interests in the following Classes are
receiving or retaining property under the Plan, are impaired by the Plan,
and are, therefore, entitled to vote on the Plan:
Class 5: Claims of Holders of Notes; and
Class 7: Holders of Interests in USL Common Stock
Only holders of Notes and holders of USL Common Stock on the
Record Date are eligible to vote on the Plan. With respect to
Noteholders, the Record Date is March 27, 1998. With respect to
Stockholders, the Record Date is April 30, 1998.
2. Voting Procedures for Holders of Impaired Claims and
Interests on the Record Date
If you are a registered holder of Notes on the Record Date, you
will receive the Ballot relating to the Notes that you hold of record.
Registered holders may include brokerage firms, commercial banks, trust
companies, or other nominees. If such nominees hold Notes, but do not
hold Notes for their own account, they should immediately provide copies
of this Disclosure Statement and the appropriate Ballot to their customers
and to beneficial owners. For further instructions, see "Beneficial
Owners of Notes" below. Any beneficial owner who has not received a
Disclosure Statement or Ballot should contact its brokerage firm or
nominee, or Foley & Lardner, at the address listed above.
If you are a registered holder of USL Common Stock on the Record
Date, you will receive the Ballot relating to USL Common Stock. Any
holder of USL Common Stock that has not received a Disclosure Statement or
Ballot should contact Foley & Lardner at the address listed above.
All votes to accept or reject the Plan with respect to any Class
of Claims or Interests must be cast by using the appropriate form of
Ballot designated for such Class. Ballots must be received no later than
5:00 p.m., Central Daylight Time, on May 6, 1998, the Voting Deadline.
USL will make a public announcement of any extension of the Voting
Deadline by release to the Dow Jones News Service prior to 9:00 a.m., New
York City Time, on the next business day following the previously
scheduled Voting Deadline.
Holders of impaired Claims and Interests on the Record Date who
vote on the Plan should complete and sign the Ballot in accordance with
instructions thereon, being sure to check the appropriate box entitled
"Accept the Plan" or "Reject the Plan." Each holder must vote all Notes
or USL Common Stock beneficially owned in a particular Class in the same
way (i.e., all "accept" or all "reject"), even if such Notes or USL Common
Stock are owned through more than one broker or bank.
3. Beneficial Owners of Notes
Any holder holding Notes on the Record Date in its own name can
vote by completing and signing the enclosed Ballot and returning it
directly to Foley & Lardner so that it is received on or before the Voting
Deadline.
Any holder holding Notes on the Record Date through a nominee
can vote by completing the beneficial owner Ballot and returning it to
such nominee early enough to permit such registered holder to transcribe
the information from the beneficial owner Ballot onto a master Ballot and
return the master Ballot to Foley & Lardner before the Voting Deadline.
You may receive multiple copies of this Disclosure Statement,
especially if you own Notes through more than one broker or bank. If you
submit more than one Ballot because you beneficially own Notes through
more than one broker or bank, be sure to indicate in Item 3 on your
Ballot(s) the names of ALL broker-dealers or other intermediaries who hold
Notes for you.
By submitting a vote for or against the Plan, you are certifying
that you are the holder of the Notes being voted or an authorized
signatory for such a holder. Your submission of a Ballot will also
constitute a request that you (or in the case of an authorized signatory,
the beneficial owner) be treated as the beneficial holder of such
securities for purposes of voting on the Plan.
4. Brokerage Firms, Banks, and Other Nominees
A nominee that is the registered holder of a Note for a
beneficial owner, or is a participant in a securities clearing agency and
is authorized to vote in the name of such securities clearing agency
pursuant to an omnibus proxy and is acting for one or more beneficial
owner(s), can vote on behalf of such beneficial owner(s) by (i)
distributing a copy of this Disclosure Statement and all appropriate
Ballots to such beneficial owner(s), (ii) collecting all such Ballots,
(iii) completing a master Ballot compiling the votes and other information
from the Ballots collected, and (iv) transmitting such completed master
Ballot to Foley & Lardner so that it is received by the Voting Deadline.
A proxy intermediary acting on behalf of a brokerage firm or bank may
follow the procedures outlined in the preceding sentence to vote on behalf
of such beneficial owner(s).
5. Voting Deadline and Extensions
In order to be counted for purposes of voting on the Plan, all
of the information requested on the applicable Ballot must be provided.
Ballots must be received by Foley & Lardner at its address set forth on
the Ballot no later than 5:00 p.m., Central Daylight Time, on May 6, 1998,
the Voting Deadline.
6. Withdrawal or Change of Votes on the Plan
A Ballot may be withdrawn by delivering a written transmission
notice of withdrawal to Foley & Lardner (or, in the case of Notes held by
a nominee, to the nominee so that the nominee may deliver such notice of
revocation to Foley & Lardner), in each case, so that Foley & Lardner
receives such notice prior to the Voting Deadline. Thereafter, withdrawal
may be effected only with the approval of the Bankruptcy Court.
In order to be valid, a notice of withdrawal must (i) specify
the name of the holder who submitted the votes on the Plan to be
withdrawn, (ii) contain the description of the Notes or USL Common Stock
to which it relates and the aggregate principal amount of Notes or number
of shares of USL Common Stock held by such holder, and (iii) be signed by
the holder in the same manner as the Ballot. USL expressly reserves the
absolute right to contest the validity of any such withdrawals of votes on
the Plan.
Any holder who has previously submitted to Foley & Lardner (or,
in the case of Notes held by a nominee, to the nominee so that the nominee
may deliver such subsequent Ballot to Foley & Lardner prior to the Voting
Deadline) a properly completed Ballot may change such vote by submitting
to Foley & Lardner prior to the Voting Deadline a subsequent properly
completed Ballot for acceptance or rejection of the Plan. In the case
where more than one timely, properly completed Ballot is received, only
the one that bears the latest date will be counted for purposes of
determining whether the Requisite Acceptances have been received. If more
than one master Ballot is submitted and the later dated master Ballot(s)
supplement rather than supersede the earlier master Ballot(s), please mark
the subsequent master Ballot(s) with the words "Additional Votes" or such
other language as is customarily used to indicate additional votes that
are not meant to revoke earlier votes.
B. Surrender of Notes
As a condition to receiving any distribution pursuant to the
Plan, each holder of Notes or shares of USL Common Stock must (i)
surrender such Notes or shares to Reorganized USL or (ii) provide an
affidavit of loss with regard to such Notes or shares that is in form and
substance satisfactory to Reorganized USL. If no surrender of such Notes
or shares occurs and such holder does not provide an affidavit acceptable
to Reorganized USL, then no distribution may be made to any holder whose
Claim or Interest is based on such Note(s) or shares. NOTES AND SHARE
CERTIFICATES SHOULD NOT BE RETURNED WITH THE BALLOT(S).
XIII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain material federal
income tax consequences of the Plan for USL, Noteholders, and
Stockholders. This summary does not discuss all aspects of federal income
taxation that may be relevant to USL, to a particular Noteholder, or to a
particular Stockholder in light of specific investment circumstances, or
to Noteholders or Stockholders subject to special treatment under the
federal income tax laws, such as parties related to USL, insurance
companies, financial institutions, dealers in securities, tax-exempt
entities, foreign corporations, or individuals who are not citizens or
residents of the United States, and Noteholders who hold Notes as part of
a straddle, hedge, or conversion transaction. It also does not discuss
any aspects of state, local, or foreign taxation. This summary is based
on the Internal Revenue Code of 1986, as amended (the "Tax Code"),
Treasury regulations promulgated thereunder, rulings, and judicial
decisions, all of which are subject to change, possibly with retroactive
effect. Moreover, the tax consequences of certain aspects of the Plan are
uncertain because of the lack of applicable legal precedent.
Consequently, each Noteholder and Stockholder is urged to
consult with his or her own tax advisor as to the specific tax
consequences to him or her of the Plan.
A. Federal Income Tax Consequences to USL
1. Discharge of Indebtedness
USL will realize discharge of indebtedness income if a Claim is
not paid in full or if a Claim is Reinstated or modified, provided that
such Reinstatement or modification constitutes a "significant
modification" that is a realization event for tax purposes and the holder
of the Claim is not paid in full (i.e., does not receive Cash and/or
property with a fair market value equal to the full amount of the Claim).
In accordance with this rule, USL will realize discharge of indebtedness
income upon the exchange of the Notes for New Common Stock, except and
only to the extent that payment of the indebtedness would have resulted in
a deduction. Such discharge of indebtedness income will equal the excess
of the amount owed by USL with respect to such Notes over the fair market
value of the New Common Stock transferred to the holders of such Notes.
For purposes of the tax projections set forth herein, the computation of
the discharge of indebtedness income assumes that the fair market value of
New Common Stock transferred to Noteholders equals approximately $50.3
million.
Such discharge of indebtedness income will not be included in
USL's gross income but will generally be applied first to reduce USL's
end-of-the-year tax attributes (e.g., net operating and capital loss
carryovers) and then, to the extent the amount of such discharge of
indebtedness income exceeds USL's tax attributes, to reduce USL's adjusted
tax basis in its assets. It is anticipated that the discharge of
indebtedness income realized from the exchange of the Notes for New Common
Stock will result in the elimination of USL's tax attributes, including
net operating losses, and a substantial reduction in the tax basis of its
assets.
2. Use of Tax Attributes
Pursuant to the Plan, approximately 97% of the New Common Stock
will be issued to the Noteholders, and the remaining 3% will be issued to
the Stockholders. As a result, USL will undergo an "ownership change"
within the meaning of the Tax Code as of the date on which the New Common
Stock is distributed (the "Distribution Date"). Accordingly, USL's
ability to use certain tax attributes (including any net operating losses,
remaining net operating loss carryovers, or net unrealized built-in
losses) that arose prior to the ownership change to offset its taxable
income, if any, generated in taxable periods after the ownership change
will be subject to an annual limitation (the "Annual Limitation"). The
Annual Limitation generally will equal (i) the value of USL immediately
after the ownership change multiplied by (ii) the long-term tax-exempt
rate, as announced each month by the Treasury Department, on the date of
the ownership change. However, the Annual Limitation will equal zero if
Reorganized USL does not continue the "business enterprise" of USL, as
that term is defined for tax purposes, for at least two years from the
Distribution Date.
As set forth above, it is anticipated that USL's net operating
loss carryovers will be eliminated as a result of USL's realization of
discharge of indebtedness income. Accordingly, the Projections assume
that USL will not have any tax attributes that carry-over from periods
prior to the Consummation of the Plan. The Projections further assume
that discharge of indebtedness income will result in a reduction in the
basis of its assets. Such a reduction will have the effect of reducing
tax-deductible depreciation in future periods, including those periods
covered by the Projections.
B. Federal Income Tax Consequences to Holders of Claims
1. Holders of Unimpaired Claims
A holder whose Claim is paid in full on the Effective Date will
recognize gain or loss for federal income tax purposes equal to the
difference between such payment and his adjusted tax basis in the Claim.
A holder whose Claim is Reinstated, provided that such Reinstatement does
not result in a "significant modification" of the Claim for tax purposes,
will not realize gain or loss as a result of the Plan. However, a holder
whose Claim is Reinstated or modified in a way that is considered a
"significant modification" of the Claim for tax purposes, or who is
treated as having received interest, damages, or other income in
connection with a Reinstatement or modification, will realize gain or loss
for federal income tax purposes. Such gain or loss will be recognized
unless such Reinstatement or modification constitutes a tax-free
recapitalization, which is unlikely.
2. Holders of Notes
General. In general, Noteholders will realize gain or loss on
the exchange of an Allowed Class 5 Claim for New Common Stock in an amount
equal to the difference between (i) the fair market value of the New
Common Stock received and (ii) the adjusted tax basis of the holder in the
Notes surrendered in exchange therefor. The Plan does not mandate an
allocation of the distributions to holders of Allowed Class 5 Claims as
between principal and interest.
Whether or not a Noteholder will be required or allowed to
recognize the gain or loss realized on the exchange of Notes for New
Common Stock depends on whether such exchange constitutes a
recapitalization. This, in turn, depends upon whether the Notes
constitute "securities" for federal income tax purposes. Whether an
instrument constitutes a "security" for federal income tax purposes is
determined based on all the facts and circumstances. Certain authorities
have held that the length of the term of a debt instrument is a factor in
determining whether such instrument is a security for federal income tax
purposes. These authorities have indicated that a term of less than five
years is evidence that the instrument is not a security, whereas a term of
ten years or more is evidence that it is a security. There are numerous
other factors that could be taken into account in determining whether a
debt instrument is a security, including among others, the security for
payment, the creditworthiness of the obligor, the subordination or lack
thereof to other Noteholders, the right to vote or otherwise participate
in the management of the obligor, convertibility of the instrument into an
equity interest of the obligor, whether payments of interest are fixed,
variable or contingent, and whether such payments are made on a current
basis or are accrued.
Thus, in general, if the Notes constitute securities, the
exchange of Notes for New Common Stock will constitute a recapitalization
and the gain or loss realized by a Noteholder will not be recognized for
federal income tax purposes as a result of the Plan. The tax basis of a
holder of New Common Stock received in the exchange generally will be
equal to the adjusted tax basis of such holder in the Notes surrendered in
exchange therefor increased by the gain, if any, recognized. The holding
period of a holder of the New Common Stock received in the exchange
generally will include the holding period of such holder in the Notes
surrendered in exchange therefor (provided such Notes were held as a
capital asset at the time of the exchange).
If the Notes do not constitute securities, the entire amount of
gain or loss realized by a Noteholder will be recognized for federal
income tax purposes. The tax basis of a Noteholder in the New Common
Stock will be equal to the fair market value of the New Common Stock at
the time of the exchange. In that event, the holding period of a holder
of the New Common Stock will begin on the day following the day of the
exchange.
Except for the amount of gain attributable to accrued market
discount (which market discount is subject to the rules described below)
and/or accrued interest (also as described below), any gain or loss
recognized on the exchange will be capital gain or loss if the Notes are
capital assets in the hands of the Noteholder. Any such capital gain or
loss on the exchange of a Note will be treated as a long-term capital gain
or loss if, at the time of the sale or exchange, the Note has been held by
the holder for more than one year; otherwise, the capital gain or loss
will be short-term. An individual's net long-term capital gain is subject
to federal income tax at a maximum stated rate of either 20%, if the
individual has held the Notes for more than 18 months prior to the
exchange, or 28%, if the individual has held the Notes for not more than
18 months prior to the exchange. An individual's short-term capital gain
is taxed at ordinary income tax rates. An individual's capital loss is
first deductible against other capital gains and then the amount of any
remaining capital loss, up to $3,000 (or $1,500 for married persons filing
separately), is deductible against other income. Capital losses in excess
of these amounts will carry over as a capital loss to succeeding years.
In addition, the recognition of capital gain on the Notes could
cause an individual to exceed certain income thresholds which, in turn,
could cause items of income otherwise not taxable to the individual to
become taxable and/or could affect the individual's ability to utilize all
or a portion of his or her personal exemptions, certain itemized
deductions, and certain other deductions.
For corporations, a capital gain is subject to federal income
tax at a stated maximum rate of 35%, while any capital loss can be offset
only against capital gains. Any unutilized capital loss generally can be
carried back three years and forward five years to be offset against net
capital gains generated in those years.
Market Discount. A debt instrument (such as a Note) has "market
discount" if its stated redemption price at maturity exceeds its tax basis
in the hands of the holder immediately after its acquisition, unless a
statutorily-defined de minimis exception applies. If the exchange of
Notes with market discount for New Common Stock pursuant to the Plan does
not qualify as a recapitalization, a Noteholder generally will be treated
as recognizing ordinary income on the exchange equal to the amount of
market discount that accrued during the Noteholder's period of ownership.
This rule will not apply to a Noteholder who had previously elected to
include market discount in income as it accrued for federal income tax
purposes.
Accrued Interest. If any amount of the consideration received
by a Noteholder in exchange for Notes were deemed for tax purposes to be
allocable to accrued but unpaid interest, the Noteholder would have
ordinary income in that amount unless the Noteholder had previously
included such interest in income. On the other hand, a Noteholder who had
previously included such interest in income should recognize a loss to the
extent the prior inclusion exceeds the amount of such consideration
allocable to accrued but unpaid interest. It is unclear whether such a
loss is capital or ordinary.
The law is also uncertain regarding the proper allocation of the
New Common Stock received by Noteholders between principal and interest.
Although Treasury Department regulations generally require each payment
under a loan to be treated first as a payment of accrued and unpaid
interest, these regulations do not specify whether such an approach
applies in the context of loan termination payments made by a Noteholder
pursuant to a Chapter 11 plan or reorganization. Moreover, the
regulations do not specify how the consideration received in a
recapitalization should be allocated. As a result, no assurance can be
given that the Internal Revenue Service will not attempt to allocate some
portion of the New Common Stock received under the Plan to some or all of
the accrued but unpaid interest on the Notes, which would require
Noteholders to include such amount in ordinary income as described in the
paragraph above. Allocation of consideration between principal and
interest in this circumstance could result in the recognition of ordinary
income and capital loss. Capital losses generally are not fully
deductible against ordinary income (as set forth above).
Notwithstanding the general discussion above, the tax basis of a
Noteholder in New Common Stock treated as received in satisfaction of
accrued interest on the Notes, if any, should be equal to the amount of
interest income treated as satisfied by the receipt of such stock.
Additionally, a Noteholder's holding period in such stock should begin on
the day following the date on which such stock is distributed.
XIV. MANAGEMENT
On the Effective Date, the operation of Reorganized USL will
become the general responsibility of the Post-Restructuring Board in
accordance with applicable non-bankruptcy law. For a list of, and
information regarding, the current directors and executive officers of
USL, see Items 10 and 11 of the Form 10-K attached hereto as Appendix D.
CONCLUSION
Noteholders and Stockholders solicited hereby are urged to vote
to accept the Plan by timely completing and submitting their ballots.
Milwaukee, Wisconsin
March 31, 1998
Respectfully submitted,
UNITED STATES LEATHER, INC.
By /s/ Kinzie L. Weimer
Kinzie L. Weimer, Secretary
APPENDIX A
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
PLAN OF REORGANIZATION OF
UNITED STATES LEATHER, INC.
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF WISCONSIN
In re:
United States Leather, Inc.,
a Wisconsin corporation, Case No. __________________
Honorable _________________
Chapter 11
Debtor.
Employer ID No. 13-3503310
PLAN OF REORGANIZATION OF UNITED STATES LEATHER, INC.
Thomas L. Shriner, Jr.
Andrew J. Wronski
Foley & Lardner
777 E. Wisconsin Avenue
Milwaukee, WI 53202-5367
Telephone: (414) 271-2400
Fax: (414) 297-4900
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Administrative Expense Claim . . . . . . . . . . . . . . . . 1
1.02 Allowed . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.03 Allowed Class . . . Claim . . . . . . . . . . . . . . . . . . 2
1.04 Ballot . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.05 Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . 2
1.06 Bankruptcy Court . . . . . . . . . . . . . . . . . . . . . . 2
1.07 Bankruptcy Rules . . . . . . . . . . . . . . . . . . . . . . 2
1.08 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.09 Bar Date . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.10 Business Day . . . . . . . . . . . . . . . . . . . . . . . . 3
1.11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.12 Chapter 11 Case . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.15 Commission . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.16 Confirmation . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 Confirmation Date . . . . . . . . . . . . . . . . . . . . . . 3
1.18 Confirmation Hearing . . . . . . . . . . . . . . . . . . . . 3
1.19 Confirmation Order . . . . . . . . . . . . . . . . . . . . . 3
1.20 Consummation . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 Creditors' Committee . . . . . . . . . . . . . . . . . . . . 4
1.22 Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.23 Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.24 DIP Credit Facility . . . . . . . . . . . . . . . . . . . . . 4
1.25 Disallowed Claim . . . . . . . . . . . . . . . . . . . . . . 4
1.26 Disclosure Statement . . . . . . . . . . . . . . . . . . . . 4
1.27 Disputed Claim . . . . . . . . . . . . . . . . . . . . . . . 4
1.28 Effective Date . . . . . . . . . . . . . . . . . . . . . . . 4
1.29 Emergence Credit Facility . . . . . . . . . . . . . . . . . . 5
1.30 Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.31 Final Order . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.32 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.33 Informal Noteholders' Committee . . . . . . . . . . . . . . . 5
1.34 Informal Noteholders' Committee Expenses . . . . . . . . . . 5
1.35 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.36 New Common Stock . . . . . . . . . . . . . . . . . . . . . . 5
1.37 Note Claims . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.38 Noteholders . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.39 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.40 Other Priority Claim . . . . . . . . . . . . . . . . . . . . 6
1.41 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.42 Petition Date . . . . . . . . . . . . . . . . . . . . . . . . 6
1.43 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.44 Post-Restructuring Board . . . . . . . . . . . . . . . . . . 6
1.45 Prepetition Credit Agreement . . . . . . . . . . . . . . . . 6
1.46 Prepetition Credit Agreement Claims . . . . . . . . . . . . . 6
1.47 Prepetition Credit Facility . . . . . . . . . . . . . . . . . 6
1.48 Prepetition Lenders . . . . . . . . . . . . . . . . . . . . . 6
1.49 Priority Tax Claim . . . . . . . . . . . . . . . . . . . . . 6
1.50 Professional Fees . . . . . . . . . . . . . . . . . . . . . . 7
1.51 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.52 Registration Rights Agreement . . . . . . . . . . . . . . . . 7
1.53 Reinstated or Reinstatement . . . . . . . . . . . . . . . . . 7
1.54 Reorganized USL . . . . . . . . . . . . . . . . . . . . . . . 7
1.55 Requisite Acceptances . . . . . . . . . . . . . . . . . . . . 7
1.56 Restated Articles of Incorporation . . . . . . . . . . . . . 7
1.57 Restated By-Laws . . . . . . . . . . . . . . . . . . . . . . 7
1.58 Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 8
1.59 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.60 Secured Claim . . . . . . . . . . . . . . . . . . . . . . . . 8
1.61 Securities Act . . . . . . . . . . . . . . . . . . . . . . . 8
1.62 Solicitation . . . . . . . . . . . . . . . . . . . . . . . . 8
1.63 Stockholders . . . . . . . . . . . . . . . . . . . . . . . . 8
1.64 USL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.65 USL Common Stock . . . . . . . . . . . . . . . . . . . . . . 8
1.66 Voting Deadline . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE II ADMINISTRATIVE EXPENSE CLAIMS . . . . . . . . . . . . . . . 9
2.01 Administrative Expense Claims. . . . . . . . . . . . . . . . 9
ARTICLE III CLASSIFICATION OF CLAIMS AND INTERESTS . . . . . . . . . . 9
3.01 Class 1: Priority Tax Claims. . . . . . . . . . . . . . . . 9
3.02 Class 2: Other Priority Claims. . . . . . . . . . . . . . . 9
3.03 Class 3: Miscellaneous Secured Claims. . . . . . . . . . . . 10
3.04 Class 4: Prepetition Credit Agreement Claims. . . . . . . . 10
3.05 Class 5: Note Claims. . . . . . . . . . . . . . . . . . . . . 10
3.06 Class 6: General Unsecured Claims Against USL. . . . . . . . 10
3.07 Class 7: Interests in Respect of USL Common Stock. . . . . . 10
ARTICLE IV TREATMENT OF UNIMPAIRED CLASSES (Classes 1, 2, 3, 4, and 6) 10
4.01 Class 1 (Priority Tax Claims). . . . . . . . . . . . . . . . 10
4.02 Class 2 (Other Priority Claims). . . . . . . . . . . . . . . 10
4.03 Class 3 (Miscellaneous Secured Claims). . . . . . . . . . . . 11
4.04 Class 4 (Prepetition Credit Agreement Claims). . . . . . . . 11
4.05 Class 6 (General Unsecured Claims Against USL). . . . . . . . 11
4.06 Unimpaired Classes. . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE V TREATMENT OF IMPAIRED CLASSES (Classes 5 and 7) . . . . . . . 12
5.01 Class 5 (Note Claims). . . . . . . . . . . . . . . . . . . . 12
5.02 Class 7 (Interests in Respect of USL Common Stock). . . . . . 12
5.03 Impaired Classes and Interests. . . . . . . . . . . . . . . . 12
ARTICLE VI DISPUTED CLAIMS . . . . . . . . . . . . . . . . . . . . . . 12
6.01 Disputed Claims; Objections to Claims. . . . . . . . . . . . 12
6.02 Resolution of Claims. . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VII MEANS FOR IMPLEMENTATION OF THE PLAN . . . . . . . . . . . 13
7.01 Management of Reorganized USL. . . . . . . . . . . . . . . . 13
7.02 Restated Articles of Incorporation and Restated By-Laws. . . 13
7.03 Emergence Credit Facility. . . . . . . . . . . . . . . . . . 13
7.04 Operations of Debtor Between Confirmation and
Consummation. . . . . . . . . . . . . . . . . . . . . . . . . 13
7.05 Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . 14
7.06 Term of Injunctions or Stays. . . . . . . . . . . . . . . . . 14
7.07 Cancellation of Existing Securities, Instruments, and
Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.08 Distribution of Consideration. . . . . . . . . . . . . . . . 14
7.09 Registration Rights Agreement. . . . . . . . . . . . . . . . 16
7.10 Corporate Action. . . . . . . . . . . . . . . . . . . . . . . 16
7.11 Effectuating Documents; Further Transactions. . . . . . . . . 16
7.12 Authorization for Management Stock Incentive Program. . . . . 16
7.13 Retiree Benefits. . . . . . . . . . . . . . . . . . . . . . . 16
7.14 Ordinary Course and Scheduled Liabilities. . . . . . . . . . 17
7.15 Effect of Failure to File Proof of Claim by Bar Date. . . . . 17
ARTICLE VIII ACCEPTANCE OR REJECTION OF THE PLAN; EFFECT OF REJECTION
BY IMPAIRED CLASSES OF CLAIMS . . . . . . . . . . . . . . . . 18
8.01 Classes Entitled to Vote. . . . . . . . . . . . . . . . . . . 18
8.02 Class Acceptance Requirement. . . . . . . . . . . . . . . . . 18
8.03 Cram Down. . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IX PRESERVATION OF LITIGATION CLAIMS AND RIGHTS OF ACTION . . . 18
9.01 Retained Litigation Claims and Rights of Action. . . . . . . 18
9.02 Preservation of Insurance. . . . . . . . . . . . . . . . . . 18
ARTICLE X EXECUTORY CONTRACTS AND UNEXPIRED LEASES19
10.01 Assumption. . . . . . . . . . . . . . . . . . . . . . . . . 19
10.02 Payments Related to Assumption. . . . . . . . . . . . . . . 19
10.03 Officers' and Directors' Indemnification Rights. . . . . . 19
10.04 Compensation and Benefit Programs. . . . . . . . . . . . . 20
ARTICLE XI CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . 20
11.01 Conditions to Confirmation. . . . . . . . . . . . . . . . . 20
11.02 Conditions to Consummation. . . . . . . . . . . . . . . . . 20
11.03 Waiver of Conditions. . . . . . . . . . . . . . . . . . . . 22
11.04 Effect of Failure of Conditions. . . . . . . . . . . . . . 22
11.05 Notice to Bankruptcy Court. . . . . . . . . . . . . . . . . 22
ARTICLE XII MODIFICATION, REVOCATION, OR WITHDRAWAL OF THE PLAN . . . . 22
12.01 Modification of Plan. . . . . . . . . . . . . . . . . . . . 22
12.02 Revocation or Withdrawal of Plan. . . . . . . . . . . . . . 23
12.03 Nonconsensual Confirmation. . . . . . . . . . . . . . . . . 23
ARTICLE XIII EFFECT OF CONFIRMATION . . . . . . . . . . . . . . . . . . 24
13.01 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . 24
13.02 Discharge of Debtor. . . . . . . . . . . . . . . . . . . . 24
13.03 Injunction. . . . . . . . . . . . . . . . . . . . . . . . . 24
13.04 Revesting. . . . . . . . . . . . . . . . . . . . . . . . . 24
13.05 Operation of Business. . . . . . . . . . . . . . . . . . . 25
13.06 Releases. . . . . . . . . . . . . . . . . . . . . . . . . . 25
13.07 Exculpation. . . . . . . . . . . . . . . . . . . . . . . . 26
13.08 Termination of Committees. . . . . . . . . . . . . . . . . 26
ARTICLE XIV RETENTION OF JURISDICTION . . . . . . . . . . . . . . . . . 26
14.01 Jurisdiction of Bankruptcy Court. . . . . . . . . . . . . . 26
14.02 Failure of Bankruptcy Court to Exercise Jurisdiction. . . . 28
ARTICLE XV MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . 28
15.01 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
15.02 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 28
15.03 Saturday, Sunday, or Legal Holiday. . . . . . . . . . . . . 28
15.04 Payment of Statutory Fees. . . . . . . . . . . . . . . . . 28
15.05 Severability. . . . . . . . . . . . . . . . . . . . . . . . 28
15.06 Modification of Treatment of Claims or Interests. . . . . . 29
15.07 Section 1145 Exemption. . . . . . . . . . . . . . . . . . . 29
15.08 Section 1146 Exemption. . . . . . . . . . . . . . . . . . . 29
15.09 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 29
15.10 Withholding and Reporting Requirements. . . . . . . . . . . 29
15.11 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INTRODUCTION
United States Leather, Inc. ("USL" or the "Debtor"), as debtor
and debtor-in-possession, proposes this plan of reorganization (the
"Plan"), as it may be amended, pursuant to section 1121(a) of title 11 of
the United States Code, for the resolution of its outstanding creditor
claims and equity interests.
All impaired creditors and equity security holders are strongly
encouraged to consult the Disclosure Statement relating to this Plan,
which discusses the Debtor and its management, business, assets, and
liabilities, before voting to accept or to reject this Plan.
Subject to the restrictions on modification set forth in section
1127 of the Bankruptcy Code and those restrictions on modification set
forth in Article XII of this Plan, the Debtor reserves the right to alter,
amend, or modify this Plan one or more times before its substantial
Consummation.
ARTICLE I
DEFINITIONS
Rules of Interpretation. As used herein, the following terms
have the respective meanings specified below, and such meanings shall be
equally applicable to both the singular and plural, and masculine and
feminine, forms of the terms defined. The words "herein," "hereof,"
"hereto," "hereunder," and others of similar import refer to this Plan as
a whole and not to any particular section, subsection, or clause contained
in this Plan. Captions and headings to articles, sections, and exhibits
are inserted for convenience of reference only, and they are not intended
to be part of or to affect the interpretation of this Plan. The rules of
construction set forth in section 102 of the Bankruptcy Code shall apply.
Any capitalized term used herein that is not defined herein but that is
defined in the Bankruptcy Code shall have the meaning ascribed to that
term in the Bankruptcy Code. In addition to such other terms as are
defined in other sections of this Plan, the following terms (which appear
in this Plan and in the Disclosure Statement as capitalized terms) have
the following meanings as used in this Plan.
1.01 Administrative Expense Claim means a Claim for payment
of an administrative expense of a kind specified in section 503(b) of the
Bankruptcy Code and entitled to priority pursuant to section 507(a)(1) of
the Bankruptcy Code, including, without limitation, any Claims of the
Prepetition Lenders or the Banks arising under the DIP Credit Facility,
the actual, necessary costs and expenses incurred after the Petition Date
of preserving the Estate and operating the business of USL, including
wages, salaries, or commissions for services rendered after the
commencement of the Chapter 11 Case, Professional Fees, and all fees and
charges assessed against the Estate under section 1930 of title 28 of the
United States Code.
1.02 Allowed means (i) with respect to a Claim (other than
an Administrative Expense Claim), any such Claim, proof of which was
timely and properly filed or, if no proof of claim was filed, that has
been or hereafter is listed by the Debtor on its Schedules as liquidated
in amount and not disputed or contingent, and, in either case, a Claim as
to which no objection to the allowance thereof, or motion to estimate for
purposes of allowance, shall have been filed on or before any applicable
period of limitation that may be fixed by the Bankruptcy Code, the
Bankruptcy Rules, or the Bankruptcy Court, or as to which any objection,
or any motion to estimate for purposes of allowance, shall have been so
filed, to the extent allowed by a Final Order; and (ii) with respect to an
Administrative Expense Claim, any such Administrative Expense Claim as to
which no objection to the allowance thereof has been interposed on or
before any applicable period of limitation that may be fixed by the
Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court, or as to
which any objection has been so interposed, to the extent allowed by a
Final Order. Except as otherwise provided herein, no amounts accruing
from and after the Petition Date, including, without limitation,
principal, interest, fees, and expenses, shall be Allowed with respect to
any Claim.
1.03 Allowed Class . . . Claim means an Allowed Claim in
the particular Class described.
1.04 Ballot means (i) the form of master ballot provided
for use by brokers, banks, proxy intermediaries, or other nominees that
hold Notes as of record on behalf of one or more beneficial owners, (ii)
the form of ballot provided to beneficial owners of the Notes in order to
permit such holders to vote on the Plan, and (iii) the form of ballot
provided to beneficial owners of USL Common Stock in order to permit such
holders to vote on the Plan.
1.05 Bankruptcy Code means the Bankruptcy Reform Act of
1978, as amended from time to time, as applicable to the Chapter 11 Case,
set forth in sections 101 et seq. of title 11 of the United States Code.
1.06 Bankruptcy Court means the United States Bankruptcy
Court for the Eastern District of Wisconsin, or such other court that
exercises jurisdiction over the Chapter 11 Case or any proceeding therein,
including the United States District Court for the Eastern District of
Wisconsin, to the extent reference of the Chapter 11 Case or any
proceeding therein is withdrawn.
1.07 Bankruptcy Rules means the Federal Rules of Bankruptcy
Procedure, as amended from time to time, as applicable to the Chapter 11
Case, including the local rules and standing orders of the Bankruptcy
Court.
1.08 Banks means any banks or other lenders, other than the
Prepetition Lenders, that may extend, or become parties to agreements,
instruments, or other documents extending, the DIP Credit Facility or the
Emergence Credit Facility.
1.09 Bar Date has the meaning given in section 7.14 hereof.
1.10 Business Day means a day other than a Saturday,
Sunday, or other day on which banks in New York, New York are authorized
or required by law to be closed.
1.11 Cash means legal tender of the United States or its
equivalent.
1.12 Chapter 11 Case means the case under chapter 11 of the
Bankruptcy Code with respect to the Debtor, pending in the Bankruptcy
Court, administered as In re United States Leather, Inc., Case No. _____
(Chapter 11).
1.13 Claim means a claim against USL, whether or not
asserted, as defined in section 101(5) of the Bankruptcy Code, including,
without limitation, (a) any right to payment from the Debtor arising
before the Confirmation Date, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured or (b) any
right to an equitable remedy against the Debtor for breach of performance
if such breach gives rise to a right of payment from the Debtor, whether
or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed, secured, or
unsecured.
1.14 Class means a category of holders of Claims or
Interests described in Article III hereof.
1.15 Commission means the Securities and Exchange
Commission.
1.16 Confirmation means confirmation of the Plan pursuant
to section 1129 of the Bankruptcy Code.
1.17 Confirmation Date means the date on which the
Confirmation Order is entered on the docket of the Bankruptcy Court.
1.18 Confirmation Hearing means the hearing on confirmation
of the Plan under section 1128 of the Bankruptcy Code.
1.19 Confirmation Order means the order of the Bankruptcy
Court confirming the Plan in accordance with the provisions of chapter 11
of the Bankruptcy Code.
1.20 Consummation means the satisfaction of all conditions
to the consummation of the Plan set forth in sections 11.01 and 11.02
hereof or the waiver of such conditions as provided in section 11.03
hereof.
1.21 Creditors' Committee means an official committee of
unsecured creditors appointed in the Chapter 11 Case by the United States
Trustee, if any, pursuant to section 1102 of the Bankruptcy Code, as
modified by the addition or removal of members from time to time.
1.22 Cure means the distribution of Cash, or such other
property as may be agreed upon by the parties and ordered by the
Bankruptcy Court, with respect to the assumption of an executory contract
or unexpired lease, pursuant to section 365(b) of the Bankruptcy Code, in
an amount equal to all unpaid monetary obligations, without interest, or
such other amount as may be agreed upon by the parties, under such
executory contract or unexpired lease, to the extent such obligations are
enforceable under the Bankruptcy Code and applicable non-bankruptcy law.
1.23 Debtor means USL, on and after the Petition Date, as
debtor and debtor-in-possession.
1.24 DIP Credit Facility means the revolving credit
facility to be provided to the Debtor pursuant to section 364 of the
Bankruptcy Code by either (i) the Banks, on such terms and conditions as
to which the Banks and the Debtor may agree or (ii) the Prepetition
Lenders, substantially in accordance with the terms set forth in Exhibit
A-1 to the Prepetition Credit Agreement, or such other terms to which the
Debtor and the Prepetition Lenders may agree, together with the
agreements, instruments, documents, and orders of the Bankruptcy Court
authorizing and governing such facility.
1.25 Disallowed Claim means (a) a Claim, or any portion
thereof, that has been disallowed by a Final Order or (b) a Claim as to
which a Bar Date has been established by the Bankruptcy Code, Bankruptcy
Rules, or a Final Order of the Bankruptcy Court, but no proof of Claim has
been filed or deemed timely filed with the Bankruptcy Court pursuant to
either the Bankruptcy Code, Bankruptcy Rules, or any Final Order of the
Bankruptcy Court.
1.26 Disclosure Statement means the Disclosure Statement of
United States Leather, Inc., dated March 31, 1998, as amended,
supplemented, or modified from time to time, pertaining to the Plan.
1.27 Disputed Claim means any Administrative Expense Claim,
Claim, or portion thereof, as to which the Debtor or any other party in
interest has interposed a timely objection or request for estimation in
accordance with the Bankruptcy Code and the Bankruptcy Rules, which
objection or request has not been withdrawn or determined by a Final Order
or otherwise settled as provided in section 6.02 hereof. As of any date
of determination, any Claim that is an Allowed Claim or a Disallowed
Claim, or that has been withdrawn, will not be considered a Disputed
Claim.
1.28 Effective Date means the first Business Day on which
all of the conditions set forth in sections 11.01 and 11.02 hereof have
been satisfied or waived as provided in section 11.03 hereof.
1.29 Emergence Credit Facility means the revolving credit
facility to be provided to Reorganized USL pursuant to an agreement, to be
dated as of the Effective Date, (i) among Reorganized USL and the Banks on
such terms and conditions as to which the Banks and Reorganized USL may
agree or, as the case may be, (ii) among Reorganized USL and the
Prepetition Lenders substantially in accordance with the terms set forth
in Exhibit A-2 to the Prepetition Credit Agreement, or such other terms as
to which Reorganized USL and the Prepetition Lenders may agree, together
with the agreements, instruments, and other documents governing such
facility.
1.30 Estate means the estate of USL in the Chapter 11 Case,
created pursuant to section 541 of the Bankruptcy Code.
1.31 Final Order means an order or judgment entered by the
Bankruptcy Court or any other court exercising jurisdiction over the
subject matter and the parties (a) that has not been reversed, stayed,
modified, or amended, (b) as to which no appeal, certiorari proceeding,
reargument, or other review or rehearing has been requested or is still
pending, and (c) as to which the time for filing a notice of appeal,
petition for certiorari, or request for reargument or further review or
rehearing shall have expired.
1.32 Indenture means the Indenture, dated as of August 2,
1993, and entered into by and between USL and M&I First National Bank, as
trustee, relating to the Notes.
1.33 Informal Noteholders' Committee means the informal and
unofficial committee of Noteholders formed prior to the commencement of
the Chapter 11 Case.
1.34 Informal Noteholders' Committee Expenses means the
fees and expenses outstanding on the Effective Date incurred by the
Informal Noteholders' Committee on behalf of holders of the Allowed Note
Claims (including, without limitation, the fees and expenses of counsel)
in connection with the negotiation and documentation of the Plan, the
Plan-related documents, and the Chapter 11 Case.
1.35 Interest means any equity interest in the Debtor
represented by USL Common Stock.
1.36 New Common Stock means the common stock of Reorganized
USL, $.01 par value per share, authorized for issuance under the Plan.
1.37 Note Claims means all Claims directly or indirectly
arising from or under, or relating in any way to, the Notes, including
Claims for accrued but unpaid interest, and the Informal Noteholders'
Committee Expenses.
1.38 Noteholders means holders of the Notes as of the
Record Date.
1.39 Notes means United States Leather, Inc.'s 10.25%
Senior Notes, due 2003.
1.40 Other Priority Claim means a Claim for an amount
entitled to priority in right of payment under section 507(a)(3), (4),
(5), or (6) of the Bankruptcy Code.
1.41 Person means an individual, a corporation, a
partnership, an association, a joint stock company, a joint venture, an
estate, a trust, an unincorporated organization, a government, or any
political subdivision thereof, or any other entity.
1.42 Petition Date means May ____, 1998, the date on which
USL filed its petition for relief commencing the Chapter 11 Case.
1.43 Plan means this plan of reorganization, as it may be
amended, modified, or otherwise supplemented from time to time.
1.44 Post-Restructuring Board means the Board of Directors
of Reorganized USL as of the Effective Date, as provided in section 7.01
hereof.
1.45 Prepetition Credit Agreement means the Loan and
Security Agreement, dated as of January 14, 1998, among USL and the
Prepetition Lenders, together with all agreements, instruments, and other
documents related thereto or entered into in connection therewith, each as
amended, modified, or supplemented from time to time, including, without
limitation, under Amendment No. 1 To Loan and Security Agreement.
1.46 Prepetition Credit Agreement Claims means all Claims
of the Prepetition Lenders arising under or related to the Prepetition
Credit Agreement, which, for purposes of the Plan, shall be deemed to be
an Allowed Claim and a Secured Claim in an amount equal to the excess of
(a) all "Obligations" (as such term is defined in the Prepetition Credit
Agreement) under the Prepetition Credit Agreement over (b) the sum of all
payments made in Cash by the Debtor to the Prepetition Lenders prior to
the Effective Date on account of such Prepetition Credit Agreement Claims
pursuant to any order of the Bankruptcy Court authorizing and approving
the DIP Credit Facility.
1.47 Prepetition Credit Facility means the credit facility
extended by the Prepetition Lenders to USL pursuant to the Prepetition
Credit Agreement.
1.48 Prepetition Lenders means BankAmerica Business Credit,
Inc., as agent and lender, PNC Bank National Association and LaSalle
Business Credit, Inc., as lenders, pursuant to the Prepetition Credit
Agreement, the DIP Credit Facility, and/or the Emergence Credit Facility,
as the case may be, and their respective successors and assigns, and any
other lenders that may become parties to any of the foregoing credit
facilities.
1.49 Priority Tax Claim means a Claim, other than an
Administrative Claim, of a governmental unit of the kind entitled to
priority under section 507(a)(8) of the Bankruptcy Code.
1.50 Professional Fees means a Claim of a professional,
retained in the Chapter 11 Case, pursuant to sections 327 and 1103 of the
Bankruptcy Code, or otherwise, for compensation or reimbursement of costs
and expenses relating to services incurred prior to and including
Confirmation, when and to the extent any Claim described above is approved
by a Final Order entered pursuant to section 330, 331, or 503(b) of the
Bankruptcy Code.
1.51 Record Date means, with respect to the Notes, March
27, 1998 and, with respect to USL Common Stock, April 30, 1998.
1.52 Registration Rights Agreement means the agreement, to
be entered into on or before the Effective Date and in form reasonably
acceptable to the Debtor and the Informal Noteholders' Committee, pursuant
to which Reorganized USL shall grant certain "shelf" and/or "demand"
rights with respect to registration of the New Common Stock under the
Securities Act to the holders of New Common Stock.
1.53 Reinstated or Reinstatement means leaving unaltered
the legal, equitable, and contractual rights to which a Claim entitles the
holder of such Claim so as to leave such Claim unimpaired, in accordance
with section 1124 of the Bankruptcy Code, thereby entitling the holder of
such Claim to, but not more than, (a) reinstatement of the original
maturity of the obligations on which such Claim is based and (b) payment,
as provided herein, of an amount of Cash consisting solely of the sum of
(i) matured but unpaid principal installments, without regard to any
acceleration of maturity, accruing prior to the Effective Date, (ii)
accrued but unpaid interest as of the Effective Date, and (iii) reasonable
fees, expenses, and charges, to the extent such fees, expenses, and
charges are allowed under the Bankruptcy Code and are provided for in the
agreement or agreements on which such Claim is based.
1.54 Reorganized USL means USL from and after the Effective
Date.
1.55 Requisite Acceptances means, with respect to each
Class of Claims entitled to vote on the Plan, acceptance of the Plan, in
the form of a vote on a Ballot in favor of the Plan, by at least two-
thirds (2/3) in aggregate dollar amount and more than one-half (1/2) in
number of the Allowed Claims of such Class held by those holders of Claims
in such Class that have timely voted on the Plan and, with respect to each
Class of Interests entitled to vote on the Plan, acceptance of the Plan,
in the form of a vote on a Ballot in favor of the Plan, by at least two-
thirds (2/3) in aggregate amount of the Interests of such Class held by
those holders of Interests in such Class that have timely voted on the
Plan.
1.56 Restated Articles of Incorporation means the Restated
Articles of Incorporation of United States Leather, Inc., substantially in
the form of Appendix E to the Disclosure Statement.
1.57 Restated By-Laws means the By-Laws of United States
Leather, Inc., substantially in the form of Appendix F to the Disclosure
Statement.
1.58 Restructuring means USL's proposal, including, but not
limited to, the terms described in the Plan and the Disclosure Statement,
for the resolution of USL's outstanding Claims and Interests.
1.59 Schedules means, collectively, the schedules of assets
and liabilities and the statement of financial affairs filed by the Debtor
with the Bankruptcy Court on the Petition Date, pursuant to section 521 of
the Bankruptcy Code and Rule 1007 of the Bankruptcy Rules, as the same
have been or may hereafter be amended or supplemented from time to time.
1.60 Secured Claim means any Claim against the Debtor held
by any entity, including a subsidiary, affiliate, or judgment creditor of
the Debtor, to the extent such Claim constitutes a secured Claim under
sections 506(a) or 1111(b) of the Bankruptcy Code, other than a Claim that
is an Administrative Expense Claim, a Class 1 Claim, or a Class 2 Claim.
1.61 Securities Act means the Securities Act of 1933, as
amended from time to time.
1.62 Solicitation means USL's prepetition solicitation,
including, but not limited to, dissemination of the Disclosure Statement,
of acceptances of the Plan from Noteholders and Stockholders.
1.63 Stockholders means holders of Interests in USL Common
Stock, as of the Record Date.
1.64 USL means United States Leather, Inc., a Wisconsin
corporation.
1.65 USL Common Stock means the common stock of USL, $.01
par value per share.
1.66 Voting Deadline means May 6, 1998, or such further
date, on which USL's prepetition solicitation of Ballots expired.
ARTICLE II
ADMINISTRATIVE EXPENSE CLAIMS
2.01 Administrative Expense Claims. Each holder of an
Allowed Administrative Expense Claim shall be paid in full in Cash as soon
as practicable after (but in any event within thirty days of) the later of
(a) the Effective Date and (b) the date such Administrative Expense Claim
becomes Allowed, unless such holder shall agree to a different treatment
(including any different treatment that may be provided for in the
documentation governing such Claim); provided, however, that Allowed
Administrative Expense Claims with respect to liabilities and obligations
incurred by the Debtor in the ordinary course of business during the
Chapter 11 Case (including, without limitation, such Claims of vendors and
suppliers in respect of goods sold and services furnished to the Debtor in
the ordinary course of the Debtor's business) may be assumed by
Reorganized USL and be paid by Reorganized USL in the ordinary course of
business in accordance with the terms and conditions of the particular
transaction and any agreements and instruments relating thereto; provided
further, however, that any Claims of the Prepetition Lenders or, as the
case may be, the Banks arising under the DIP Credit Facility shall be paid
in full in Cash on the Effective Date.
ARTICLE III
CLASSIFICATION OF CLAIMS AND INTERESTS
All Claims and Interests, except Administrative Expense Claims,
are placed in the Classes set forth below. In accordance with section
1123(a)(1) of the Bankruptcy Code, Administrative Expense Claims, as
described above, have not been classified.
For purposes of the Plan, Claims and Interests are classified as
provided below. A Claim is classified in a particular Class only to the
extent that such Claim qualifies within the description of that Class and
is classified in a different Class to the extent that the Claim qualifies
within the description of that different Class.
A Claim or Interest is also placed in a particular Class for the
purpose of receiving distributions pursuant to the Plan only to the extent
that such Claim or Interest is an Allowed Claim in that Class and such
Claim or Interest has not been paid, released, or otherwise settled prior
to the Effective Date.
3.01 Class 1: Priority Tax Claims. Class 1 consists of all
Priority Tax Claims. As described in Article IV hereof, Class 1 is not
impaired and is not entitled to vote on the Plan.
3.02 Class 2: Other Priority Claims. Class 2 consists of all
Other Priority Claims. As described in Article IV hereof, Class 2 is not
impaired and is not entitled to vote on the Plan.
3.03 Class 3: Miscellaneous Secured Claims. Class 3 consists
of all Secured Claims, other than the Prepetition Credit Agreement Claims.
As described in Article IV hereof, Class 3 is not impaired and is not
entitled to vote on the Plan.
3.04 Class 4: Prepetition Credit Agreement Claims. Class 4
consists of all Prepetition Credit Agreement Claims. As described in
Article IV hereof, Class 4 is not impaired and is not entitled to vote on
the Plan.
3.05 Class 5: Note Claims. Class 5 consists of the Note Claims.
As described in Article V hereof, Class 5 is impaired and is entitled to
vote on the Plan.
3.06 Class 6: General Unsecured Claims Against USL. Class 6
consists of all Claims against USL, other than Claims that are otherwise
classified hereby or that are Administrative Expense Claims. As described
in Article IV hereof, Class 6 is unimpaired and is not entitled to vote on
the Plan.
3.07 Class 7: Interests in Respect of USL Common Stock. Class
7 consists of all Interests arising from or in any way associated with the
USL Common Stock. As described in Article V hereof, Class 7 is impaired
and is entitled to vote on the Plan.
ARTICLE IV
TREATMENT OF UNIMPAIRED CLASSES
(CLASSES 1, 2, 3, 4, AND 6)
4.01 Class 1 (Priority Tax Claims). Each holder of an Allowed
Class 1 Claim shall be paid in full in Cash the amount of its Allowed
Class 1 Claim as soon as practicable after (but in any event within thirty
days of) the later of (a) the Effective Date and (b) the date such Class 1
Claim becomes Allowed, unless such holder shall agree to a different
treatment.
4.02 Class 2 (Other Priority Claims). Each holder of an
Allowed Class 2 Claim shall be paid in full in Cash the amount of its
Allowed Class 2 Claim as soon as practicable after (but in any event
within thirty days of) the later of (a) the Effective Date and (b) the
date such Class 2 Claim becomes Allowed, unless such holder shall agree to
a different treatment (including any different treatment that may be
provided for in the documentation governing such Claim).
4.03 Class 3 (Miscellaneous Secured Claims). With respect to
each Allowed Class 3 Claim, unless the holder thereof shall agree to a
different treatment (including any different treatment that may be
provided for in the documentation governing such Claim), the holder of an
Allowed Class 3 Claim shall receive one of the following alternative
treatments, at the election of the Debtor or Reorganized USL made on or
prior to the Effective Date:
(i) The Debtor shall pay such holder in full in
Cash the amount of such Claim as soon as practicable
after (but in any event within thirty days of) the
later of (i) the Effective Date and (ii) the date such
Claim becomes Allowed.
(ii) The Claim shall be Reinstated and the
legal, equitable, and contractual rights to which such
Claim entitles the holder thereof shall be unaltered
by this Plan.
(iii) All collateral securing such Claim shall
be transferred and surrendered to such holder, without
representation or warranty by or recourse against the
Debtor or Reorganized USL.
4.04 Class 4 (Prepetition Credit Agreement Claims). Each
holder of an Allowed Class 4 Claim shall be paid in full in Cash the
amount of its Allowed Class 4 Claim on the Effective Date.
4.05 Class 6 (General Unsecured Claims Against USL). Each
holder of an Allowed Class 6 Claim shall be paid in full in the ordinary
course of business of USL and, accordingly, will not receive any
distribution under the Plan on the Effective Date. Such Allowed Class 6
General Unsecured Claim, if not so paid during the pendency of the Chapter
11 Case, will be Reinstated and will be paid in the ordinary course of
business in accordance with the terms of any invoice or agreement relating
to such Allowed Class 6 Claim or as otherwise provided by applicable non-
bankruptcy law.
4.06 Unimpaired Classes. By virtue of the foregoing provisions
of this Article IV, the Claims in Classes 1, 2, 3, 4, and 6 are not
impaired by the Plan. Pursuant to section 1126(f) of the Bankruptcy Code,
these Classes are conclusively presumed to have accepted the Plan and are
not entitled to vote on the Plan, and solicitation of acceptances of
holders of Claims in those Classes is not required.
ARTICLE V
TREATMENT OF IMPAIRED CLASSES
(CLASSES 5 AND 7)
5.01 Class 5 (Note Claims). On the Effective Date, each holder
of an Allowed Class 5 Claim will receive its pro rata share of 9,700,000
shares of New Common Stock. No fractional shares of New Common Stock will
be issued. In addition, on the Effective Date, the Debtor shall pay the
Informal Noteholder's Committee Expenses in full. No other distribution
will be made to holders of Allowed Class 5 Claims in respect of their
Class 5 Claims, including, without limitation, Claims for accrued but
unpaid interest on the Notes.
5.02 Class 7 (Interests in Respect of USL Common Stock). On
the Effective Date, each holder of an Allowed Class 7 Interest will
receive its pro rata share of 300,000 shares of New Common Stock. No
other distribution will be made to holders of Allowed Class 7 Interests in
respect of their Class 7 Interests.
5.03 Impaired Classes and Interests. By virtue of the
foregoing provisions and Interests of this Article V, Classes 5 and 7 are
impaired under the Plan, and holders of Allowed Claims and Interests in
such Classes are entitled to vote to accept or reject the Plan.
ARTICLE VI
DISPUTED CLAIMS
6.01 Disputed Claims; Objections to Claims. Only Claims that
are Allowed shall be entitled to distributions under the Plan. Until a
Disputed Claim becomes an Allowed Claim, no distributions otherwise
available to the holder of such Claim will be made, and no Cash or shares
of New Common Stock otherwise distributable to such holder will be
distributed. The Debtor reserves the right to contest and object to any
Claims (whether or not a proof of Claim has been filed), including,
without limitation, those Claims that are specifically referenced herein,
that are not listed in the Schedules, are listed in the Schedules as
disputed, contingent, or unliquidated in amount, or are listed in the
Schedules at a lesser amount than asserted by the holder of the Claim.
Any party in interest, including the Debtor, may object to the allowance
of any Claim. Unless otherwise ordered by the Bankruptcy Court, all
objections to Claims (other than Administrative Expense Claims) shall be
filed with the Bankruptcy Court and served upon counsel to the Debtor,
counsel to the Creditors' Committee, if any, and the holder of the Claim
objected to on or before the later of the Effective Date and 25 days after
the date (if any) that a proof of claim is timely filed in respect of such
Claim. The last day for filing objections to Administrative Expense
Claims shall be set pursuant to an order of the Bankruptcy Court.
6.02 Resolution of Claims. Objections filed in the Bankruptcy
Court will be litigated to a Final Order. However, the Debtor reserves
the right to compromise and settle, withdraw, or resolve by any other
method approved by the Bankruptcy Court, any objection to a Disputed
Claim, and may seek the Bankruptcy Court's estimation of any Disputed
Claim pursuant to section 502(c) of the Bankruptcy Code. All Disputed
Claims shall be resolved in the Bankruptcy Court, except to the extent
that (a) the Debtor may otherwise elect consistent with this Plan and the
Bankruptcy Code or (b) the Bankruptcy Court may otherwise order.
As soon as reasonably practicable after a Disputed Claim becomes
an Allowed Claim, or on such date as this Plan shall otherwise provide,
the holder of such Allowed Claim shall receive all payments and
distributions to which such holder is then entitled under this Plan. To
the extent any Claim is disallowed, the Debtor will retain any Cash or New
Common Stock that would otherwise have been distributable on account of
such Claim.
ARTICLE VII
MEANS FOR IMPLEMENTATION OF THE PLAN
7.01 Management of Reorganized USL. On the Effective Date, the
operation of Reorganized USL shall become the general responsibility of
the Post-Restructuring Board, in accordance with applicable law. The
Post-Restructuring Board shall consist of five directors. Four of the
initial directors of Reorganized USL shall be designated by the Informal
Noteholders' Committee. The remaining director shall be nominated by
management of Reorganized USL. All members of the Post-Restructuring
Board shall be deemed to have been elected on the Effective Date However,
in the event that any officer or director is unwilling or unable to take
office at that time, the resulting vacancy shall be filled by action of
the Post-Restructuring Board.
7.02 Restated Articles of Incorporation and Restated By-Laws.
On the Effective Date, Reorganized USL shall be deemed to have adopted the
Restated Articles of Incorporation, which shall (among other things)
include a provision that prohibits the issuance of non-voting equity
securities to the extent required by section 1123(a)(6) of the Bankruptcy
Code, and the Restated By-Laws. As soon as practicable on or after the
Effective Date, Reorganized USL will file its Restated Articles of
Incorporation with the Department of Financial Institutions of the State
of Wisconsin. Except to the extent inconsistent with the terms of this
Plan, after the Effective Date, Reorganized USL may further amend the
Restated Articles of Incorporation and may amend the Restated By-Laws, as
permitted by such Restated Articles of Incorporation, such Restated By-
Laws, and applicable state law.
7.03 Emergence Credit Facility. On the Effective Date,
Reorganized USL shall, in accordance with the Plan, enter into the
Emergence Credit Facility.
7.04 Operations of Debtor Between Confirmation and
Consummation. The Debtor shall continue to operate as debtor-in-
possession, subject to the supervision of the Bankruptcy Court, pursuant
to the Bankruptcy Code, during the period from Confirmation through and
until Consummation, and any obligation incurred by the Debtor during that
period shall constitute an Administrative Expense Claim; provided,
however, that nothing herein shall preclude the Debtor from taking any
step it deems necessary or desirable to prepare for and effect the
Consummation of the Plan.
7.05 Exclusivity. The Debtor shall retain the exclusive right
to amend the Plan and solicit acceptances thereof until Consummation.
7.06 Term of Injunctions or Stays. Unless otherwise provided
herein or in the Confirmation Order, all injunctions or stays provided for
in the Chapter 11 Case under section 105 or 362 of the Bankruptcy Code, or
otherwise, and extant immediately prior to Confirmation shall remain in
full force and effect until Consummation.
7.07 Cancellation of Existing Securities, Instruments, and
Agreements. On the Effective Date, except as otherwise provided herein,
all securities and all instruments and agreements governing any Claims or
Interests impaired hereby shall be deemed cancelled and terminated, and
the obligations of the Debtor relating to, arising under, in respect of,
or in connection with such securities, instruments, and agreements shall
be discharged; provided, however, that except as otherwise provided
herein, Notes, share certificates, and other evidences of Claims or
Interests shall, effective upon the Effective Date, represent the right to
participate, to the extent such Claims or Interests are Allowed, in the
distributions contemplated by the Plan.
7.08 Distribution of Consideration.
(a) Distribution Agent. Reorganized USL shall distribute all
property to be distributed under this Plan. Reorganized
USL may employ or contract with other entities to assist in
or perform the distribution of such property.
(b) Distribution of Cash. Cash payments made pursuant to this
Plan shall be in legal tender of the United States, by the
means agreed to by the payor and the payee, including by
check or wire transfer, or, in the absence of an agreement,
such commercially reasonable manner as the payor shall
determine in its sole discretion.
(c) Distribution of New Common Stock. On the Effective Date,
Reorganized USL will distribute the New Common Stock to the
holders of Allowed Class 5 Claims and Allowed Class 7
Interests in accordance with the provisions of this Plan.
(d) Fractional Shares. Fractional shares of the New Common
Stock shall not be issued under this Plan. If, but for
this section, a Person would be entitled to receive a
fractional share, then such Person shall be issued in lieu
thereof either no share (if such fraction is less than one-
half) or one whole share (if such fraction is equal to or
greater than one-half).
(e) Surrender of Securities. Each holder of a Note, share
certificate, or other instrument evidencing an Allowed
Claim or Interest shall surrender the same to Reorganized
USL, and Reorganized USL shall distribute or shall cause to
be distributed to the holders thereof the appropriate
distribution of property hereunder. No distribution of
property hereunder shall be made to or on behalf of any
such holder unless and until such Note, share certificate,
or other instrument is received by Reorganized USL, or the
unavailability of such Note, share certificate, or other
instrument is established to the satisfaction of
Reorganized USL. Any such holder that fails to surrender
or cause to be surrendered such Note, share certificate, or
other instrument, or to execute and deliver an affidavit of
loss and indemnity satisfactory to Reorganized USL, and, in
the event that Reorganized USL so requests, fails to
furnish a bond in form and substance (including, without
limitation, with respect to amount) reasonably satisfactory
to Reorganized USL within two years after the Effective
Date shall be deemed to have forfeited all Claims or
Interests represented by such Note, share certificate, or
other instrument and shall not participate in any
distribution hereunder in respect of such Note, share
certificate, or other instrument, and all property in
respect of such forfeited distribution, including (if
applicable) interest accrued thereon, shall irrevocably
revert to Reorganized USL. Notwithstanding the foregoing,
all Claims shall be discharged by this Plan to the extent
provided herein regardless of whether and when any
surrender, indemnity, or bond required or permitted by this
section is provided, and regardless of whether Reorganized
USL makes a distribution hereunder without compliance with
this section. Reorganized USL, in its sole discretion, may
waive the requirements of this section.
(f) Delivery of Distributions. Distributions to holders of
Allowed Claims and Interests shall be made by Reorganized
USL (a) at the addresses for such holders set forth on the
list of record holders of the Notes and USL Common Stock as
of the appropriate Record Date or (b) at the addresses
reflected in USL's books and records. If any holder's
distribution is returned to Reorganized USL, or such other
agent as Reorganized USL may designate, as the case may be,
no further distributions to such holder shall be made
unless and until Reorganized USL, or such other agent as
Reorganized USL may designate, as the case may be, is
notified of such holder's then current address, at which
time all missed distributions shall be made to such holder.
Amounts in respect of undeliverable distributions made
through Reorganized USL, or any such other agent as
Reorganized USL may designate, as the case may be, shall be
returned to Reorganized USL until such distributions are
claimed. All claims for undeliverable distributions shall
be made within two years following the Effective Date.
After such date, all unclaimed property shall irrevocably
revert to Reorganized USL in accordance with section
7.08(g) hereof.
(g) Distribution of Unclaimed Property. If any Person entitled
to receive Cash or New Common Stock under the provisions of
this Plan does not claim such Cash or New Common Stock on
the Effective Date, or on such other date when such Person
becomes eligible for distribution of such Cash or New
Common Stock, such Cash or New Common Stock will be set
aside and (in the case of Cash) held in a segregated,
interest-bearing fund to be maintained by Reorganized USL.
If such Person presents itself within two years following
the Effective Date, such Cash or New Common Stock, together
with any interest or dividends earned thereupon, will be
paid or distributed by Reorganized USL to such Person. If
such Person does not present itself within two years
following the Effective Date, such Cash, New Common Stock,
or any other property distributable under the provisions of
this Plan shall irrevocably revert to Reorganized USL, and
the Claim of any such holder or successor to such holder
shall be discharged and forever barred. Neither the Debtor
nor Reorganized USL shall be required to attempt to locate
any such Person.
(h) Setoffs. The Debtor may, but shall not be required to, set
off against any Claim and the payments to be made pursuant
to the Plan in respect of such Claim, any claims of any
nature whatsoever that the Debtor may have against the
holder of such Claim, but neither the failure to do so nor
the allowance of any Claim hereunder shall constitute a
waiver or release of any such claim the Debtor may have
against such holder.
7.09 Registration Rights Agreement. On or before the Effective
Date, the Debtor shall enter into the Registration Rights Agreement with
Noteholders who may be deemed "affiliates" or "underwriters" under
applicable law.
7.10 Corporate Action. Upon entry of the Confirmation Order by
the Clerk of the Bankruptcy Court, all actions contemplated by the Plan
shall be authorized and approved in all respects (subject to the
provisions of the Plan), including, without limitation, the adoption and
filing with the Department of Financial Institutions of the State of
Wisconsin of the Restated Articles of Incorporation, and the adoption of
the Restated By-Laws. All matters provided for under the Plan involving
the corporate structure of the Debtor or Reorganized USL in connection
with the Plan (including any corporate action required by the Debtor or
Reorganized USL in connection with the Plan) shall be deemed to have
occurred and shall be in effect pursuant to chapter 180 of the Wisconsin
Business Corporation Law and the Bankruptcy Code, without any requirement
of further action by the stockholders or directors of the Debtor or
Reorganized USL.
7.11 Effectuating Documents; Further Transactions. On the
Effective Date, the Chairman of the Post-Restructuring Board, the
President, the Chief Operating Officer, the Chief Financial Officer, or
any other appropriate officer of Reorganized USL, shall be, and they
hereby are, authorized to execute, deliver, file, or record such
contracts, instruments, releases, indentures, certificates, and other
agreements or documents, and take such actions as may be necessary or
appropriate to effectuate and further evidence the terms and conditions of
the Plan in the name of and on behalf of Reorganized USL. The Secretary
or Assistant Secretary of Reorganized USL shall be authorized to certify
or attest to any of the foregoing actions, if necessary.
7.12 Authorization for Management Stock Incentive Program. Upon
the Effective Date, the Post-Restructuring Board shall be, and it hereby
is, authorized, in its sole discretion, to implement a Management Stock
Incentive Program with such terms and conditions that the Post-
Restructuring Board, in its sole discretion, shall deem to be in the best
interests of Reorganized USL, and, pursuant to such terms and conditions,
to authorize the issuance of no more than 1,000,000 additional shares of
New Common Stock to certain employees and officers of Reorganized USL.
7.13 Retiree Benefits. On and after the Effective Date, to the
extent required by section 1129(a)(13) of the Bankruptcy Code, Reorganized
USL shall continue to pay all retiree benefits (if any), as that term is
defined in section 1114 of the Bankruptcy Code, maintained or established
by the Debtor prior to the Confirmation Date, without prejudice to
Reorganized USL's rights under applicable non-bankruptcy law to modify,
amend, or terminate the foregoing arrangements.
7.14 Ordinary Course and Scheduled Liabilities. Subject to the
terms hereof, neither holders of Claims that are listed on the Debtor's
Schedules and are not listed as disputed, contingent, unliquidated, or
unknown, nor holders of Claims relating to liabilities arising before or
after the Petition Date in respect of goods and services purchased by USL
in the ordinary course of its business, nor the Prepetition Lenders, nor,
as the case may be, the Banks shall be required to file any proof of Claim
or request for payment of such Claims, unless the holder of such Claim
disputes the amount of the Claim as scheduled by the Debtor. Such Claims
shall be paid or otherwise satisfied by the Debtor and/or Reorganized USL
in accordance with the terms of this Plan, without any further action by
the holders of such Claims.
7.15 Effect of Failure to File Proof of Claim by Bar Date. In
accordance with the provisions of the Bankruptcy Code and the Bankruptcy
Rules, the Debtor will request that the Bankruptcy Court enter an order
establishing the last date and time by which proofs of Claims (other than
Claims of governmental authorities) against, and proofs of Interests in,
USL must be filed (the "Bar Date"). Except as provided in section 7.13
hereof, or as otherwise provided by a Final Order of the Bankruptcy Court,
any Claim or Interest with respect to which the holder of such Claim or
Interest has not filed a proof of Claim or proof of Interest by the Bar
Date shall be forever barred and any obligation of USL with respect to
such Claim or Interest shall be discharged and released to the fullest
extent authorized or provided by the Bankruptcy Code, including, without
limitation, by sections 524 and 1141(d)(1)(A) of the Bankruptcy Code.
ARTICLE VIII
ACCEPTANCE OR REJECTION OF THE PLAN; EFFECT OF REJECTION BY IMPAIRED
CLASSES OF CLAIMS
8.01 Classes Entitled to Vote. Each impaired Class that will
receive or retain property or any interest in property under the Plan
shall be entitled to vote to accept or reject the Plan. Any Class of
Claims that is not impaired shall be deemed to have accepted the Plan and
shall not be entitled to vote to accept or reject the Plan.
8.02 Class Acceptance Requirement. Under section 1126(c) of
the Bankruptcy Code, Class 5 has accepted the Plan if the holders of at
least two-thirds (2/3) in amount and more than one-half (1/2) in number of
Allowed Claims of such Class who have timely voted on the Plan have voted
to accept the Plan. Under section 1126(d) of the Bankruptcy Code, Class 7
has accepted the Plan if the holders of at least two-thirds (2/3) in
amount of Allowed Interests of such Class who have timely voted on the
Plan have voted to accept the Plan.
8.03 Cram Down. The Debtor reserves the right to request
Confirmation of the Plan, as it may be modified from time to time, under
section 1129(b) of the Bankruptcy Code.
ARTICLE IX
PRESERVATION OF LITIGATION CLAIMS AND RIGHTS OF ACTION
9.01 Retained Litigation Claims and Rights of Action. In
accordance with section 1123(b)(3) of the Bankruptcy Code, except for (a)
avoidance actions arising under section 547 of the Bankruptcy Code (which
would be meaningless, given the treatment of Claims hereunder, which
negates the possibility of transfers subject to avoidance thereunder), and
(b) to the extent otherwise provided in this Plan or in the Confirmation
Order, Reorganized USL shall retain and may expressly, in its sole
discretion, enforce, sue on, settle, or compromise (or decline to do any
of the foregoing), all claims, rights of action, suits, and proceedings,
whether in law or in equity, whether known or unknown (including, without
limitation, any and all avoidance actions that USL, Reorganized USL, or
the Estate may hold against any Person), and such claims, rights of
action, suits, and proceedings shall remain assets of Reorganized USL.
Reorganized USL or any of its successors may pursue such claims and rights
of action, as appropriate, in accordance with the best interests of
Reorganized USL or its successors who hold such claims or rights of
action.
9.02 Preservation of Insurance. The Debtor's discharge and
release from all Claims as provided herein, except as necessary to be
consistent with this Plan, shall not diminish or impair the enforceability
of any insurance policy that may cover Claims against USL or any other
Person.
ARTICLE X
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
10.01 Assumption. On and as of the Confirmation Date, all
executory contracts and unexpired leases that exist between the Debtor and
any Person are hereby specifically assumed, except for any executory
contracts and unexpired leases that have been specifically rejected by the
Debtor with the approval of the Bankruptcy Court on or before the
Confirmation Date or in respect of which a motion for rejection has been
filed with the Bankruptcy Court on or before the Confirmation Date. Entry
of the Confirmation Order by the Clerk of the Bankruptcy Court shall
constitute approval of such assumptions pursuant to section 365(a) of the
Bankruptcy Code. Claims created by the rejection of executory contracts
and unexpired leases must be filed with the Bankruptcy Court no later than
20 days after entry of a Final Order authorizing such rejection (or, if
later, the Bar Date established by the Bankruptcy Court for prepetition
Claims generally). Any such Claims not filed within such time shall be
forever barred from assertion against the Debtor, Reorganized USL, and
their respective properties and estates.
10.01 Payments Related to Assumption. Any monetary amounts by
which any executory contract or unexpired lease to be assumed under the
Plan may be in default shall be satisfied by Cure under section 365(b)(1)
of the Bankruptcy Code, at the option of the Debtor or the assignee of the
Debtor assuming such contract or lease. In the event of a dispute
regarding (i) the nature or amount of any Cure, (ii) the ability of
Reorganized USL or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code)
under the contract or lease to be assumed, or (iii) any other matter
pertaining to assumption, Cure shall occur following the entry of a Final
Order resolving the dispute and approving the assumption and, as the case
may be, assignment.
10.02 Officers' and Directors' Indemnification Rights.
Notwithstanding any other provisions of the Plan, the obligations of the
Debtor to indemnify its or its parents', subsidiaries', or affiliates'
present and former directors, officers, and employees against any
obligations, liabilities, costs, or expenses pursuant to the articles of
incorporation or by-laws of the Debtor, applicable state law, specific
agreement, or any combination of the foregoing, shall not survive
Confirmation of the Plan and shall be discharged, regardless of whether
indemnification is owed in connection with an event occurring prior to,
upon, or subsequent to the commencement of the Chapter 11 Case; provided,
however, that Reorganized USL shall maintain in force for a period of two
years following the Effective Date policies of Directors' and Officers'
Liability Insurance, covering pre-Effective Date directors and officers of
USL and containing substantially the same provisions and limits of
coverage as the policies that were in force on the Petition Date, and
Reorganized USL shall also be responsible for paying the deductible or
retention amounts under such policies for such two-year period.
10.03 Compensation and Benefit Programs. All employment and
severance agreements and policies, and all employee compensation and
benefit plans, policies, and programs of the Debtor applicable generally
to its employees, including agreements and programs subject to sections
1114 and 1129(a)(13) of the Bankruptcy Code, as in effect on the Effective
Date, including, without limitation, all savings plans, retirement plans,
health care plans, disability plans, severance benefit plans, incentive
plans, and life, accidental death, and dismemberment insurance plans,
shall be deemed to be, and shall be treated as though they are, executory
contracts that are assumed under this Plan, but only to the extent that
rights under such agreements and programs are held by the Debtor or
Persons who are USL employees as of Confirmation, and the Debtor's
obligations under such agreements and programs to Persons who are
employees of the Debtor on Confirmation shall survive Confirmation of this
Plan, without prejudice to Reorganized USL's rights under applicable non-
bankruptcy law to modify, amend, or terminate the foregoing arrangements,
except for (i) such executory contracts or plans specifically rejected
pursuant to the Plan (to the extent such rejection does not violate
sections 1114 and 1129(a)(13) of the Bankruptcy Code) and (ii) such
executory contracts or plans as have previously been rejected, pursuant to
a Final Order, or specifically waived by the beneficiaries of such plans,
contracts, or programs.
ARTICLE XI
CONDITIONS PRECEDENT
11.01 Conditions to Confirmation. The Plan shall not be
confirmed unless the aggregate amount of Allowed Class 6 General Unsecured
Claims on the date of the Confirmation Hearing is less than $25,000,000,
unless this condition is waived pursuant to section 11.03 hereof.
11.02 Conditions to Consummation. The Plan shall not be
consummated unless and until the following conditions shall have been
satisfied or waived pursuant to section 11.03 hereof:
(a) The Confirmation Order shall have been entered in form and
substance reasonably acceptable to the Debtor, the Informal Noteholders'
Committee, and (i) the Prepetition Lenders, provided that the Prepetition
Lenders have extended the DIP Credit Facility or, as the case may be, (ii)
the Banks, provided that the Banks have extended the DIP Credit Facility.
(b) The Confirmation Order shall have become a Final Order and
provide, among other things, that:
(i) The provisions of the Confirmation Order are non-
severable and mutually dependent.
(ii) Except as expressly provided in the Plan, USL is
discharged effective upon Confirmation from any "debt" (as that term is
defined in section 101(12) of the Bankruptcy Code), and the Debtor's
liability in respect thereof is extinguished completely, whether reduced
to judgment or not, liquidated or unliquidated, contingent or non-
contingent, asserted or unasserted, fixed or unfixed, matured or
unmatured, disputed or undisputed, legal or equitable, or known or
unknown, or that arose from any agreement of USL that has either been
assumed or rejected in the Chapter 11 Case or pursuant to the Plan, or
obligation of USL incurred before Confirmation, or from any conduct of USL
prior to Confirmation, or that otherwise arose before Confirmation,
including, without limitation, all interest, if any, on any such debts,
whether such interest accrued before or after the Petition Date.
(iii) The Plan does not provide for the liquidation of all
or substantially all of the property of USL, and its Confirmation is not
likely to be followed by the liquidation of Reorganized USL or the need
for further financial reorganization.
(iv) Any objection, not previously withdrawn or settled,
to the adequacy of the information contained in the Disclosure Statement
is overruled, and the information contained in the Disclosure Statement
was adequate for the purpose of soliciting Ballots for Confirmation of the
Plan.
(c) The Post-Restructuring Board shall have been designated.
(d) The Bankruptcy Court shall have entered one or more orders
(which may be the Confirmation Order), which have become Final Orders,
authorizing the assumption and assignment of all unexpired leases and
executory contracts that were not expressly rejected.
(e) No request for revocation of the Confirmation Order under
section 1144 of the Bankruptcy Code shall have been made or, if made,
shall remain pending.
(f) All other actions required by Article VII to occur on or
before the Effective Date shall have occurred.
(g) None of the Debtor's pension plans shall have been
terminated.
(h) The Emergence Credit Facility shall have been entered into
among Reorganized USL and the Prepetition Lenders or, as the case may be,
the Banks, and all agreements, instruments, or other documents
contemplated by the Emergence Credit Facility shall have been executed by
Reorganized USL and the Prepetition Lenders or, as the case may be, the
Banks, and all of the conditions precedent to the effectiveness of such
agreements, instruments, and other documents (other than Consummation of
the Plan) shall have been satisfied in full or duly waived.
(i) The Debtor shall have concurrently satisfied all of its
obligations under the DIP Credit Facility, and the DIP Credit Facility
shall have been terminated.
(j) The Debtor shall have entered into the Registration Rights
Agreement.
11.03 Waiver of Conditions. The Debtor and the Informal
Noteholders' Committee may, in writing, waive any of the conditions set
forth in sections 11.01 or 11.02 hereof at any time without notice or
hearing, without leave or order of the Bankruptcy Court, and without any
formal action other than proceeding to consummate the Plan; provided,
however, that the waiver of the conditions set forth in sections 11.01,
11.02(a), (b), (h), and (i) shall also require the written consent of (i)
the Prepetition Lenders, provided that the Prepetition Lenders have
extended the DIP Credit Facility, or, as the case may be, (ii) the Banks,
provided that the Banks have extended the DIP Credit Facility.
11.04 Effect of Failure of Conditions. If one or more of the
conditions specified in sections 11.01 or 11.02 of the Plan have not
occurred or been duly waived as provided in section 11.03 on or before 60
days after the Confirmation Date, upon notification submitted by the
Debtor to the Bankruptcy Court, to counsel for the Informal Noteholders'
Committee, and to counsel for the Prepetition Lenders or the Banks, as
appropriate under section 11.03 hereof, (a) the Confirmation Order shall
be vacated, (b) no distributions under the Plan shall be made, (c) the
Debtor and all holders of Claims and Interests shall be restored to the
status quo ante as of the Business Day immediately preceding the
Confirmation Date as though the Confirmation Date never occurred, and (d)
the Debtor's obligations with respect to the Claims and Interests shall
remain unchanged and nothing contained herein shall constitute or be
deemed a waiver or release of any Claims or Interests by or against the
Debtor or any other person or to prejudice in any manner the rights of the
Debtor or any person in any further proceedings involving the Debtor.
11.05 Notice to Bankruptcy Court. The Debtor shall notify the
Bankruptcy Court in writing promptly after the Effective Date that the
Plan has become effective.
ARTICLE XII
MODIFICATION, REVOCATION, OR WITHDRAWAL OF THE PLAN
12.01 Modification of Plan. The Debtor may alter, amend, or
modify the Plan or any exhibits thereto under section 1127(a) of the
Bankruptcy Code at any time prior to the Confirmation Date. The Debtor
shall provide parties in interest with notice of such amendments or
modifications as may be required by the Bankruptcy Rules or order of the
Bankruptcy Court and shall, in any event, provide such notice to counsel
to the Creditors' Committee, if any, counsel to the Informal Noteholders'
Committee, and counsel to the Prepetition Lenders or the Banks, as
appropriate.
After the Confirmation Date and prior to the substantial
Consummation of the Plan, as defined in section 1101(2) of the Bankruptcy
Code, the Debtor may, under section 1127(b) of the Bankruptcy Code, and so
long as the treatment of holders of Claims or Interests under the Plan is
not adversely affected, institute proceedings in the Bankruptcy Court to
remedy any defect or omission or to reconcile any inconsistencies in the
Plan, the Disclosure Statement approved with respect to the Plan, the
Confirmation Order, and any other matters as may be necessary to carry out
the purposes and effects of the Plan; provided, however, that prior notice
of such proceedings shall be served in accordance with Bankruptcy Rule
2002, or order of the Bankruptcy Court.
12.02 Revocation or Withdrawal of Plan.
(a) Right to Revoke. The Debtor reserves the right to
revoke or withdraw the Plan prior to the Confirmation Date.
(b) Effect of Withdrawal or Revocation. If the Debtor
revokes or withdraws the Plan prior to the Confirmation Date, or if
Confirmation or the Effective Date does not occur, then the Plan, any
settlement or compromise embodied in the Plan (including the fixing or
limiting to an amount certain any Claim or Class of Claims), assumption or
rejection of any executory contract or unexpired lease affected by the
Plan, and any document or agreement executed pursuant to or in furtherance
of the Plan, shall be deemed null and void. In such event, nothing
contained herein, and no acts taken in preparation for Consummation of the
Plan, shall be deemed to constitute a waiver or release of any Claims by
or against the Debtor or any other Person or to prejudice in any manner
the rights of the Debtor or any Person in any further proceedings
involving the Debtor or to constitute an admission of any sort by the
Debtor or any other Person.
12.03 Nonconsensual Confirmation. In the event that any
impaired Class of Claims or Interests shall fail to accept the Plan in
accordance with section 1129(a)(8) of the Bankruptcy Code, the Debtor
reserves the right (a) to request that the Bankruptcy Court confirm the
Plan in accordance with section 1129(b) of the Bankruptcy Code or (b) to
modify the Plan in accordance with section 12.01 hereof.
ARTICLE XIII
EFFECT OF CONFIRMATION
13.01 Binding Effect. The provisions of this Plan shall be
binding upon and inure to the benefit of USL, Reorganized USL, the holders
of Claims, whether or not they have voted to accept the Plan, the holders
of Interests, whether or not they have voted to accept the Plan, and their
respective successors and assigns.
13.02 Discharge of Debtor. All property distributed under the
Plan shall be in exchange for, and in complete satisfaction, settlement,
discharge, and release of, all Claims and Interests of any nature
whatsoever against the Debtor or any of its assets or properties, and,
except as otherwise provided herein or in the Confirmation Order, upon
Confirmation, USL shall be deemed discharged and released to the fullest
extent authorized or provided by the Bankruptcy Code, including, without
limitation, by sections 524 and 1141(d)(1)(A) of the Bankruptcy Code. The
entry of the Confirmation Order shall be, provided that the Effective Date
occurs, a judicial determination of discharge and release of all
liabilities of USL.
13.03 Injunction. Except as otherwise expressly provided
herein, the entry of the Confirmation Order shall, provided that the
Effective Date occurs, permanently enjoin all Persons that have held,
currently hold, or may hold a Claim or other debt or liability that is
discharged or released pursuant to the Plan or who have held, currently
hold, or may hold an Interest terminated pursuant to the Plan from taking
any of the following actions in respect of such discharged or released
Claim, debt, or liability or such terminated Interest: (a) commencing,
conducting, or continuing in any manner, directly or indirectly, any suit,
action, or other proceeding of any kind against the Debtor, Reorganized
USL, or their respective property; (b) enforcing, levying, attaching,
collecting, or otherwise recovering in any manner or by any means, whether
directly or indirectly, any judgment, award, decree, or order against the
Debtor, Reorganized USL, or their respective property; (c) creating,
perfecting, or enforcing in any manner, directly or indirectly, any lien
or encumbrance of any kind against the Debtor, Reorganized USL, or their
respective property; (d) asserting any setoff, right of subrogation, or
recoupment of any kind, directly or indirectly, against any debt,
liability, or obligation due to the Debtor, Reorganized USL, or their
respective property; and (e) proceeding in any manner in any place
whatsoever that does not conform to or comply with or is inconsistent with
the provisions of the Plan.
13.04 Revesting. Except as otherwise expressly provided herein
or in the Confirmation Order, pursuant to section 1141(b) of the
Bankruptcy Code, on the Effective Date, all property and assets of the
Estate of the Debtor shall revest in Reorganized USL, free and clear of
all Claims, liens, encumbrances, charges, Interests, and other interests
of creditors and equity security holders arising on or before the
Effective Date. Thereafter, Reorganized USL may operate its business,
from and after the Effective Date, free of any restrictions imposed by the
Bankruptcy Code or by the Bankruptcy Court. Without limiting the
foregoing, Reorganized USL may, without application to or approval by the
Bankruptcy Court, pay Professional Fees and expenses that it may incur
after Confirmation.
13.05 Operation of Business. Until the Effective Date, the
Debtor shall operate its business as debtor-in-possession under the
Bankruptcy Code. On and after the Effective Date, Reorganized USL shall
operate its business and may buy, use, acquire, and dispose of its assets
free of any restrictions contained in the Bankruptcy Code or imposed by
the Bankruptcy Court, except as provided herein.
13.06 Releases. Except as otherwise specifically provided for
by this Plan, any Person accepting any distribution of Cash, New Common
Stock, or any other property pursuant to this Plan (including any creditor
whose Claim is unimpaired) shall be presumed conclusively to have released
USL, Reorganized USL, and their current and former parents, subsidiaries,
and affiliates, and their respective current and former directors,
officers, shareholders, employees, agents, representatives, attorneys,
accountants, advisors, financial advisors, and other professionals
retained by USL, Reorganized USL, and their respective current and former
parents, subsidiaries, and affiliates, and their predecessors, successors
and assigns, and any Person claimed to be liable derivatively through any
of the foregoing, from any and all claims, debts, actions, or causes of
action, whether known or unknown, and whether based upon facts now known
or unknown, direct or derivative, in law, equity, or bankruptcy, that any
such Person, and anyone claiming in a derivative capacity from such
Person, had, now has, or hereafter can, shall, or may have against such
Persons, from the beginning of the world to the Effective Date, arising
from, in connection with, or related to any act or omission related to the
Debtor, the Chapter 11 Case, or the Plan, except for willful misconduct or
gross negligence. The release described in the preceding sentence shall
be enforceable as a matter of contract law against any Person that accepts
any distribution pursuant to this Plan (including each creditor whose
Claim is unimpaired).
Upon the Effective Date, Reorganized USL and each Person
accepting any distribution of Cash, New Common Stock, or any other
property under the Plan (including each creditor whose Claim is
unimpaired) will be conclusively deemed to have released and discharged
the following parties, their current and former members, parents,
subsidiaries, affiliates, directors, officers, shareholders, employees,
agents, representatives, attorneys, accountants, advisors, financial
advisors, and other professionals retained by such parties, and their
predecessors, successors, and assigns: (i) the Debtor, (ii) the
Creditors' Committee, if any, (iii) the Noteholders' Committee; (iv) the
Prepetition Lenders; (v) the Banks; (vi) all Stockholders; and (vii) all
Noteholders (collectively, the "Released Persons") from any and all
liability, claims, debts, actions, or causes of action, whether known or
unknown and whether based upon facts now known or unknown, direct or
derivative, in law, equity, or bankruptcy, which Reorganized USL, the
Debtor, or any Person accepting a distribution under the Plan had, now
has, or hereafter can, shall, or may have against such Released Persons,
from the beginning of the world to the Effective Date, arising from, in
connection with, or related to any act or omission related to the Notes,
the Interests, the negotiation and prosecution of the Plan, or to such
Released Person's past service with, for, or on behalf of the Debtor,
including, but not limited to, prosecution of the Chapter 11 Case, except
for willful misconduct or gross negligence. The release described in the
preceding sentence shall be enforceable as a matter of contract law
against any Person that accepts any distribution pursuant to this Plan
(including each creditor whose Claim is unimpaired).
The releases embodied in this Plan are in addition to, and not
in lieu of, any other release separately given, conditionally or
unconditionally.
13.07 Exculpation. Neither USL, Reorganized USL, the
Creditors' Committee, if any, the Informal Noteholders' Committee, the
Prepetition Lenders, the Banks, nor any of their respective present or
former parents, subsidiaries, affiliates, members, officers, directors,
employees, agents, attorneys, accountants, or other advisors, shall have
or incur any liability to any holder of a Claim or Interest, any Person
accepting any distribution of Cash, New Common Stock, or any other
property under the Plan (including each creditor whose Claim is
unimpaired), or any of their respective agents, employees,
representatives, financial advisors, attorneys, or affiliates, or any of
their respective successors or assigns, for any act or omission in
connection with, relating to, or arising out of, the negotiation of the
Plan, the solicitation of acceptance of the Plan, the pursuit of
Confirmation of the Plan, the Consummation of the Plan, or the
administration of the Plan or the property to be distributed under the
Plan, except for willful misconduct or gross negligence; and in all
respects such Persons shall be entitled to rely upon the advice of counsel
with respect to their duties and responsibilities under the Plan and will
be fully protected in acting or in refraining from action in accordance
with such advice.
13.08 Termination of Committees. The appointment of each
official statutory committee appointed in the Chapter 11 Case, if any,
shall terminate on the Effective Date.
ARTICLE XIV
RETENTION OF JURISDICTION
14.01 Jurisdiction of Bankruptcy Court. Following the
Effective Date, the Bankruptcy Court will retain exclusive jurisdiction,
under sections 105(a) and 1142 of the Bankruptcy Code, of all matters
arising out of, and related to, the Chapter 11 Case and the Plan
including, among other things, the following matters:
(a) All adversary proceedings, applications, motions, contested
matters, and other litigated matters pending on the Effective Date, and
all claims by or against USL arising under the Bankruptcy Code or non-
bankruptcy law (if made applicable under the Bankruptcy Code), including
claims to avoid fraudulent transfers under section 548 of the Bankruptcy
Code, whether such claims are commenced before or after the Effective
Date.
(b) Proceedings to ensure that distributions to holders of
Allowed Claims and Allowed Interests are accomplished as provided herein.
(c) All pending or future objections to or requests for
estimation of Claims and Interests, including any objections to the
classification of any Claim or Interest, and proceedings to allow,
disallow, or estimate any Claim or Interest, in whole or in part.
(d) Proceedings to enter and implement such orders as may be
appropriate in the event the Confirmation Order is for any reason stayed,
revoked, modified, or vacated.
(e) Proceedings to construe and to take any action to enforce
the Plan or the Confirmation Order and to issue such orders as may be
necessary for the implementation, execution, and Consummation of the Plan.
(f) Proceedings to hear and determine any applications to
modify the Plan, to cure any defect or omission or to reconcile any
inconsistency in the Plan, including any exhibit thereto, or in any order
of the Bankruptcy Court, including, without limitation, the Confirmation
Order, as may be necessary to carry out the purposes and intent of the
Plan and to implement and effectuate the Plan.
(g) Proceedings to hear and determine all applications for
Professional Fees, compensation, and reimbursement of expenses under
sections 330, 331, and 503(b) of the Bankruptcy Code.
(h) Proceedings to hear and determine all pending or future
controversies, suits, and disputes that may arise in connection with the
interpretation, implementation, or enforcement of the Plan or any
documents intended to implement the provisions of the Plan.
(i) Proceedings to consider and rule on the compromise and
settlement of any Claim against or cause of action on behalf of USL or its
Estate.
(j) Proceedings to hear and determine, if necessary, or to
estimate or liquidate any and all Claims arising from the rejection of
executory contracts or unexpired leases, pursuant to the Plan or
otherwise.
(k) Proceedings to determine such other matters as may be
provided for in the Confirmation Order or other orders of the Bankruptcy
Court as may be authorized under the provisions of the Bankruptcy Code or
any other applicable law.
(l) Proceedings to enforce all orders, judgments, injunctions,
and rulings entered in the Chapter 11 Case.
(m) Proceedings to issue such orders as may be necessary or
appropriate in aid of Confirmation and to facilitate Consummation of the
Plan.
(n) Proceedings to recover all assets of USL, or property of
its Estate, wherever located.
(o) Proceedings to hear and determine other issues presented or
arising under the Plan.
(p) Proceedings to hear and determine any other matters related
hereto and not inconsistent with chapter 11 of the Bankruptcy Code.
(q) Entry of a final decree closing the Chapter 11 Case.
Following the Effective Date, the Bankruptcy Court will retain
non-exclusive jurisdiction of the Chapter 11 Case for the following
purposes:
(a) To hear and determine any motions or contested matters
involving taxes, tax refunds, tax attributes, tax benefits, and similar or
related matters with respect to the Debtor or its Estate arising prior to
the Effective Date or relating to the period of administration of the
Chapter 11 Case, including, without limitation, matters concerning state,
local, and federal taxes, in accordance with sections 346, 505 and 1146 of
the Bankruptcy Code.
(b) To hear any other matter not inconsistent with the
Bankruptcy Code.
14.02 Failure of Bankruptcy Court to Exercise Jurisdiction. If
the Bankruptcy Court abstains from exercising or declines to exercise
jurisdiction over any matter arising under, arising in, or related to the
Chapter 11 Case, including with respect to the matters set forth above in
section 14.01 hereof, this Article shall not prohibit or limit the
exercise of jurisdiction by any other court having competent jurisdiction
with respect to such subject matter.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.01 Time. In computing any period of time prescribed or
allowed by the Plan, Bankruptcy Rule 9006 shall apply, unless otherwise
expressly provided.
15.02 Headings. The headings and captions to articles,
sections, and exhibits used in this Plan are inserted for convenience of
reference only and neither constitute a portion of the Plan nor in any
manner affect the provisions or interpretation of the Plan.
15.03 Saturday, Sunday, or Legal Holiday. If any payment or
act under the Plan is required to be made or performed on a date that is
not a Business Day, then the making of such payment or the performance of
such act may be completed on the next succeeding Business Day, but shall
be deemed to have been completed as of the required date.
15.04 Payment of Statutory Fees. All fees payable pursuant to
section 1930 of title 28 of the United States Code, as determined by the
Bankruptcy Court at the hearing pursuant to section 1128 of the Bankruptcy
Code, shall be paid on or before the Effective Date.
15.05 Severability. Should any provision of this Plan be
determined to be unenforceable, such determination shall in no way limit
or affect the enforceability and operative effect of any or all other
provisions of this Plan. To the extent that any provision of the Plan
would, by its inclusion in the Plan, prevent or preclude the Bankruptcy
Court from entering the Confirmation Order, the Bankruptcy Court, on the
request of the Debtor, may modify or amend, or permit the Debtor to modify
or amend, such provision, in whole or in part as necessary to cure any
defect or remove any impediment to Confirmation of the Plan existing by
reason of such provision; provided, however, that such modification or
amendment must be otherwise permitted under section l2.01 of this Plan.
15.06 Modification of Treatment of Claims or Interests. The
Debtor and Reorganized USL reserve the right to modify the treatment of
any Allowed Claim or Interest in any manner adverse only to the holder of
such Claim or Interest at any time after Consummation upon the consent of
the holder of the Allowed Claim or Interest being adversely affected.
15.07 Section 1145 Exemption. Pursuant to, in accordance with,
and solely to the extent provided under section 1145 of the Bankruptcy
Code, the issuance of the New Common Stock under this Plan is exempt from
the registration requirements of Section 5 of the Securities Act, as
amended, and any State or local law requiring registration for offer or
sale of a security or registration or licensing of an issuer of,
underwriter of, or broker or dealer in such New Common Stock and is deemed
to be a public offering of the New Common Stock.
15.08 Section 1146 Exemption. To the extent permitted by
section 1146(c) of the Bankruptcy Code, the issuance, transfer, or
exchange of any security under the Plan, or the execution, delivery, or
recording of an instrument of transfer pursuant to, in implementation of,
or as contemplated by the Plan, or the revesting, transfer, or sale of any
property of the Debtor, pursuant to, in implementation of, or as
contemplated by the Plan shall not be taxed under any State or local law
imposing a stamp tax, transfer tax, or similar tax or fee. Consistent
with the foregoing, each recorder of deeds or similar official for any
county, city, or other governmental unit in which any instrument hereunder
or of the type referred to above is to be recorded shall, pursuant to the
Confirmation Order, be ordered and directed to accept such instrument,
without requiring the payment of any documentary stamp tax, deed stamps,
stamp tax, transfer tax, intangible tax, or similar tax.
15.09 Governing Law. Except to the extent the Bankruptcy Code,
the Bankruptcy Rules, or other federal laws apply, the laws of the State
of Wisconsin shall govern the construction and implementation of the Plan
and all rights and obligations arising under the Plan. The laws of the
State of Wisconsin shall govern all corporate governance matters.
15.10 Withholding and Reporting Requirements. In connection
with the Plan and all instruments issued in connection therewith and
distributions thereon, the Debtor shall comply with all withholding and
reporting requirements imposed by any federal, state, local, or foreign
taxing authority, and all distributions hereunder shall, to the extent
applicable, be subject to any such withholding and reporting requirements.
15.11 Notice. Any notice required or permitted to be provided
to the Debtor in connection with the Plan shall be in writing and served
by (a) certified mail, return receipt requested; (b) hand delivery; or (c)
overnight delivery service, to be addressed as follows:
To the Debtor:
United States Leather, Inc.
1403 West Bruce Street
Milwaukee, WI 53204
Attention: Mr. Kinzie L. Weimer
With a copy to:
Foley & Lardner
777 East Wisconsin Avenue, Suite 3800
Milwaukee, WI 53202
Attention: Thomas L. Shriner, Jr.
To the Informal Noteholders' Committee:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Attention: Chaim J. Fortgang.
To the Prepetition Lenders:
Kaye, Scholer, Fierman, Hays & Hardler, LLP
425 Park Avenue
New York, NY 10022
Attention: Herbert S. Edelman
(or counsel for the Banks as may be subsequently designated):
Dated: Milwaukee, Wisconsin
May ___ , 1998
Respectfully submitted,
UNITED STATES LEATHER, INC.
______________________________________
Kinzie L. Weimer, Secretary
APPENDIX B
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
UNITED STATES LEATHER, INC.
LIQUIDATION ANALYSIS
APPENDIX B
UNITED STATES LEATHER, INC.
LIQUIDATION ANALYSIS
THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE
SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR SUGGESTED BY ANY
SUCH STATEMENT. (SEE "FORWARD-LOOKING STATEMENTS" IN THE DISCLOSURE
STATEMENT.)
This Liquidation Analysis has been provided solely for the purpose of
providing an estimate of the amount of liquidation proceeds that might be
generated as a result of a hypothetical chapter 7 liquidation of USL.
This Liquidation Analysis does not reflect a valuation of USL's assets on
a Post-Restructuring basis.
Estimated Enterprise Value of United States
Leather, Inc.(1) $104.5
Less: Discount Factor of 20.0% (20.9)
------
Enterprise Value Net of Discount(2) $83.6
Less:
Prepetition Credit Facility as of December 31,
1998(3) ($46.5)
Accrued Interest through December 31, 1998(4) (2.9)
------
Total ($49.4)
Estimated Company Sale Proceeds $34.2
Estimated Cash Flow During Liquidation Period(5) ($7.5)
-----
Gross Liquidation Value $26.7
Less:
Trustee Fees(6) ($2.3)
Chapter 7 Professionals(7) (2.4)
-----
Net Liquidation Proceeds as of December 31, 1998 $22.0
Present Value of Net Liquidation Proceeds as of
Assumed July 1, 1998 Effective Date(8) $20.5
Less: Priority Claims $0.0
-----
Net Proceeds Distributable to Holders of
Impaired Claims and Equity Interests $20.5
Notes:
(1) USL's enterprise value assumes a piecemeal sale of each of its
operating divisions with each division's value determined by a
multiple of its total revenues. The multiples were determined based
upon the following factors, not necessarily in order of importance.
(a) USL's historical consolidated financial statements, relevant
historical financial and operating information, and projected
financial and operating performance as reflected therein;
(b) Information provided by senior management with regard to USL's
business and products;
(c) USL's marketing expertise, operating advantages and
disadvantages, as well as other aspects of its business;
(d) Certain economic, industry, and company specific information
that was deemed to be appropriate and relevant; and
(e) Acquisition values, multiples, and premiums for companies within
the leather industry.
Applying the factors set forth above, USL's businesses have a
collective value of approximately $104.5 million, as illustrated in
the following table.
Fiscal
1997 Concluded
Division Revenues Multiple Value
Lackawana $123.8 0.35 $ 43.3
Pfister & Vogel $ 93.4 0.35 $ 32.7
A.L. Gebhardt $ 57.7 0.35 $ 20.2
A.R. Clarke $ 17.3 0.30 $ 5.2
Caldwell Moser $ 10.3 0.30 $ 3.1
Total Value of
Divisions $104.5
(2) A chapter 7 liquidation requires that a business be sold
expeditiously. This analysis assumes that a liquidation would be
accomplished in 6 months (July 1, 1998 December 31, 1998). There
is a risk, however, that significant delays may occur. Because USL's
revenues and cash flow are heavily dependent on maintenance of its
customer base due to the heavily competitive nature of the leather
manufacturing industry, significant delays would likely cause a
reduction in USL's customer base. Revenues and cash flow and, in
turn, potential realizable value likely would suffer. Employee
morale, productivity and key-employee retention may also suffer as a
result of delays in the sale process. Based on the foregoing, the
going concern value has been reduced by the application of a 20%
discount factor recognizing the six-month liquidation period in
chapter 7 described above. The discount applied by any particular
purchaser could be materially different due to these various factors.
In addition, this distressed sale scenario assumes that the operating
liabilities, such as accounts payable (approximately $7.5 million)
and accrued expenses (i.e., payroll) would be assumed by the
purchasers.
(3) Projected balance as of December 31, 1998 per USL's stand-alone
business plan. Does not include the negative effect the liquidation
process will have on operating cash flow (i.e., operating losses,
increased working capital needs). The negative effect on operating
cash flow is incorporated in the line item "Estimated Cash Flow
During Liquidation Period."
(4) Assumes (i) an average balance on the Prepetition Credit Facility of
$46.0 million for the eight-month period beginning on the assumed
filing date of May 1, 1998, and ending December 31, 1998, and (ii) an
average interest rate of 9.5%.
(5) Cash flow from operations (EBITDA less increases in working capital)
is estimated to be approximately $7.5 million less under the
liquidation scenario than under USL's stand-alone business plan.
(6) Section 326 of the United States Bankruptcy Code limits United States
Trustee fees to 3% of gross liquidation proceeds. Gross liquidation
proceeds are assumed to be the Net Enterprise Value, net of the
discount factor, plus the estimated cash flow during the liquidation
period.
(7) Case administration costs, including fees of counsel and other
professionals retained by the chapter 7 Trustee, are estimated at
$400,000 per month for the six-month liquidation period (assumes the
Chapter 11 case is converted to a Chapter 7 case two months after the
filing).
(8) The Net Liquidation Proceeds as of December 31, 1998 have been
discounted to the assumed July 1, 1998, Effective Date in order to
illustrate recoveries to unsecured creditors and equity holders under
the plan and a chapter 7 liquidation on a comparable basis.
Application of Proceeds Available for Distribution
The table below sets forth (i) the estimated proceeds available for
distribution to holders of impaired Claims and Interests in a hypothetical
chapter 7 liquidation of USL and (ii) a comparison of the estimated
recoveries under the Plan with the estimated recoveries to such holders in
a chapter 7 liquidation after giving effect to all contractual
subordination provisions, and assuming $20.6 million of available proceeds
as outlined above. As shown in the table below, USL believes that, under
the Plan, each member of an impaired Class of Claims or Interests will
receive property with a value in excess of the value that such Class
member would receive in a chapter 7 liquidation. Therefore, USL believes
that the Plan satisfies the requirements of the best interests test as set
forth in section 1129(a)(7) of the Bankruptcy Code.
Chapter 7 Liquidation Prepackaged Plan
Approximate
Aggregate Percentage Value of Percentage
Claim Value of Recovery Distribution Recovery
Amounts(a) Distribution(b) (c)
Noteholders $140.0 $20.5 14.6% $50.3 36.0%
Stockholders N/A $ 0.0 0.0% $ 2.0 >0.0%
(a) Assumes USL's Chapter 11 case is filed on May 1, 1998. Therefore,
the respective Claim amounts include interest accrued to such date.
(b) Represents the aggregate cash available for distribution to
Noteholders and Stockholders. The distribution date under the Plan
is anticipated to be earlier than the distribution date in a chapter
7 liquidation and, as a result, the estimated proceeds from a chapter
7 liquidation have been discounted to the July 1, 1998 Effective
Date.
(c) Based upon the reorganized equity to be distributed to Noteholders
pursuant to the Plan. The value of the equity is based upon a going
concern valuation of $100 million (which assumes the Consummation of
the Plan and performance based upon the Projections contained in
Appendix C of the Disclosure Statement), less estimated post-
Restructuring senior debt of $48.1 million. Under the Plan,
Noteholders will receive 97% of the New Common Stock of Reorganized
USL.
APPENDIX C
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
UNITED STATES LEATHER, INC.
PROJECTED POST-RESTRUCTURING FINANCIAL DATA
APPENDIX C
UNITED STATES LEATHER, INC.
PROJECTED POST-RESTRUCTURING FINANCIAL DATA
THE FOLLOWING CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE
SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR SUGGESTED BY ANY
SUCH STATEMENT. (SEE "FORWARD-LOOKING STATEMENTS" IN THE DISCLOSURE
STATEMENT.)
A. Introduction
These projected financial statements and other data (the
"Projections") were prepared in order to show the projected results of
Reorganized USL's operations following Consummation of the Plan. The
Projections should be read in conjunction with the Disclosure Statement,
including section VII. C "Certain Factors to be Considered."
All capitalized terms not defined in this Appendix have the same
meanings ascribed to them in the Disclosure Statement to which these
Projections are appended.
The Projections, and the significant assumptions on which they
are based, were prepared solely to assist Noteholders and Stockholders in
deciding whether to accept or reject the Plan. USL does not ordinarily, as
a matter of course, publicly disclose projections as to future revenues,
earnings, or cash flows and does not intend to do so in the future; nor
does USL intend to update or otherwise revise the Projections to reflect
circumstances or events that have transpired since their preparation in
March 1998. Nonetheless, Reorganized USL's regular quarterly and annual
financial statements, and the accompanying management discussion and
analysis, contained in its Quarterly Reports on Form 10-Q and Annual
Reports on Form 10-K will contain information concerning Reorganized USL's
financial condition and results of operations during the projected period.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE
WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS, THE FINANCIAL ACCOUNTING STANDARDS BOARD, OR THE RULES
AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION REGARDING
PROJECTIONS. THE PROJECTIONS HAVE NOT BEEN AUDITED OR REVIEWED BY
INDEPENDENT CERTIFIED ACCOUNTANTS. WHILE PRESENTED WITH NUMERICAL
SPECIFICITY, THE PROJECTIONS ARE BASED UPON ASSUMPTIONS, WHICH, ALTHOUGH
BELIEVED TO BE REASONABLE UNDER THE CIRCUMSTANCES, MAY NOT BE REALIZED AND
ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND USL'S CONTROL.
THE PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY OF
USL, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED.
The Projections included herein are:
1. Pro Forma Consolidated Balance Sheet of USL, as of July 1,
1998 (the assumed Effective Date of the Plan), based on USL's historical
balance sheet updated to reflect the effect of projected activity up to
the Effective Date, and the projected effects of Consummation of the Plan
and of the "fresh start" accounting (as promulgated by the AICPA Statement
of Position 90-7, entitled "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code") that Consummation of the Plan
will require.
2. Projected Consolidated Statements of Operations and
Selected Financial Data of USL as of July 1, 1998.
3. Projected Statement of Cash Flow for USL for the six-month
period ending June 30, 1998.
4. Projected Consolidated Balance Sheets of USL as of the
periods ending in December 1998, 1999, and 2000.
5. Projected Consolidated Statement of Operations and Other
Financial Data for USL as of the periods ending in December 1998, 1999,
and 2000.
6. Projected Consolidated Statement of Cash Flows for USL as
of the periods ending in December 1998, 1999, and 2000.
The Projections have been prepared on the basis of generally
accepted accounting principles consistent with those currently adopted by
USL in the preparation of its historical financial statements, except as
noted in the accompanying assumptions. The Projections should be read in
conjunction with the significant assumptions set forth below, and with
USL's audited consolidated financial statements for the year ended
December 31, 1997, which are included in the Form 10-K attached as
Appendix D to the Disclosure Statement.
The Projections present, to the best of management's knowledge
and belief, the expected financial position, results of operations, and
cash flows of USL and Reorganized USL for the periods shown. Accordingly,
the Projections reflect management's judgment, as of the date of the
Disclosure Statement, with respect to expected future operating
conditions. All estimates and assumptions shown within the Projections
were developed by management and in certain instances reflect the
anticipated operating results of strategies that have been subjected to
very limited testing at the time of preparation of the Projections. The
assumptions disclosed herein are those that management believes are
significant to the Projections. There will normally be differences
between projected and actual results because events and circumstances
frequently do not occur as expected.
The Projections reflect the effect of Consummation of the Plan
and adjustments based on the "fresh start" accounting that Consummation of
the Plan will require. The Projections are based on a number of estimates
and assumptions that, although developed and considered reasonable by
management, are inherently subject to significant economic and competitive
uncertainties and contingencies, some of which are beyond the control of
Reorganized USL and its management. The Projections are based upon
assumptions of future business decisions that are subject to change.
Accordingly, there can be no assurance that the projected results will be
realized, and actual results may vary materially from those projected. If
actual results are lower than those shown or if the assumptions used in
formulating the Projections are not realized, Reorganized USL's operating
results and cash flows and, consequently, its ability to perform under the
Plan, may be materially adversely affected.
Management does not intend to revise the Projections solely to
reflect circumstances existing after the date of the Disclosure Statement
or to reflect the occurrence of unanticipated events. Management assumes
no responsibility to advise users of the Projections about any subsequent
changes.
WHILE MANAGEMENT BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
PROJECTED FINANCIAL STATEMENTS FOR THE PROJECTED PERIOD, WHEN CONSIDERED
ON AN OVERALL BASIS, ARE REASONABLE IN LIGHT OF CURRENT CIRCUMSTANCES AND
EXPECTATIONS, NO ASSURANCE CAN BE GIVEN THAT THE PROJECTIONS WILL BE
REALIZED. USL URGES NOTEHOLDERS AND STOCKHOLDERS TO CONSIDER THE
ASSUMPTIONS CAREFULLY IN REACHING THEIR DETERMINATION OF WHETHER TO ACCEPT
OR REJECT THE PLAN.
B. Reorganized USL's Business
Reorganized USL will continue the business of USL. As part of
its strategic operating plan, Reorganized USL will continue the
implementation of certain initiatives undertaken by USL in 1997.
C. Significant Assumptions
USL operates in a highly competitive industry, and its and
Reorganized USL's earnings may be significantly adversely affected by the
actions of its competitors or suppliers. Many of the products that USL
manufactures and markets are subject to changes in fashion demands or
other phenomena that may render certain products obsolete or unable to be
sold at prices planned or previously experienced. In addition, USL's
products are sold to companies whose businesses are cyclical in nature and
are subject to changes in global economic conditions. The Projections
that follow generally assume that no material change in the competitive
environment or general economic conditions that presently exist will occur
during the projected period.
As explained in the Disclosure Statement, the single largest
component of the cost of finished leather is the cost of the cattlehide,
which accounts for approximately 60% of USL's cost of goods sold.
Cattlehide is a by-product of cattle slaughtered to meet the worldwide
demand for beef and beef products and, therefore, cattlehide prices are
subject to cyclical, seasonal, and other market fluctuations, including
the overall demand for beef, the supply of cattle being bred for
slaughter, and worldwide leather demand. In late 1997, the demand for
cattlehide dropped, resulting in a significant decline in the price of
U.S. cattlehide. USL considers this decline in hide prices to be
temporary and projects that they will return to their previous levels
before the end of 1998 and continue to increase annually thereafter.
USL has also assumed that some, but not all, of the projected
increases in costs associated with cattlehide purchases will eventually be
passed through to customers. Increases in selling prices, however, often
take time and selling effort to implement, and rates of success and timing
of implementation differ from business to business, and from customer to
customer within each business. As a result, USL's profitability may be
materially affected by increases in cattlehide prices. Such effects,
moreover, may be more pronounced during periods of high price volatility.
No assumptions are made with regard to investments in or
benefits derived from significant strategic initiatives Reorganized USL
may undertake after the Effective Date. STRATEGIC INITIATIVES ARE AN
IMPORTANT REASON THAT USL HAS UNDERTAKEN THIS REORGANIZATION. ALTHOUGH
THERE CAN BE NO ASSURANCES THAT SUCH INITIATIVES WILL BE IDENTIFIED OR
CONSUMMATED, USL BELIEVES THAT, BY HAVING THE FINANCIAL ABILITY TO INVEST
IN SUCH OPPORTUNITIES AS THEY ARISE, THERE IS A REASONABLE BASIS TO
FORECAST THE IMPROVEMENT IN USL'S FINANCIAL PERFORMANCE THAT IS REFLECTED
IN THESE PROJECTIONS.
D. Effects of Reorganization and Fresh Start Accounting.
The Plan provides for an exchange of the Notes for 9,700,000
shares of New Common Stock, resulting in the cancellation of the Notes,
the extinguishment and discharge of USL's liability on the Notes and any
accrued interest thereon, and the establishment of new equity in
Reorganized USL.
The following sets forth the pro forma projected balance sheet
of Reorganized USL as of the Effective Date is (assumed to be July 1,
1998), and the projected statements of operations and cash flows for the
six months immediately preceding the Effective Date, and depicts the
effect of the reorganization and fresh start accounting on each. For
purposes of the Projections, USL has assumed an enterprise value (i.e.,
assets, less liabilities excluding debt) of $100 million as of the
Effective Date. The estimated enterprise value is highly dependent upon
achieving the future financial results set forth in the projections and
certain other assumptions, the realization of which cannot be assured.
The valuations set forth herein represent estimated reorganization values
and do not necessarily reflect values that could be attained in public or
private markets. The equity value assumed for purposes of the Projections
does not purport to be an estimate of the post-reorganization market
value. Such trading value, if any, may be materially different from the
reorganization equity value ranges associated with the valuation analysis.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES PROJECTED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Period
Ended Restated
June 30, Reorganized Fresh Start July 1,
1998 Adj. Adj. 1998
(a) (b)
Assets
Cash $ 1,050 $ - $ - $1,050
Accounts Receivable 34,000 - - 34,000
Inventories 45,800 - 8,500 54,300
Other Current
Assets 900 - - 900
------- --------- -------- -------
Total Current
Assets 81,750 - 8,500 90,250
Property, Plant and
Equipment, Net 40,700 - - 40,700
Deferred Financing
Costs 4,000 (3,150) - 850
Other Assets 1,250 - - 1,250
Excess
Reorganization
Value - - 11,968 11,968
------- ------- ------- -------
Total Assets $127,700 $ (3,150) $ 20,468 $145,018
======= ======= ======= =======
Liabilities and
Stockholders'
Equity
Current Maturities
of Long Term Debt $140,000 $(140,000) $ - $ -
Revolving Credit
Facility 48,100 - - 48,100
Accounts Payable &
Payable to Banks 8,700 - - 8,700
Accrued Liabilities 11,068 - - 11,068
Deferred Income
Taxes - - - -
------- ------- -------- -------
Total Current
Liabilities 207,868 (140,000) - 67,868
Deferred Income
Taxes - 13,250 3,250 16,500
Other Long Term
Liabilities 8,800 - - 8,800
Capital Stock 92,342 51,850 (92,342) 51,850
Retained Earnings (181,310) 71,750 109,560 -
------- ------- ------- -------
Total Current
Liabilities &
Shareholder
Equity $127,700 $ (3,150) $ 20,468 $145,018
======= ======= ======= =======
UNITED STATES LEATHER, INC. AND SUBSIDIARIES PROJECTED CONSOLIDATED
STATEMENTS OF OPERATIONS AND SELECTED FINANCIAL DATA (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Six Reorganization
months ended & fresh start June 30, 1998
June 30, 1998 Adjustments Reported
(a),(b),(c)
Net sales $139,900 $ - $139,900
Cost of goods sold 127,400 - 127,400
------- -------
Gross profit 12,500 - 12,500
Selling, general &
admin. expenses 12,000 - 12,000
Reorganization
expenses 2,700 - 2,700
Amortization 600 - 600
Adjust accounts to
fair value (gain) - (20,468) (20,468)
------- -------- --------
Income (loss) from
operations (2,800) 20,468 17,668
Interest expense 7,900 (d) - 7,900
Other (income) expense - - -
------- -------- --------
Income (loss) before
taxes (10,700) 20,468 9,768
Income tax provision
(benefit) - 13,250 13,250
Extraordinary gain
(loss) - 64,532 64,532
------- -------- --------
Net income (loss) $ (10,700) $ 71,750 $ 61,050
Other Data:
LIFO charge (credit) $ (600)
FIFO gross profit margin 8.5%
FIFO EBITDA (e) 3,500
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Six Months
Ended
June 30, 1998
Cash Flows from Operating Activities:
Net income $ 60,050
Adjustments to reconcile net income to net cash provided
by operating activities:
Noncash gains associated with Restructuring (71,750)
Depreciation and amortization 4,200
Noncash interest expense 6,050
Deferred income taxes
Change in assets and liabilities:
Accounts receivable (1,664)
Inventories (2,470)
Prepaid expenses and other (78)
Accounts payable (414)
Accrued liabilities (3,583)
Income taxes payable -
Other long-term liabilities (4)
-------
Net cash (used) provided by operating
activities (8,663)
-------
Cash Flows from Investing Activities
Capital expenditures (1,500)
Proceeds from sales of fixed assets -
Purchase of software license -
-------
Net cash used in investing activities (1,500)
-------
Cash Flows from Financing Activities:
Payments of revolving credit facility (37,932)
Borrowings under revolving credit facility 48,100
Net change in payable to bank -
Payment of long-term debt (9)
-------
Net cash provided (used) by financing
activities 10,159
-------
Net decrease in cash (4)
Cash, beginning of period 1,054
-------
Cash, end of period $1,050
Supplemental cash flow disclosures: =======
Interest paid 1,850
Income taxes refunded (net) -
Notes pertaining to the preceding statements and the effects of the
reorganization and fresh start accounting.
(a) Reflects the extinguishment of $130,000 of principal, $10,000 of
interest accrued from August 1, 1997 through April 30, 1998, and
the write-off of $3,150 of deferred financing expenses related
to the Notes. Cancellation of debt income ($88,150) arising
from the exchange is projected to be partially reduced by the
application of $62,000 of net operating loss carryforwards
(NOLs) to this COD income, and the write-off of $3,150 deferred
financing expenses. The resulting $23,000 reduction in the tax
basis of fixed assets creates a timing difference that gives
rise to a $8,750 deferred tax liability. Elimination of these
NOLs, in turn, results in further provisions for deferred taxes
aggregating $4,500 due principally to timing differences which
the NOLs had sheltered. The net effect of these reorganization
adjustments is an extraordinary after-tax gain of $73,950.
(b) USL proposes to account for the reorganization using the
principles of fresh start accounting as required by the
Statement of Position 90-7 ("SOP 90-7") issued by the AICPA.
USL has estimated a reorganization value of $145,018 after the
Effective Date. In accordance with SOP 90-7, the reorganization
value has been allocated to specific tangible and identifiable
intangible assets and liabilities and stated at their estimated
fair value. The unallocated portion of the reorganization value
is classified as Excess Reorganization Value, which, based on
preliminary discussions, USL estimates will be amortized over 20
years. For purposes of this presentation, book values have been
assumed to equal fair values except for inventories, which are
detailed in footnote (c) below. USL is currently performing
appraisals of various assets, including its fixed assets, which
could lead to additional adjustments to the book values and
result in a different Excess Reorganization Value as of the
Effective Date. The amount of shareholders' equity in the fresh
start balance sheet is not an estimate of the trading value of
the New Common Stock after Confirmation of the Plan, which value
is subject to many uncertainties and cannot be reasonably
estimated at this time. USL does not make any representation
as to the trading value of the shares of New Common Stock to be
issued pursuant to the Plan.
(c) After the Effective Date, USL will continue to value its
inventories according to the last-in, first-out (LIFO) method of
accounting. In accordance with SOP 90-7, inventory has been
reflected at its aggregate fair value of as of the Effective
Date. Accordingly, USL estimates that it will record a $8,500
step-up in the value of its LIFO inventories as of the Effective
Date. SOP 90-7 has no impact on the tax basis of assets. This
step-up for book purposes, therefore, constitutes a temporary
difference for which a deferred tax liability of $3,250 is also
established as of the Effective Date.
(d) Includes $1,375 of deferred finance charges written off in
connection with the termination of the Replacement Credit
Facility.
(e) FIFO EBITDA, the primary earnings measurement used in the
Prepetition Credit Facility, represents income or loss from
operations plus non-cash charges related to depreciation and
amortization of intangible assets, plus or minus charges or
credits to operations related to the change in the LIFO
inventory reserve, plus or minus certain other gains or charges
related to non-recurring transactions. FIFO EBITDA is not
determined pursuant to generally accepted accounting principles
and should not be considered in isolation or as an alternative
to GAAP-derived measurements.
E. Assumptions and Projected Financial Performance of Reorganized
USL After the Effective Date
For purposes of the following projections and analysis only, 1998 is
considered to be a single twelve-month period, instead of the two shorter
periods that the Plan will require under GAAP. Management believes that,
with the exception of the reorganization and fresh start accounting
adjustments discussed previously, combining the two accounting periods
into one of the same duration as preceding and succeeding years permits
more meaningful comparisons and more informative analysis.
1. Net Sales
Net sales are projected to decline from 1997 to 1998 principally
because of (i) the discontinuance of three operations that contributed
approximately $11.8 million of sales, but little margin, in 1997, (ii)
lower sales volume anticipated in the Footwear and Specialty Leather Group
due to expectations of continued weakness in many retail markets, loss of
share resulting from increased competition, and intentional efforts on the
part of Reorganized USL to prune unprofitable products from its mix, and
(iii) the pass-through to customers of lower cattlehide costs in its
Footwear and Automotive businesses. Growth in the Furniture Group,
stemming from the repenetration of its traditional markets with new
products, and increased cut-set business in the Automotive Group, is
projected to offset this decline partially. Sales growth is projected in
1999 and 2000 because of the anticipated pass-through of higher hide
costs, continued share gains in the Furniture and Automotive markets, some
recovery in the Footwear markets, and anticipated benefits stemming from
the 1998 product line overhaul in the Footwear and Specialty Leather
Group. USL also believes that its customers will respond favorably to the
implementation of the Plan, and projects that this will also contribute to
improved sales. Presently, many customers are hesitant to make product
sourcing decisions in favor of USL because of the uncertainties
surrounding USL's financial condition and proposed restructuring.
The following table summarizes Reorganized USL's projected sales
by line of business:
($ in millions) 1998 1999 2000
Footwear & Specialty
Leather Group $145.0 $185.0 $194.0
Furniture Group 88.0 97.3 100.0
Automotive Group 56.0 85.9 101.0
------ ------ ------
Total Sales $289.0 $368.2 $395.0
2. Gross Profits
Gross profits are projected to improve by approximately 90%, 92%, and
37% in 1998, 1999, and 2000, respectively. The net effect of lower hide
costs in 1998, the implementation of productivity initiatives that are
expected to more than offset inflation, improved quality, and benefits
derived from improvements in Automotive cutting yields and efficiency are
the principal reasons for these projected improvements. USL also assumes
that the beneficial impact of replacing most existing Automotive contracts
with new contracts that have more favorable terms than those that USL bid
in order to enter this business in 1995 and 1996 will contribute
significantly to improved gross profits in 1999 and 2000. Increasing hide
costs are expected to partially offset these gains and gains resulting
from volume-related efficiency improvements. Gross margins are projected
to increase from 4.1% in 1997 to 10.6% by 2000.
3. Selling, General, and Administrative Expenses
Selling, general, and administrative expenses are projected to
decrease modestly to approximately $23.2 million in 1998 and then increase
approximately 7% in each of the two years thereafter. Inflation and
higher selling expenses associated with increased sales volumes and, in
the case of Footwear, expanded sales coverage are projected to be the
principal contributors to the 1999 and 2000 increases. Calculated as a
percentage of sales, selling, general, and administrative expenses are
projected to be 8%, 6.7%, and 6.7% in 1998, 1999, and 2000, respectively.
4. Earnings Before Interest, Taxes, Depreciation, and Amortization
Excluding the effects of provisions for LIFO revaluations and non-
recurring gains and losses recorded in 1997 and 1998 (including the cash
expenses discussed in the next paragraph in connection with the Plan),
earnings before interest, taxes, and non-cash charges for depreciation and
amortization ("FIFO EBITDA") are expected to increase each year during the
projected period.
5. Restructuring Expenses
USL and Reorganized USL expect to incur approximately $2.7 million of
cash expenses in 1998 in consummating the Plan. Substantially all of
these expenses will be for legal, advisory, and similar services.
6. Interest Expense
Interest expenses after the Effective Date assume that the Plan will
be approved and that all of the debt associated with the Notes will be
extinguished. This expense consists principally of debt service
associated with borrowings under the Prepetition Credit Facility. In
1998, prior to the Effective Date, the projected interest expense includes
debt service accrued under the Notes, the write-off of origination costs
for the Replacement Credit Facility, and the amortization of origination
costs associated with the Notes. After adjusting for the extinguishment
of the Notes and the write-off of previously-incurred origination fees,
interest expenses are expected to increase slightly in 1998 and 1999 due
to increases initially, and later decreases, in borrowings under the
Prepetition Credit Facility. The effect on interest expenses of such
increased borrowings, however, will be partially offset by pricing
reductions contained in the Prepetition Credit Facility that will take
effect initially on the Effective Date, and further upon improved
financial performance by Reorganized USL. Cash flow projections that
result in such increased or decreased borrowings are described more fully
in the liquidity and cash flow section of this section.
7. Income (Loss) Before Taxes
As a result of interest expense exceeding 1998 operating income, USL
projects that a pre-tax loss will be incurred in 1998. In 2000, USL
projects that pre-tax income of $10.3 million will be generated by the
improvement in operating income and cash flows that should begin to reduce
bank debt and interest expense during the year.
8. Provision for Income Taxes
Although USL projects that Reorganized USL will generate a taxable
loss in 1998 after the Effective Date, it anticipates that this loss will
be carried forward and applied to taxable income that occurs in succeeding
years. Accordingly, USL anticipates that it will fully provide for such
tax benefits in 1998. USL projects an effective tax rate of 38% in each
of the periods following the Effective Date. USL projects that no pre-
reorganization net operating loss carryforwards will exist after the
Effective Date.
9. Net Income or Loss
For the reasons described previously, USL projects that Reorganized
USL will generate a net loss of $4,300 for the six months in 1998
following the Effective Date. For the twelve months ended December 31,
1998 and December 31, 1999, USL projects net income of $200 and $6,200,
respectively.
10. Liquidity and Capital Resources
USL estimates that cash earnings (FIFO EBITDA) will not be sufficient
in 1998 and 1999 to offset cash used for capital expenditures, interest
payments, taxes, costs associated with the reorganization, and increases
in working capital that will be required to support business growth. As a
consequence, USL anticipates that cash used will be $8.4 million and $5.9
million during 1998 and 1999, respectively. As a result of earnings
improvements in 2000, USL projects that Reorganized USL will generate $3.0
million of cash during that period. USL anticipates that Reorganized USL
will use availability under the Prepetition Credit Facility to fund the
cash flow deficiencies in 1998 and 1999 and that excess cash generated in
2000 will be applied to reduce in borrowings under the Prepetition Credit
Facility. Borrowings as of December 31, 1998, 1999, and 2000 are
projected to be $46.5 million, $52.4 million, and $49.4 million,
respectively.
Capital expenditures are projected to increase during the
projected period to $5.0 million for the twelve months ended December 31,
1998, $6.0 million for the twelve months ended December 31, 1999, and $7.0
million for the twelve months ended December 31, 2000. Most of these
expenditures will be used for the replacement of worn out or obsolete
manufacturing equipment, safety and environmental compliance, productivity
improvements, and computer hardware maintenance and upgrades. USL
anticipates that Reorganized USL will continue to expend funds in 1998
and, to a lesser extent, in 1999 to complete and improve the
implementation of an enterprise-wide management information system needed
to replace obsolete and inefficient legacy systems that, if not replaced,
would create century dating problems in 2000. USL estimates that it will
spend approximately $2 million over the next two years to complete this
effort.
USL projects that $5.1 million, $9.4 million, and $4.1 million
will be used in 1998, 1999, and 2000, respectively, for increases in
working capital. Most of the increases will occur in accounts receivable
as a function of increased sales projections. Inventories are also
expected to increase in order to maintain service levels required for such
sales increases and to reflect the increasing cost of cattlehides
throughout the projected period. Number of days sales outstanding are
projected to remain relatively constant; inventory turnover is expected to
improve as Reorganized USL implements new manufacturing systems and
simplifies its product lines.
Provisions have been made in the Prepetition Credit Facility to
provide ongoing financing as USL migrates from prepetition status through
the Plan and emerges as Reorganized USL. Certain more favorable terms and
conditions will be available as USL proceeds through these stages,
including additional availability, higher credit limits, and lower
pricing. Management believes that the Prepetition Credit Facility, as
amended by these more favorable terms, will be sufficient to meet day-to-
day liquidity needs throughout the projected period. It is possible,
however, that Reorganized USL will need to incur additional debt should
further adverse circumstances impacting Reorganized USL's performance
arise, or should Reorganized USL identify additional strategic or
operational investments that it believes would be prudent to pursue; any
such incremental investments would not likely produce cash benefits
sufficient to repay such investments until beyond the projected period.
11. Projected Balance Sheets
The following tables set forth condensed projected balance sheets,
statements of operations and selected financial data, and cash flows for
the six months ending December 31, 1998 (the period during 1998 in which
USL assumes that Reorganized USL will operate) and the twelve month
periods ending December 31, 1999 and 2000:
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
PROJECTED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
July 1, December 31,
1998 1998 1999 2000
Current Assets:
Cash $1,050 $1,050 $1,050 $1,050
Accounts receivable 34,000 33,150 39,150 41,750
Inventories 54,300 48,100 50,400 50,800
Other current assets 900 800 800 800
------- ------- ------- -------
Total current assets 90,250 83,100 91,400 94,400
Property, plant and 40,700 40,600 39,400 38,400
Deferred financing costs 850 700 400 100
Other assets 1,250 1,300 1,300 1,300
Excess reorganization 11,968 11,668 11,168 10,668
------- ------- ------- -------
Total assets $145,018 $137,368 $143,668 144,868
======= ======= ======= =======
Current Liabilities:
Revolving credit facility $48,100 $46,500 $52,350 $49,400
Accounts payable & 8,700 9,200 11,000 11,200
Accrued liabilities 11,068 11,518 11,518 11,568
Deferred income taxes - 750 5,250 6,900
------- ------- ------- -------
Total current 67,868 67,968 80,118 79,068
Deferred income taxes 16,500 13,050 7,000 3,050
Other long-term liabilities 8,800 8,800 8,800 8,800
Stockholder's Equity:
Capital stock 51,850 51,850 51,850 51,850
Retained earnings - (4,300) (4,100) 2,100
------- ------- ------- -------
Total stockholder's equity 51,850 47,550 47,750 53,950
------- ------- ------- -------
Total liabilities and
stockholder's equity $145,018 137,368 143,668 144,868
======= ======= ======= =======
UNITED STATES LEATHER, INC. AND SUBSIDIARIES PROJECTED CONSOLIDATED
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA (UNAUDITED)
Six months
ended
December 31, Year ended December 31,
1998 1999 2000
Income Statement Data
Net Sales $149,100 $368,200 $395,000
Cost of sales 142,500 337,700 353,100
------- ------- -------
Gross profit 6,600 30,500 41,900
Selling, general &
administrative expenses 11,200 24,700 26,400
Amortization of intangible
assets 300 500 500
------- ------- -------
Income (loss) from
operations (4,900) 5,300 15,000
Interest expense 2,100 4,700 4,700
------- ------- -------
Income (loss) before taxes (7,000) 600 10,300
Income tax (benefit)
provision (2,700) 400 4,100
------- ------- -------
Net income (loss) $(4,300) $200 $6,200
======= ======= =======
Other Data
LIFO Charge (credit) $2,500 $3,000 $1,500
FIFO Gross Profit Margin 8.0% 9.1%% 11.0%
FIFO EBITDA (a) $4,500 $16,000 $25,000
Effective Tax Rate 38.0%% 38.0%% 38.0%
FIFO EBITDA represents income or loss from operations plus non-cash
charges related to depreciation and amortization of intangible assets,
plus or minus charges or credits to operations related to the change
in the LIFO inventory reserve, plus or minus certain other gains or
charges related to non-recurring transactions. FIFO EBITDA is not
determined pursuant to GAAP and should not be considered in isolation
or as an alternative to GAAP-derived measurements. In 1998, $2,850 of
cost of goods sold related to the step-up in inventories as of the
effective date are excluded from FIFO EBITDA.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Six Months. Twelve Months
Ended Dec. 31, Ended December 31,
1998 1999 2000
Cash Flows from Operating Activities:
Net loss $(4,300) $200 $6,200
Adjustments to reconcile net income
by operating activities:
Depreciation and amortization 3,900 7,700 8,500
Noncash interest expense 150 300 300
Deferred income taxes (2,700) (1,550) (2,300)
Change in assets and
Accounts receivable 850 (6,000) (2,600)
Inventories 6,200 (2,300) (400)
Prepaid expenses and other 50 - -
Accounts payable 500 1,800 200
Accrued liabilities 450 - 50
Income taxes payable - - -
Other long-term liabilities - - -
------- ------- -------
Net cash (used) provided 5,100 150 9,950
------- ------- -------
Cash Flows from Investing Activities
Capital expenditures (3,500) (6,000) (7,000)
Proceeds from sales of fixed assets - - -
Net cash used in investing (3,500) (6,000) (7,000)
------- ------- --------
Cash Flows from Financing Activities:
Payments of revolving credit (1,600) - (2,950)
Borrowings under revolving credit - 5,850 -
------- ------- --------
Net cash provided (used) (1,600) 5,850 (2,950)
------- ------- --------
Net decrease in cash - - -
Cash, beginning of period 1,050 1,050 1,050
------- ------- --------
Cash, end of period $1,050 $1,050 $1,050
======= ======= ========
Interest paid $1,950 $4,400 $4,400
Income taxes paid/(refunded)
(net) - 2,150 $6,500
APPENDIX D
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
UNITED STATES LEATHER, INC.
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-64142
UNITED STATES LEATHER, INC.
(Exact name of registrant
as specified in its charter)
Wisconsin 13-3503310
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1403 West Bruce Street
Milwaukee, Wisconsin 53204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 383-6030
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
_______________
As of the date hereof and at all times during 1997 there was no public
market for the Company's Common Stock.
Number of shares outstanding of the Company's Common Stock as of the date
hereof: 100
_______________
COMPANY'S DOCUMENTS INCORPORATED BY REFERENCE:
None
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe the Company's future plans, objectives
or goals are forward-looking statements. Such forward-looking statements
are subject to certain risks and uncertainties which are described in
close proximity to such statements and which could cause actual results to
differ materially from those currently anticipated. Readers are urged to
consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-
looking statements. The forward-looking statements made herein are only
made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Item 1. Business
General
United States Leather, Inc., a Wisconsin corporation ("USL" or
the "Company"), is one of the largest and most diversified producers of
leather in North America, and a leading leather producer for the domestic
upholstery and footwear markets. USL produces and sells a broad line of
finished leather and related products which are sold to a diverse customer
base in the United States and internationally.
Furniture Group. USL, under the trade name Lackawanna Leather,
is a leading supplier of upholstery leather to the furniture industry.
Furniture Group sales were approximately $70.2 million in 1997 and
approximately $95.0 million for 1996.
Footwear and Specialty Leather Group. USL is a leading producer
of finished leather for footwear, personal accessories, sporting goods,
apparel and other personal leather goods. Selling under the brand names
Pfister & Vogel, A. L. Gebhardt, A. R. Clarke and Caldwell Moser, the
Group's sales were approximately $181.7 million in 1997 and approximately
$181.0 million for 1996.
Automotive Group. USL is an emerging producer of finished
leather for use in automobile interiors. Automotive Group sales were
approximately $50.4 million in 1997 and approximately $18.2 million in
1996.
USL also sells unfinished hides, partially finished hides and
leather by-products to other leather producers, although these sales
constitute only a small portion of the USL's overall revenue. The USL
Trading Division ("Trading") traded hides and sold partially finished
leather and unwanted or excess hides. This division was discontinued in
1996. Prior thereto, Trading's 1996 sales were $7.4 million. USL also
operated a branch in Germany that procured partially finished hides from
outside sources (principally from South America) contracted for them to be
finished and sold the finished leather to furniture manufacturers in
Europe. This operation was also discontinued in 1996, prior to which its
1996 sales were approximately $4.2 million. USL also produced collagen, a
protein extracted from cattlehides, for sales to food manufacturers.
Prior to discontinuing this operation in 1997, collagen sales were
approximately $3.2 million compared with $6.0 million for all of 1996.
USL's principal executive offices are located at 1403 West Bruce
St., Milwaukee, Wisconsin 53204. Its telephone number is (414) 383-6030.
The 1996 Holding Company Recapitalization
In a series of transactions completed in 1993, USL was
reorganized into a corporate structure consisting of USL and two new
holding companies: United States Leather Holdings, Inc. ("USLH"), which
owned 100% of the capital stock of USL, and U.S. Leather Holdings, Inc.
("Old Holdings"), which in turn owned 100% of the capital stock of USLH.
Old Holdings also carried, as of April 9, 1996, $86.0 million aggregate
principal amount of 15% Senior Debentures Due 2004 (the "Old Holdings
Debentures"), approximately 87% of which were owned by The Equitable Life
Assurance Society of the United States and certain of its affiliates and
13% of which were owned by First Plaza Group Trust (the "Former Holding
Company Debenture Holders"). The Old Holdings Debentures were secured by
the capital stock of USLH.
A default occurred with respect to the Old Holdings Debentures
due to the noncompliance, as of December 31, 1995, of Old Holdings with a
financial covenant contained in the Old Holdings Debentures. Old Holdings
was unable to cure the default; however, the default did not give rise to
any cross-defaults or other recourse to the Company's 10-1/4% Senior Notes
due 2003 (the "Notes") or revolving credit facility in place at the time
(the "Old Credit Facility").
On April 9, 1996, a series of transactions were completed, with
the consent of Old Holdings, USLH and USL, which resulted in the Former
Holding Company Debenture Holders foreclosing on their security (the "1996
Holding Company Recapitalization"). Such foreclosure resulted in the
cancellation of the Old Holdings Debentures and the contribution of all
USLH capital stock to Leather U.S., Inc. (the "New Holding Company"), a
company wholly owned by the Former Holding Company Debenture Holders. The
foreclosure also resulted in the elimination of any ownership interest in
USLH or USL by the previous equity holders. The nominees of the previous
equity holders resigned from the Board of Directors of USL and were
replaced by nominees of the New Holding Company. The 1996 Holding Company
Recapitalization did not cause a default under any of the existing debt of
USL, nor did it constitute a change of control or default under the Notes
or the Old Credit Facility.
Upon the consummation of the 1996 Holding Company
Recapitalization, USL became a wholly-owned subsidiary of USLH which in
turn became a wholly-owned subsidiary of the New Holding Company. The New
Holding Company and USLH had no assets other than the shares of their
respective subsidiary, and had no independent operations. USL owns all of
its operating assets directly, except those owned by A.R. Clarke, Ltd.
("A.R. Clarke"), USL's wholly-owned subsidiary. USL's principal
indebtedness are the Notes and borrowings under its revolving credit
facility.
In November 1996, USL entered into a new asset-backed revolving
credit facility (the "Replacement Credit Facility") that replaced the Old
Credit Facility. From February to November 1997, the Replacement Credit
Facility was amended a number of times to, among other things, modify
certain financial covenants. In January 1998 USL entered into a new $55
million asset-backed revolving credit facility (the "New Credit Facility")
that replaced the Replacement Credit Facility.
Company Reorganization and Financial Restructuring
Prior to 1996, the Company, while reporting as an integrated
company, operated as a series of stand-alone divisions or subsidiaries with
separate financial statements and management teams for each unit. During
1996, the Company eliminated this divisional structure and reorganized its
management structure along functional lines, and its business structure
(i.e., segment financial reporting) along the lines of markets served.
While the Company has preserved Lackawanna Leather, Pfister & Vogel, A.L.
Gebhardt, Caldwell-Moser, and A.R. Clarke as valued trade names, it no
longer evaluates or reports business results according to these
designations. During 1996 and continuing in 1997, the Company began a
series of initiatives to strengthen the Company's financial position and
return it to profitability. Among these initiatives were (1) the
reorganization of the management of the Company previously discussed,
which included the elimination or replacement of several other senior
executives in the Company, and a general reduction in salaried workforce,
(2) comprehensive reviews of the Company's products and inventories, (3)
closing three operations which had not either been profitable or were
not strategically critical to the Company, (4) replacing critical talent
which had been lost in prior years, and (5) vacating the Company's corporate
offices and moving such offices into one of the Company's operating
facilities. The Company also continued efforts to grow and improve the
business of its Automotive Group.
The Company experienced liquidity problems in 1997, due
primarily to operating losses and high debt service costs. On September,
24, 1997, the Company announced its intention to restructure its debt by
converting all or a substantial portion of the Notes into equity in the
Company. Since that time, extensive discussions have taken place with
certain material holders of the Notes to effect such an exchange of debt
for equity. On December 31, 1997, the Company's aggregate indebtedness
was $173.5 million (compared with $162.1 million at December 31, 1996),
consisting of $135.6 million of principal and accrued interest on the
Notes and $37.9 million borrowed under the Replacement Credit Facility.
In January 1998, the Company entered into the New Credit
Facility, a $55 million asset-backed revolving credit facility that
replaced the Replacement Credit Facility. On January 31, 1998, the
Company failed to make the semi-annual interest payment that was due on
the Notes and, as a consequence, reclassified the Notes from long-term
debt to current liabilities. The Company does not have the capital
resources necessary to satisfy this liability and, as a result,
uncertainties exist concerning its ability to continue as a going concern.
On March 25, 1998, the Company announced that it had reached an agreement
in principle with its shareholders and an informal committee of holders of
the Notes to convert all of the Notes into 97% of the equity of the
Company outstanding on the date of conversion. Upon completion of the
necessary solicitation process, the Company anticipates that it will file
a petition with the United States Bankruptcy Court for approval of a
prenegotiated Joint Plan of Reorganization (the "Plan") and make the
exchange of the Notes for common stock effective within a reasonable
period of time thereafter. There can be no assurances, however, that
sufficient votes will be obtained to gain approval of the Plan.
Although the Company had incurred losses in each of the last two
years, it believes that it has implemented measures which will stabilize
operations and permit it to reverse these losses and become profitable
again within a reasonable period of time. The capital restructuring
provided by the Plan represents an essential step in this stabilization
and return to profitability because it will (1) create greater liquidity
and borrowing capacity under the terms of the New Credit Facility, and (2)
enable the Company to compete more effectively and demand more favorable
terms from suppliers because it will reduce uncertainties in the
marketplace regarding the Company's financial stability.
Because the Company believes that the Plan will be approved, and
the measures it has implemented will be successful, the accompanying
financial statements have been prepared on a going concern basis. These
statements contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business.
The Leather Manufacturing Process
The leather manufacturing process begins with the conversion of
raw cattle hides into "wet blue" leather through soaking and agitating in
alkaline and chromium solutions that dissolve the hair and preserve the
hide. The term "wet blue" is derived from the fact that this initial
tanning process turns the hides into a bluish color.
After bluing, hides are split and shaved to obtain uniform
thicknesses and separated into classifications referred to as grain (the
outside portion of the split hide which is considered the most desirable
and is used to make the higher quality finished leathers) and splits (the
interior portion of the hide used to make less expensive suede's and other
leathers). Grains are further sorted according to the quality of the
tanned hide, based on such criteria as appearance, the number of surface
defects and weight. Hides are then colored with dyes, treated with fat
liquors to soften and smooth the leather, and then dried and finished
through a variety of sophisticated processes to improve the appearance and
performance of the grain and, in some cases, to add such properties as
water resistance. Finally, hides are electronically measured and packaged
for shipment to customers who, with the exception of certain automotive
customers, cut the finished leather for their products. In the case of
certain automotive customers, USL cuts the leather into prescribed
patterns (known as "cut sets"), and then sells such sets to seating
manufacturers.
As with any manufacturing process that involves organic
materials such as cattle hides, which vary from lot to lot and season to
season, there is a certain amount of art in addition to science which goes
into the successful production of quality leathers. The manufacturing
processes must consistently generate finished leathers with the
distinctive properties customers require. The process also requires a
selection of hides in order to permit the manufacture of the array of
products customers demand.
By its nature, leather manufacturing regularly generates excess
and off-quality products. Excess inventories may be created by changes in
leather fashions, overestimation of customer requirements for a particular
leather product or by customer returns. Off-quality inventories may be
created by hide defects, equipment malfunctions or manufacturing process
mistakes. Historically, USL adopted the practice of holding such
inventories for rework and/or resale into other finished markets. Such
practices, however, consumed manufacturing capacity and sales effort, and
often required such stocks to remain idly in inventory until a suitable
opportunity to rework or sell the products arose. In 1996, USL changed
its policy toward disposing of these inventories. The new policy calls
for less rework, fewer small-lot sales (which require extensive time and
effort from the sales force), and more bulk sales to leather brokers,
particularly offshore brokers. As a consequence, USL now writes such
inventories down to a lower estimated net realizable value and attempts to
sell them more promptly.
Sales
USL's finished leather operations are divided into three
principal lines of business. The following chart summarizes USL's sales
by line of business:
Year Ended December 31,
1997 1996 1995
Furniture Group $70.2 $95.0 $121.2
Footwear and Specialty
Leather Group 181.7 181.0 191.7
Automotive Group 50.4 18.2 9.3
Discontinued Operations 3.2 17.6 38.5
----- ----- -----
Total Net Sales $305.5 $311.8 $360.7
===== ===== =====
USL sells its products into markets that tend to be cyclical.
Furniture Group sales are affected by such factors as housing starts and
competition, interest rates, consumer confidence levels and general
economic conditions. Footwear and Specialty Leather Goods Group sales
tend to be functions of retail and fashion trends, and can also be
affected by international markets, since the majority of footwear is now
manufactured overseas. Automotive Group sales are influenced by
automobile sales and the economic and social factors which influence such
sales.
Furniture Group
The Furniture Group was founded as Lackawanna Leather in 1896,
and continues to sell under the Lackawanna trade name today. The Group
produces and markets finished leather for the furniture industry and, to a
lesser extent, the aircraft seat manufacturing industry. Group sales in
1997 were $70.2 million, which accounted for 23.0% of USL's net sales in
1997, and were $95.0 million in 1996, which accounted for 30.5% of USL's
1996 net sales.
Finished upholstery leather is sold primarily to furniture
manufacturers, generally at three different price categories:
promotional, mainstream and upscale. Under the Lackawanna trade name, USL
is a leader in the mainstream and upscale categories, and has a
substantial share of the market serving the promotional price category.
Selling such brands as Regency, Passport, Captiva, Rustica and Commanche,
the group has built upon its strength in these categories to develop and
sell new leathers at competitive price points, thus helping to satisfy
consumer demand for quality leather furniture at affordable prices. To
maintain its leading market position, the group works closely with its
customer base to develop and refine its leather upholstery products in a
variety of fashion-oriented colors and textures.
The Furniture Group receives tanned and partially tanned hides
primarily from USL's tanneries in Omaha, Nebraska and Milwaukee,
Wisconsin, although it also acquires tanned hides and finished leathers
from other international tanneries. The Group finishes the hides and then
packages and ships them from its plant in Conover, North Carolina.
Footwear and Specialty Leather Group
USL markets finished leather to the footwear and personal
leather goods industries under the trade names of the companies originally
acquired to form the Footwear and Specialty Leather Group - Pfister &
Vogel, A.L. Gebhardt, A.R. Clarke and Caldwell Moser. The Group is a
leading producer of finished leathers used in the production of high
quality dress and casual footwear, rugged outdoor and athletic footwear,
leather apparel, sporting goods and personal accessories such as gloves,
belts and handbags. Under the Caldwell Moser trade name, the Group
produces leather for shoe laces and harder, more durable leathers for such
applications as shoe soles, saddles and animal collars. The Group also
provides contract tanning and finishing services to other small leather
producers, and also sells finished splits, wet blue and various leather
by-products. Group sales in 1997 were $181.7 million, which accounted for
59.5% of USL's net sales in 1997 net sales. Group sales were $181.0
million in 1996, which accounted for 58.1% of USL's net sales that year.
The diversity of the Group's product line, enhanced regularly by
the introduction of new products, is the source of USL's competitive
strength in the footwear and specialty leather market segments. Under the
Pfister & Vogel trade name alone, USL markets over 100 types of shoe
leather, each with its own distinct combination of color, finish and
texture. Examples are Durashu, the standard penny loafer shoe leather
since the 1950's, Raindance, a highly water resistant shoe leather used in
outdoor hiking and boat shoes, Thunderhead, a heavy oil, water resistant
outdoor leather used in outdoor hiking shoes, and Cyclone, a heavy oil,
pull-up leather used in men's casual footwear. USL believes that the
color, texture and consistency of its various products have been developed
through a process that it considers proprietary in nature.
The Footwear and Specialty Leather Group manufactures finished
leather at facilities located in Milwaukee, Wisconsin; New Albany,
Indiana; Berlin, Wisconsin; and Toronto, Canada. Through the diversity
and flexibility of these facilities, USL is able to (a) produce a wide
variety of leather products, including waterproof and water resistant
leathers, as well as splits and other by-products, (b) support a customer
base numbering in excess of 1,000,(c) productively utilize the different
selections of leather each lot of hides produces, and (d) support, as
needed, the tanning needs of USL's Furniture and Automotive Groups.
Export sales are an increasingly important aspect of the
international footwear market, as manufacturers continue to shift
production from domestic facilities to overseas operations, especially in
the Far East. In addition to exporting finished products into these
markets, USL had also contracted for certain leather tanning and finishing
in China to support the growing demand for such operations in closer
proximity to shoe manufacturers" overseas operations. In December, 1997,
after concluding that such means of serving Asian markets was not
effective, the Company discontinued this operation.
USL supports its footwear and personal leather goods sales
through a direct sales and marketing force augmented by manufacturers
representatives in Europe, Asia, Canada and the United States. USL also
maintains a sales office in Taiwan to support its Far East sales.
Automotive Group
USL formed the Automotive Group in 1992 to supply finished
leather to the worldwide automotive leather interior market, which USL
believes is over $1.0 billion per year. Until 1996, the Group's sales
consisted almost exclusively of finished hides sold to automotive original
equipment manufacturers and aftermarket suppliers. In 1996, however, the
Group began selling cut sets to seating manufacturers that supply a major
domestic automobile manufacturer. Of the Group's $50.4 million of 1997
sales, approximately 75.0% were sold as cut sets. Approximately 37.0% of
the Group's $18.2 million sales for 1996 were sold as cut sets.
USL manufactures its Automotive leather at its facilities in
Omaha, Nebraska. The Automotive Group markets its products through
automotive manufacturers" representatives located in the United States,
Canada and Asia.
Other
In 1997, USL discontinued the manufacture and sale of food-
quality collagen from its facilities in Omaha, Nebraska. Although the
business was modestly profitable, it created significant operating
challenges and inefficiencies because the process required fresh hides to
be soaked immediately upon receipt, and because of the need to maintain
manufacturing standards regulated by the U.S. Food and Drug
Administration. These obstacles and the non-strategic nature of this by-
product prompted USL to close this operation in July, 1997, Prior to
discontinuation, collagen sales were $3.2 million, $6.0 million, and $5.9
million in 1997, 1996, and 1995, respectively.
In 1996, USL discontinued its USL Trading Division and the
German operations of its Furniture Group. These operations consisted
mostly of buying and selling activities, rather than the core
manufacturing competencies for which USL had become best known. Neither
operation produced a material strategic or financial benefit or was
expected to produce such a benefit in the foreseeable future.
Consequently management discontinued these operations in 1996.
In 1997, the Company placed its operations in New Albany, IN
(Caldwell Moser) and Berlin, WI (Berlin Leather) up for sale. No suitable
buyers for these operations emerged and, in January, 1998, the Company
took them off the market. It has since closed its finishing plant in
Berlin, WI, and transferred products finished at this location to other
facilities.
Raw Materials
The single largest component of the cost of finished leather is
the cost of the cattle hide. Hide costs in each of the past three years
have accounted for approximately 60% of USL's cost of goods sold. USL
believes it purchases approximately 5% of the hides taken from cattle
slaughtered in the United States, and that it is among the largest U.S.
buyers of raw domestic cattle hides. The three largest domestic meat
packers account for approximately 70% of the total number of U.S. cattle
slaughtered for commercial purposes and, accordingly, are also USL's
largest suppliers of hides. USL purchases most of its raw cattle hides
domestically on a spot basis. Such hides are readily available, and the
concentration of hide supplies among a limited number of meat packers has
not historically had a material effect on USL's ability to source raw
hides.
Imported cattle hides in the form of partially tanned and
finished leather constituted approximately 13% of USL's manufacturing
material requirements in 1997. Most of such imports by USL in 1997 were
from tanners in Thailand and Argentina.
USL's diverse product line enables it to utilize a wide variety
of hide grades and types. Consequently, USL is able to purchase large
quantities of varied hides and use substantially all of the hides
contained in each shipment from the meat packers. This, in turn, enables
USL to centralize its raw hide purchasing. USL does, from time to time
however, resell hides it is unable to use. Since such resales also occur
on a spot basis, the Company may incur gains or losses in connection with
reselling hides.
Hides are a by-product of the cattle slaughtered to meet the
worldwide demand for beef and beef products. Prices are subject to
cyclical, seasonal and other market fluctuations. Historically, USL has
been generally successful in passing along raw material price increases to
customers unless the demand for finished leather was weak. Such increases
take time to implement and when prices rise significantly in a short
period of time USL's margins have suffered until such time as the price
increases are fully implemented. Such price increases, however, may also
impact demand for leather goods by prompting customers to consider
alternative materials, especially in the furniture and automotive
segments. Hide price increases and decreases immediately impact USL's cost
of goods sold because USL recognizes such changes immediately through its
LIFO method of accounting. Coupled with delays in passing such changes
through to selling prices for finished products, hide price fluctuations
have had and may continue to have a material impact on USL's reported
financial results.
From time to time, in an effort to improve the selection and
yield of hides, USL will build hide inventories during the fall for use
during the winter season. Such hide buys benefit USL because the hides
have fewer defects, have less hair and therefore cost less to tan, and
generally produce higher quality leathers. USL did not execute such a
hide buy in 1996 or 1997.
Other materials consumed in leather tanning and finishing, such
as chemicals and dyes, typically aggregate less than 13% of total cost of
goods sold. Such materials are readily available from a variety of
suppliers.
Competition
Each of USL's principal markets - furniture, footwear and
personal leather goods, and automotive - is highly competitive, and
certain of USL's competitors may have greater financial or other resources
than USL. Competition is based on price, service, quality and the ability
to supply customers in a timely manner with a diverse product line through
wide-spread marketing and distribution channels. USL has historically
been subject to both domestic and international competition. USL's
efforts to increase its international sales could be adversely affected
by, among other things, currency fluctuations.
Furniture Group. The Furniture Group competes with both foreign
and domestic leather manufacturers, domestic agents who represent foreign
tanneries, and companies that import leather in a partially tanned state
to finish and sell domestically. Foreign leather manufacturers with
significant domestic facilities include Elmo Leather of America, Inc., a
Swedish concern, Italian Leather (formerly Valdapone SPA), an Italian
concern, and Louis Schweitzer GmbH, a German concern that is represented
by Arcona Trading Co., Inc. Domestic manufacturers include Prime Tanning
Company, Inc., Irving Tanning Company, Inc., and Garden State Tanning,
Inc. Agents located in the United States that represent several
tanneries domestically include Americraft Leather, Inc., Carroll
Companies, Inc. and Friitala of America, Inc. Arpel Trading Co., Inc.
represents foreign tanneries domestically and imports foreign partially
tanned hides to finish and sell in the United States. Arpel also
purchases partially tanned hides produced and rejected by domestic leather
manufacturers, including USL, to refinish and sell domestically.
Footwear and Specialty Leather Group. Competition in the
footwear and specialty leather markets is highly fragmented. In the men's
footwear market, in which USL competes primarily under the Pfister & Vogel
trade name, its principal competitors include Prime Tanning Company, Inc.;
Irving Tanning Company, Inc.; S. B. Foot Tanning Company; and Dominion
Tanners (Canada), a division of United Canadian Shares, Limited. The
Company also faces increased competition from tanneries in the Far East,
principally China, whose proximity to footwear manufacturers' operations
offer increasingly important competitive advantages. Competitors in other
market segments tend to be smaller tanneries with a single or very limited
product focus.
Automotive Group. Domestically, competitors which supply
leather products to the automotive industry include Eagle Ottawa Leather
Company, a division of Trostel, Albert & Sons Company, Garden State
Tanning, Inc. and Seton Leather Company. These competitors supply
predominantly precut leather to seat and interior manufacturers.
Additional competition in the United States comes from smaller foreign
tanneries seeking to enter the U.S. automotive market . Whole hide
competition in international automotive OEM markets typically comes from
furniture leather manufacturers, including those previously mentioned.
International Sales
International sales include export sales from USL's domestic
operations, and sales by A.R. Clarke, Ltd. (the Company's Candian
subsidiary and part of the Footwear and Specialty Leather Group) to
markets other than the United States, and sales, prior to discontinuation,
from USL's German operations. International sales for 1997, 1996 and 1995
are as follows:
Year Ended December 31,
1997 1996 1995
(dollars in millions)
Asia $61.5 $46.5 $53.6
Europe 15.3 17.1 16.8
Americas 43.9 44.9 49.0
----- ----- -----
Total International
Sales $120.7 $108.5 $119.4
===== ===== =====
Research and Development
USL's research and development activities are directed toward
leather product development and improvement designed to meet the specific
requirements of its customers. They involve both the formulation of
proprietary processes and the development of new leather finishes. USL
works closely with its customers in its product development initiatives.
USL has spent approximately $1.9 million, $2.3 million, and $2.4 million
for research and development in 1997, 1996 and 1995 respectively.
Major Customers
USL had no customer that accounted for more than 10% of its
combined net sales in 1997, 1996 or 1995.
Patents and Trademarks
Other than with respect to trademarks and tradenames, the
Company does not rely to any material degree on intellectual property
protection. The Company has no registered copyrights. The Company has
been issued two patents relative to certain environmental processes.
The Company has several registered trademarks and trade names in
both the United States and Canada, and has submitted Applications for
Registration of trademarks for several more. Registered trade names
include Lackawanna Genuine Leather, Pfister & Vogel, and A.L. Gebhardt,
among others.
Employees
As of December 31, 1997, USL employed approximately 1,800 full-
time employees, approximately 92% of which were engaged in manufacturing,
with the remaining 8% engaged in sales, marketing and administrative
activities. Approximately 900 employees engaged in manufacturing
activities as of December 31, 1997 were covered by collective bargaining
agreements. One agreement covering approximately 415 employees
represented by the United Food and Commercial Workers Union (the "UFCWU")
expires on May 10, 1998. The Company and UFCWU are scheduled to begin
negotiating a new contract in mid-March 1998, and the Company expects to
have a new agreement in place by the May 10, 1998 expiration of the
existing agreement, although no assurance can be given as to when such an
agreement will be reached.
Environmental Matters
The Company's leather manufacturing and finishing operations are
subject to numerous federal, state and local laws and regulations
governing the protection of the environment. These laws and regulations
establish specific requirements for the handling of hazardous materials
and wastes, impose limitations on the emission of air and water pollutants
and establish administrative requirements for permits and reporting. The
Company places a high priority on compliance with environmental laws and
regulations, and believes that it has obtained all material permits,
licenses, orders or agreements from appropriate federal, state, and local
regulators currently required for its manufacturing operations. The
Company's Board of Directors has adopted appropriate policies toward
environmental compliance, and USL has a designated corporate officer
responsible for implementing such policies.
Except as set forth below, the Company is not aware of any
current material environmental liabilities that exist at any of the
Company's facilities because of prior leather manufacturing operations or
waste management practices. The Company has also implemented appropriate
programs designed to minimize pollution and waste production.
Toronto, Ontario Facility. During 1997, the Company discovered
subsurface contamination of soil and ground water with chlorinated
hydrocarbons at its A.R. Clarke facility in Toronto, Ontario, Canada. The
contamination had crossed property boundaries to an adjacent commercial
property. The Company has reported the contamination to the Ontario
Ministry of Environment and Energy, as required by the law. Likewise, the
Company has filed a claim against the previous owner of A.R. Clarke for
restoration of the site under the terms of an Asset Purchase Agreement
between the Company and the previous owner. Options for on-site
management and/or remediation are under investigation.
Wastewater Discharges. The Company believes that all of its
facilities have either installed appropriate pretreatment equipment and
are in compliance in all material respects with federal, state and local
pretreatment categorical standards or are zero discharge facilities.
Besides having to comply with such categorical standards specific to the
tanning industry, each facility must also comply with local generic
pretreatment standards as a condition of discharge. Operational systems
are subject to upsets and equipment malfunctions, which may lead to
occasional violations of such discharge standards.
In 1995, one of the Company's Milwaukee, Wisconsin facilities
experienced equipment malfunctions that caused chromium discharges in
excess of allowable limits. A Consent Order with the Milwaukee
Metropolitan Sewerage District ("MMSD") was signed, which provided for
daily sampling a fine of less than $100,000. Although the Company
implemented measures to provide additional redundancy and monitoring to
reduce the likelihood of a recurrence of such excess chromium discharges,
and although such recurrences have been reduced, they have not been
eliminated. In October 1996, the Company received a Notice of
Noncompliance from the MMSD for two incidents of excess chromium
discharges during the first quarter of 1996, and in January 1997, the
Company self-reported two additional such occurrences. These incidents
were caused by cross-connections in the facility's various effluent
collection sewers. Corrective measures were taken and the Company
continues daily monitoring for chromium. No fines or penalties were
levied as a consequence of the 1996 or 1997 incidents.
The Company received a Notice of Continuing Violation from the
MMSD for a September 26, 1996 exceedence of the oil and grease discharge
limits at another of its Milwaukee, Wisconsin facilities. A subsequent
Notice of Noncompliance was issued following a January 14, 1997
exceedence. The Company implemented steps to improve controls over slug
loads of oil and grease discharged into the municipal sewer systems,
including increased sampling and testing. The Company also petitioned
the MMSD to revise the Company's Discharge Permits to allow it to use an
alternate method for testing discharge quantities. The proposed alternate
method is easier to comply with than the method previously specified by
the Discharge Permit. The controls over slug discharges were effective.
In addition, the MMSD approved the alternate method. As a result of these
two developments, the facility has remained compliant since the January
14, 1997 date and the MMSD has discontinued their enforcement action. No
fines or penalties have been levied on the Company relating to this
action.
In July, 1996, the Environmental Protection Agency of the United
States (the "EPA") revised the categorical pH standard for tannery
discharges to publicly owned treatment works. This revised standard as
allowed the Company's facilities in Milwaukee, Wisconsin and Omaha,
Nebraska to discontinue costly pH neutralization. Based on EPA's action,
authorities in Toronto, Canada also modified pH standards, thus allowing
the Company's A.R. Clarke operation to also cease such neutralization
procedures.
Off-Site Liabilities. Under existing environmental laws,
companies can be held liable for cleanup costs if they arrange for the
disposal or treatment of hazardous substances that are subsequently
released into the environment. Accordingly, the Company may be
potentially liable for the cleanup of hazardous substances at facilities
to which the Company shipped hazardous substances for treatment or
disposal. there are a number of solvents and other materials containing
hazardous substances that have been shipped from the Company's facilities
for disposal or treatment.
In February 1998, the Company received a notice from the EPA of
the opportunity to participate in a de minimis settlement at the Caldwell
Systems, Inc. site in North Carolina. The Company believes that at least
a portion of any potential liability associated with this site should be
borne by Beatrice Companies, Inc. under the terms of the Asset Purchase
Agreement dated January 13, 1985, and has tendered the defense and
indemnification of the claim to Beatrice Companies, Inc. Beatrice has not
yet responded to the tender. The EPA settlement would require a payment
by the Company of $46,000, in exchange for a release from future liability
at the site related to specific issues. The settlement agreement contains
some exceptions for coverage, including liability for natural resource
damages. At this time, the Company is evaluating the settlement offer.
It is not possible to determine what, if any, liability the Company may
have for any matters that are not covered by the settlement agreement.
In August 1997, the Company received information requests under
Section 104(e) of the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") regarding the Peter Cooper Site in Gowanda,
New York with respect to two of its predecessors, A.L. Gebhardt and
Lackawanna Leather. Pursuant to the terms of the Asset Purchase Agreement
dated January 13, 1985, Beatrice Companies, Inc. has agreed to defend and
indemnify the Company for any potential liability associated with
Lackawanna Leather at this site. Beatrice Companies, Inc. has agreed to
defend this matter on behalf of Lackawanna Leather. At this time,
however, it is not possible to determine what, if any, liability the
Company, as the successor to A.L. Gebhardt and Lackawanna Leather, will
have with respect to this site.
The North Carolina Department of Environment, Health and Natural
Resources ("DEHNR") identified the Company's facilities at Conover, North
Carolina as a potentially responsible party ("PRP") that arranged for the
disposal or treatment of hazardous waste at the Seaboard Chemical facility
in North Carolina. During the Phase I Remediation process, the Company
was adjudged to be a de minimis contributor to the site and, with its
payment of $25,512, was able to discharge its Phase I Remediation
liability. The Company joined a PRP group consisting of 946 companies to
negotiate the Phase II Remedial Investigation and Feasibility Study
("RI/FS") with the DEHNR. This group negotiated an Administrative Order
of Consent with DEHNR to conduct the remedial investigation of the site.
The Administrative Order contains a covenant not to sue the members of the
PRP group, and provides signatories with protection from contribution
actions. Although there can be no assurances, the Company expects that
(1) the Company will continue to be identified as a de minimis contributor
to the site, (2) the Company's share of the costs remaining to clean up
the site will aggregate less than $500,000, and (3) since approximately
35% of the wastes in question were sent to the site during ownership of
the Conover facilities by a previous owner, such previous owner will
assume his pro rata share of the cleanup costs under the indemnity
provisions of the January 13, 1985 Asset Purchase Agreement which conveyed
these facilities to the Company.
In March 1993 and December 1995, the EPA completed removal
actions at the Cherokee Oil Sites, a commercial waste treatment facility
located in Charlotte, North Carolina. The Company had sent non-hazardous
wastewater from its facilities in Conover, North Carolina to these sites
between December 1988 and October 1990. EPA spent approximately $6.5
million to clean up and remove wastes from the sites, and is now
attempting to recover costs from users of the facility. In March 1996,
EPA sent the Company a CERCLA Section 104(e) Information Request ("104(e)
Request") relative to the wastes sent by the Company to the sites. The
Company responded to the Request in May, 1996 and, in order to prevent the
Department of Justice from filing a cost recovery action in federal court,
executed a Tolling Agreement along with other parties to allow time to
negotiate a settlement. In March 1997, the Company and the EPA
tentatively agreed to settle the Company's share of cleanup costs for
approximately $78,000. The resulting settlement Consent Decree has been
approved by a Federal District Court.
Item 2. Properties
As of December 31, 1997, USL operated 16 manufacturing
facilities in North America, of which nine were located in Wisconsin,
three were located in Nebraska, and one each was located in North
Carolina, Indiana and Toronto, Canada. In addition, USL owned a
manufacturing facility in Berlin, Wisconsin which it closed in January
1998. USL owns all but two of its facilities. The leased facilities are
subject to customary commercial leases. The term of the lease for the
larger facility expires in 2000, while the lease for the smaller facility
has a month to month term. The aggregate floor area of the Company's
facilities is approximately 1.5 million square feet, as follows:
Approximate Area Principal Purpose
Location (in sq. ft.) Owned or Leased of Facility
Milwaukee, WI 340,000 Owned Manufacturing
Milwaukee, WI 140,000 Owned Manufacturing
Conover, NC 175,000 Owned Manufacturing
Toronto, Canada 130,000 Owned Mfg./Warehouse
New Albany, IN 120,000 Owned Manufacturing
Omaha, NE 108,000 Owned Manufacturing
Milwaukee, WI 81,000 Owned Admin./Warehouse
Berlin, WI 80,000 Owned Manufacturing
Milwaukee, WI 70,000 Owned Manufacturing
Milwaukee, WI 70,000 Owned Mfg./Warehouse
Milwaukee, WI 50,000 Owned Admin./Warehouse
Omaha, NE 50,000 Owned Manufacturing
Milwaukee, WI 26,000 Owned Warehouse
Omaha, NE 28,000 Leased Manufacturing
Milwaukee, WI 22,000 Owned Warehouse
El Paso, TX 1,600 Leased Warehouse
Berlin, WI 40,000 Owned Manufacturing
(closed)
USL considers its plant and equipment to be in generally good
condition. In addition to capital expenditures to replace worn out or
obsolete equipment, USL incurred expenses to maintain and repair its
plants and equipment of $9.3 million, $10.2 million, and $10.5 million in
1997, 1996 and 1995 respectively.
USL's executive offices are located at 1403 W. Bruce St.,
Milwaukee, WI 53204, within one of the owned facilities summarized above.
Item 3. Legal Proceedings
In May 1995, USL received a request for information from the
United States Customs Service (the "Customs Service") concerning the
classification and duties paid on a series of importations of Russian and
Romanian wet blue from 1991 to 1993. Upon review of the Harmonized Tariff
Schedules in effect in 1991, 1992 and 1993, USL determined that it had
paid less than the proper import duty and thereupon paid approximately
$164,000 in additional duty. In April and September 1996, the Customs
Service issued a total of three penalty notices related to this matter.
One of the penalty cases relating to such notices has been settled for
less than $12,000. The two remaining cases are pending, with a total
potential exposure of approximately $680,000. Petitions for relief from
two remaining penalty cases have been filed, and a final administrative
determination is expected by the end of 1998. USL believes it is
adequately reserved for any additional duties or penalties.
USL is also involved in other litigation and proceedings. Based
on current information, management believes that future costs, if any, in
excess of insurance coverage with respect to such litigation and
proceedings, will not be material to USL's financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Company's security
holders in the fourth quarter of 1997.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
As of December 31, 1997, there was no public market for the
Company's common stock. All 100 shares of the Company's common stock are
owned by USLH, which is a wholly owned subsidiary of the New Holding
Company. The Company paid no cash dividends on its common equity in 1997
and paid $50,000 in 1996, and, $1.2 million in 1995.
Item 6. Selected Financial Data
The following table sets forth the selected financial data of
USL for each of the preceding five years ended December 31, 1997. The
selected historical data for each of the preceding five years ended
December 31, 1997 are derived from the audited consolidated financial
statements of USL. The selected historical financial data presented herein
are qualified in their entirety by, and should be read in conjunction
with, the USL's Consolidated Financial Statements and Notes thereto
included in Item 8 of this Form 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in
Item 7 of this Form 10-K.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)
Year ended December 31,
1997 1996 1995 1994 1993
Income Statement Data
Net Sales $305,476 $311,843 $360,660 $371,584 $351,902
Cost of sales(1) 297,103 293,111 307,556 315,251 295,054
------- ------- ------- ------- -------
Gross profit 8,373 18,732 53,104 56,333 56,848
Selling, general & administrative
expenses 24,254 24,916 22,974 27,040 23,486
Restructuring expenses -- 3,744 -- -- --
Asset valuation loss (5) 101,000 -- -- -- --
Amortization of intangible assets 4,631 4,134 3,529 3,177 3,334
------- ------- ------- ------- -------
Income (loss) from operations (121,512) (14,062) 26,601 26,116 30,028
Interest expense 19,119 17,159 18,062 17,283 23,111
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes and
extraordinary item (140,631) (31,221) 8,539 8,833 6,917
Income tax (benefit) provision (1,273) (10,999) 4,373 4,685 3,791
------- ------- ------- ------- -------
Net income (loss) before
extraordinary item (139,358) (20,222) 4,166 4,148 3,126
Extraordinary gain (loss) -- -- 417 -- (652)
------- ------- ------- ------- -------
Net income (loss) (139,358) (20,222) 4,583 4,148 2,474
Preferred Stock dividends -- -- -- -- 705
------- ------- ------- ------- -------
Net income (loss) available for
common shares(2) ($139,358) ($20,222) $4,583 $4,148 $1,769
======= ======= ======= ======= =======
Other Data
Ratio of earnings to fixed
charges(3) -- -- 1.47 1.50 1.30
Deficiency of earnings available
to cover fixed charges(3) ($140,631) ($31,221) -- -- --
Gross profit margin (3) 2.7% 6.0% 14.7% 15.2% 16.2%
EBITDA(4) ($7,841) ($2,941) $36,319 $34,548 $38,440
FIFO EBITDA(4) ($10,439) ($972) $31,845 $44,038 $38,549
Capital Expenditures $3,998 $6,523 $7,948 $6,062 $6,789
Square footage of finished
leather sold 118,110 126,890 138,049 148,804 149,529
Balance Sheet Data
Working capital(6) ($118,085) $44,117 $64,925 $65,902 $63,696
Total assets $126,202 $264,822 $285,994 $286,309 $295,525
Long-term debt, including current
maturities(6) $130,144 $130,257 $130,320 $134,237 $134,871
Stockholders' equity/(deficit) $(78,268) $61,073 $81,265 $78,047 $77,935
__________________________________________
(1) Included in cost of sales is a charge (credit) of $(2,598), $1,969,
$(4,474), $9,490, and $109 related to the change in LIFO inventory
reserve for the years ended December 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(2) The Company paid cash dividends of $50, $1,173 and $4,036 related to
shares of common stock in 1996, 1995 and 1994, respectively. There
were no cash dividends paid or declared related to common stock for
1997 or 1993.
(3) For purposes of computing the ratio and deficiency of earnings to
fixed charges, earnings represents income from operations, less that
portion of rental obligations on operating leases that is
representative of interest. Fixed charges represents the sum of
interest expense plus such portion of rental obligations that is
representative of interest.
(4) EBITDA, the primary earnings measurement used in the Indenture,
represents income or loss from operations plus non-cash charges
related to depreciation and amortization of intangible assets and
loss on asset impairment. FIFO EBITDA, the primary earnings
measuring in the New Credit Facility, represents EBITDA plus or minus
charges or credits to operations related to the change in the LIFO
inventory reserve from December 31 of the prior year to December 31
of the current year, plus or minus certain other gains or charges
related to non-recurring items. Neither EBITDA nor FIFO EBITDA is
determined pursuant to generally accepted accounting principles
(GAAP"), and should not be considered in isolation or as an
alteration to GAAP-derived measurements.
(5) During 1997 the Company recorded asset valuation losses aggregating
$101.0 million: a $7.0 million provision recorded in connection with
certain operations which the Company put up for sale, and a $94.0
million charge recorded to write off all of the remaining impaired
goodwill as of December 31, 1997.
(6) On January 31, 1998 a semi-annual interest payment that was due on
the Notes was not made. As a consequence all of the Notes and
accrued interest thereon, totaling $135.0 million, was classified as
current as of December 31, 1997, and is included in the working
capital deficit.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year 2000 Computer Compliance
In order to address the problem relating to the inability of
certain computer software programs to process 2-digit year-date codes
after December 31, 1999, the Company has conducted a comprehensive review
of its computer systems and formulated a plan to modify or replace
programs where necessary. It is anticipated that all reprogramming
efforts of major programs will be completed by December 31, 1998.
Management believes that the cost of completing the plan will be
approximately $2.0 million.
Company Reorganization and Financial Restructuring
Prior to 1996, the Company, while reporting as an integrated
company, operated as a series of stand-alone divisions or subsidiaries
with separate financial statements and management teams for each unit.
During 1996, the Company eliminated this divisional structure and
reorganized its management structure along functional lines, and its
business structure (i.e., segment financial reporting) along the lines of
markets served. While the Company has preserved Lackawanna Leather,
Pfister & Vogel, A.L. Gebhardt, Caldwell-Moser, and A.R. Clarke as valued
trade names, it no longer evaluates or reports business results according
to these designations.
During 1996 and continuing in 1997, the Company began a series
of initiatives to strengthen the Company's financial position and return
it to profitability. Among these initiatives were (1) the reorganization
of the management of the Company previously discussed, which included the
elimination or replacement of several other senior executives in the
Company, and a general reduction in salaried workforce, (2) comprehensive
reviews of the Company's products and inventories, (3) closing three
operations which had not either been profitable or were not strategically
critical to the Company, (4) replacing critical talent which had been lost
in prior years, and (5) vacating the Company's corporate offices and
moving such offices into one of the Company's operating facilities. The
Company also continued efforts to grow and improve the business of its
Automotive Group.
The Company experienced liquidity problems in 1997, due
primarily to operating losses and high debt service costs. On September,
24, 1997, the Company announced its intention to restructure its debt by
converting all or a substantial portion of the Notes into equity in the
Company. Since that time, extensive discussions have taken place with
certain material holders of the Notes to effect such an exchange of debt
for equity. On December 31, 1997, the Company's aggregate indebtedness
was $173.5 million (compared with $162.1 million at December 31, 1996),
consisting of $135.6 million of principal and accrued interest on the
Notes and $37.9 million borrowed under the Replacement Credit Facility.
In January 1998, the Company entered into the New Credit
Facility, a $55 million asset-backed revolving credit facility that
replaced the Replacement Credit Facility. On January 31, 1998, the
Company failed to make the semi-annual interest payment that was due on
the Notes and, as a consequence, reclassified the Notes from long-term
debt to current liabilities. The Company does not have the capital
resources necessary to satisfy this liability and, as a result,
uncertainties exist concerning its ability to continue as a going concern.
On March 25, 1998, the Company announced that it had reached an agreement
in principle with its shareholders and an informal committee of holders of
the Notes to convert all of the Notes into 97% of the equity of the
Company outstanding on the date of conversion. Upon completion of the
necessary solicitation process, the Company anticipates that it will file
a petition with the United States Bankruptcy Court for approval of a
prenegotiated Joint Plan of Reorganization and make the exchange of the
Notes for common stock effective within a reasonable period of time
thereafter. There can be no assurances, however, that sufficient votes
will be obtained to gain approval of the Plan.
Although the Company had incurred losses in each of the last two
years, it believes that it has implemented measures which will stabilize
operations and permit it to reverse these losses and become profitable
again within a reasonable period of time. The capital restructuring
provided by the Plan represents an essential step in this stabilization
and return to profitability because it will (1) create greater liquidity
and borrowing capacity under the terms of the New Credit Facility, and (2)
enable the Company to compete more effectively and demand more favorable
terms from suppliers because it will reduce uncertainties in the
marketplace regarding the Company's financial stability. There can be no
assurance, however, that the measures the Company has implemented nor the
effect of the restructuring, if approved, will be sufficient to permit it
to remain an ongoing concern.
Because the Company believes that the Plan will be approved, and
the measures it has implemented will be successful, the accompanying
financial statements have been prepared on a going concern basis. These
statements contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business.
General
The Company reported net sales of $305.5 million, $311.8 million
and $360.7 million, in 1997, 1996 and 1995 respectively, of which sales of
finished leather accounted for approximately 93%, 90% and 90%
respectively. The balance of sales revenues were attributable principally
to sales of by-products, which included splits, wet blues and raw
cattlehides.
Results of Operations
The following table sets forth certain consolidated income
statement data of the Company as a percentage of net sales for the periods
indicated.
Year Ended December 31,
1997 1996 1995
Net Sales 100.0% 100.0% 100.0%
Gross Profit 2.7 6.0 14.7
Income/(loss) from operations (39.8) (4.5) 7.4
Net income/(loss) (45.6) (6.5) 1.3
1997 Compared to 1996
General. The Company incurred a net loss of $139.4 million in
1997, compared with a net loss of $20.2 million in 1996. Included in
these net losses were certain non-recurring charges recorded by the
Company in each of these years. In 1997, the Company wrote off all of the
goodwill remaining ($94.0 million) from the 1988 acquisition of the
Company's predecessors by the previous equity holders and recorded write
downs of long-lived assets ($7.0 million) which the Company held for sale
in 1997. The Company also incurred non-recurring charges in 1997
aggregating $6.8 million, including writedowns of excess and obsolete
products, provisions for loss on certain automotive contracts, and
discontinuation of leather refinishing in China. In 1996, the Company
recorded a series of pre-tax charges totaling $16.5 million associated
with, among other things, changes in policies for the valuation and
disposition of excess and off-quality inventories, restructuring charges,
impairment of certain contracts, customer claims regarding the use of
certain defective chemicals and the closing of its Trading and German
operations (see 1996 compared to 1995). In addition to the above non-
recurring charges, the increased loss in 1997 was the result of increased
competition from other leather producers, weakened demand for finished
leather during most of the second half of 1997, particularly in the
footwear and furniture upholstery segments, and loss of market share. The
Company attributes the loss of market share to the uncertainties
surrounding its financial condition and the financial restructuring which
it announced in September 1997. Also contributing to the increased loss
in 1997 was the high cost of cattlehides which the Company was unable to
recover through higher pricing to customers.
Net sales. The Company's net sales in 1997 were $305.5 million,
a decrease of $6.4 million or 2.0% from the prior year period. Excluding
$11.6 million of sales in 1996 from the closed Trading and German
operations, comparable 1997 sales increased $5.3 million or 1.8%. Square
footage of finished leather sales dropped 6.9% in 1997 compared to 1996.
The decrease was principally due to weaker sales volume in the Furniture
Group and Footwear and Specialty Leather Group, which was partially offset
by increased cut set sales in the Automotive Group.
USL's operations are divided into three principal lines of
business. The following chart summarizes USL's sales by line of business:
Year Ended December 31,
1997 1996 % Change
($ in millions)
Furniture Group $70.2 $95.0 (26)%
Footwear and Specialty Leather Group 181.7 181.0 --
Automotive Group 50.4 18.2 177%
Discontinued Operations 3.2 17.6 N.A.
----- -----
Total Net Sales $305.5 $311.8 (2)%
===== =====
Furniture Group. Furniture Group sales in 1997 were $70.2
million, a decrease of $24.8 million or 26.1% from 1996. Contributing to
the decline was (1) volume lost because of severe price-based competition
from foreign tanneries in the Group's promotional product lines, carryover
difficulties the Company experienced from its 1996 quality and delivery
problems and, to a lesser extent, softening in retail furniture sales, (2)
the discontinuation of certain products during the second half of 1996,
and (3) lower volume in the Group's mid and high-fashion product lines
because of fewer cattlehides which met the Group's quality criteria for
these products. Lack of high-impact new product introductions in prior
years contributed to the erosion.
Footwear and Personal Leather Goods Group. Footwear and
Personal Leather Goods Group sales were $181.7 million in 1997, an
increase of $0.7 million from 1996. Strong first half sales during 1997,
particularly in waterproof products, were offset by weakened market
conditions during the second half of the year and the reluctance of
customers to place substantial product commitments with USL due to
uncertainty surrounding the Company's final condition.
Automotive Group. Automotive Group sales in 1997 were $50.4
million, an increase of $32.2 million or 176.9% from 1996. This increase
was entirely attributable to volume in the Group's cut-to-pattern
business.
Gross profit. The Company's gross profit decreased to $8.4
million in 1997, from $18.7 million in 1996, a $10.3 million reduction.
Excluding discontinued 1996 operations, gross profit decreased by $9.1
million. Excluding non-recurring charges of $5.3 million in 1997 and
$12.2 million in 1996, comparable gross profit from operations decreased
by $17.2 million in 1997. Contributing to the lower gross profits in 1997
were lower sales volumes in the Furniture Group and the Footwear and
Specialty Leather Group, lingering inefficiencies in the Automotive
Group's cut-to-pattern plant, and increased cattlehide prices, which were
3% higher in 1997 than in 1996. The lower volume in the Furniture Group
and, during the second half of the year, the Footwear and Specialty
Leather Group resulted in higher conversion costs per unit at the
facilities manufacturing these products.
Gross margins were 2.7% for 1997 compared to 6.0% in 1996.
Excluding the effects of non-recurring charges, gross margins were 4.5%
for 1997 and 9.9% for 1996.
Selling, general and administrative expenses. Selling, general
and administrative expenses during 1997 were $24.3 million, a 2.7%
reduction from 1996. Lower compensation and benefit expenses during 1997
were partially offset by higher professional services fees.
Restructuring expenses. In 1996, the Company incurred $3.7
million of restructuring expenses. These included severance costs
associated with a management reorganization, costs incurred in connection
with the closing of the Company's German operations, writedown of the
lease for the prior corporate headquarters space, and writedown of
equipment used in certain manufacturing processes. The Company incurred
no restructuring expenses in 1997.
Asset valuation losses. In 1997, the Company recorded an asset
valuation loss of $101.0 million consisting of $94.0 million of
unamortized goodwill and $7.0 million for assets held for sale. During the
third quarter of 1997 the Company approved a plan to sell two of its
operations: Caldwell Moser Leather Co. and Berlin Leather. Both
operations are part of the Company's Footwear and Specialty Leather Group.
The Company recorded a pretax charge of $7.0 million in the third quarter
to reduce the book value of the long-lived assets (property, plant,
equipment and goodwill) of these operations to their estimated aggregated
fair market value less costs to sell based on a contingent selling
arrangement with an investment banker. The assets and sales of these two
operations do not represent a material portion of the Company's total
assets or sales.
Although the Company began implementing strategic measures in
1996 which it believes will eventually improve the financial performance
of the Company, operating losses continued in 1996 and 1997. Pursuant to
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of', the Company deemed its long-lived
assets to be impaired as the future undiscounted cash flows of long-lived
assets would not be sufficient to recover the carrying value of such
assets. The assets were therefore adjusted to their fair value based upon
the estimated present value of expected future cash flows. As a result,
all unamortized goodwill was written off with no reduction in the carrying
amounts of other long-lived assets.
Earnings before interest, taxes, depreciation, amortization, and
asset valuation loss. Earnings before interest, taxes, depreciation,
amortization, asset valuation loss and provisions for LIFO revaluations
("FIFO EBITDA") during 1997 was a loss of $10.4 million compared with a
loss of $1.0 million in 1996. The decline was due principally to the
change in gross profit previously discussed. FIFO EBITDA, which is the
principal earnings measure in the New Credit Facility, is not determined
pursuant to generally accepted accounting principles ("GAAP"), and should
not be considered in isolation or as an alternative to GAAP-derived
measurements
Interest Expense. Interest expense in 1997 was $19.1 million,
$1.9 million higher than that of the prior year. The increase was due to
higher outstanding borrowings during the year and higher amortization of
deferred financing fees. The higher borrowings under the Replacement
Credit Facility were required to fund greater working capital requirements
caused earlier in the year by increased cattlehide prices and sales volume
growth in the Automotive Group.
Loss Before Income Taxes. The Company incurred a loss before
taxes of $140.6 million in 1997, compared to a loss of $31.2 million in
1996, an increase of $109.4 million. Excluding the effects of non-
recurring charges in 1997 of $107.8 million and $16.5 million in 1996 the
respective losses were $32.8 million in 1997 compared to $14.7 million in
1996. This increase, as previously discussed, was primarily the result of
lower operating margins.
Income Tax(Benefit)/Provision. In 1997 the Company recorded a
tax benefit of $1.3 million compared to a benefit of $11.0 million in
1996. A minimal tax benefit was recorded in 1997 due to the
nondeductibility of the goodwill impairment and valuation reserves being
established for most of the remaining losses.
Net Loss. Due to the factors previously discussed, the Company
had a net loss of $139.4 million in 1997, compared to a net loss of $20.2
million in 1996.
1996 Compared to 1995
General. The Company experienced a net loss of $20.2 million in
1996, compared to a net profit of $4.6 million in 1995. This loss was the
result of increased competition from other leather producers, increased
cattlehide prices, restructuring and turnaround initiatives undertaken by
the Company, and certain quality problems the Company experienced. In
connection with the restructuring and turnaround initiatives, the Company
recorded a series of charges in 1996 totaling $16.5 million which
management believes are unusual or non-recurring items. In the aggregate,
these charges increased the Company's cost of goods sold by $12.2 million,
selling general and administrative expenses by $0.6 million, and resulted
in a charge for restructuring expenses of $3.7 million. The cost of goods
sold charges included $8.6 million in inventory reserve provisions to
reflect a change in Company policy toward disposing of excess and off-
quality products (see Item 1 of this form 10-K under the caption "The
Leather Manufacturing Process"), $2.2 million to recognize that certain
contracts the Company held were impaired, $0.9 million for the recovery
and disposal of products produced using certain chemicals which were later
determined to be defective, and $0.5 million in inventory writedowns in
connection with the closing of German operations. In addition, the
Company incurred operating losses in 1996 aggregating $1.8 million in
connection with the activities of the USL Trading Operation and German
operations prior to their being discontinued.
Net Sales. The Company's net sales in 1996 were $311.8 million,
a decrease of $48.8 million or 14% from the prior year period. After
adjusting for discontinued operations, net sales decreased by $27.9
million or 9% to $300.2 million in 1996 from $328.1 million in 1995. The
decrease was entirely attributable to lower finished leather sales.
Square footage of finished leather sales dropped 8% in 1996 compared to
1995 because of lower volume in the Company's Furniture Group, driven by
severe price-based competition from foreign tanneries in the Company's
promotional product lines, and quality and delivery problems the Company
experienced in 1996 in its mid and high fashion products. Volume in 1996
in the Company's Automotive Group was up substantially from 1995 due to
higher OEM and cut-to-pattern business, while volume in the Footwear and
Personal Leather Goods Group was approximately unchanged. Average selling
prices in 1996 dropped slightly from the levels experienced in 1995
because of (1) lower cattlehide prices in late 1995 and early 1996 which
were passed on to customers in 1996, (2) increased sales of excess and
off-quality inventories stemming from the Company's previously mentioned
policy change, and (3) lower selling prices in certain segments of the
Company's Automotive Group business.
Gross Profit. The Company's gross profit decreased to $18.7
million in 1996, from $53.1 million in 1995, a $34.4 million reduction.
Gross margins decreased approximately 8.7%, from 14.7% to 6.0%. Excluding
discontinued operations, gross profit decreased by $33.2 million. Much of
the decrease was the result of higher cattlehide costs experienced in
1996. After dropping through the second half of 1995 and much of the
first half of 1996, the purchase price of cattlehides rose significantly
in the second half of 1996. Approximately $7.6 million more was charged
to cost of goods sold for hide costs in 1996 than in 1995. Due to the
restructuring and turnaround initiatives discussed previously, cost of
goods sold increased $12.2 million in 1996. Lower sales volumes and
prices resulting in approximately $7.0 million lower gross profit in 1996
than 1995. The Company also experienced increased conversion costs in
1996, as it absorbed inefficiencies and other ramp-up expenses associated
with the Automotive Group's cut-to-pattern initiatives, and as it
implemented remedial measures to cure quality and delivery problems.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses in 1996 were $24.9 million; compared with
$23.0 million in 1995. The increase, after adjusting for $0.6 million of
non-recurring unusual items previously discussed, was principally the
result of fees paid for outside professional services, including
management fees paid to Claymore Partners, and executive recruitment fees
paid in connection with the implementation of the Company's
reorganization.
Restructuring Expenses. In 1996, the Company incurred $3.7
million of restructuring expenses. These included severance costs
associated with the management reorganization previously discussed, costs
incurred in connection with the closing of the Company's German
operations, writedown of the lease for the prior corporate headquarters
space, and writedown of equipment used in certain manufacturing processes
which the Company intends to sell in 1997. No restructuring expenses were
recorded in 1995.
Interest Expense. Interest expense in 1996 was $17.2 million,
$0.9 million lower than that of the prior year. The decrease was
principally the result of borrowings which averaged approximately $5.2
million lower in 1996 than in 1995, and lower amortization of deferred
financing fees.
Loss Before Taxes and Extraordinary Items. The loss before
taxes and extraordinary items was $31.2 million in 1996, compared to
income before taxes and extraordinary items of $8.5 million in 1995.
Lower gross profits and restructuring expenses were the principal drivers
behind the $39.8 million reduction from 1995 to 1996 in the Company's
income/(loss) before taxes and extraordinary income.
Income Tax Provision. The Company recorded a $11.0 million
favorable tax provision in 1996, as a result of the operating losses it
generated, compared with a $4.4 million charge in 1995. The effective tax
rate, prior to the inclusion in income of non-deductible amortization of
goodwill and extraordinary items, was 35.2% in 1996, compared with 38.2%
in 1995.
Loss Before Extraordinary Items. The loss before extraordinary
items was $20.2 million in 1996, compared with net income before
extraordinary items of $4.2 million in 1995. Pre-tax operating losses and
the slightly lower tax rate were the reasons for the change.
Extraordinary Items. In 1995, the Company recorded a $0.4
million extraordinary gain in connection with the repurchase of $4.0
million of its Notes. No extraordinary items were recorded in 1996.
Net Loss. The net loss was $20.2 million in 1996, compared to
net income of $4.6 million in 1995. The reasons for the loss are
described above.
Seasonality
The Company does not believe that its business is subject to
seasonal factors which would materially affect its financial performance.
However, the Company periodically shuts down its manufacturing operations
during the third and fourth quarter for routine maintenance of such
facilities. As a result of these shutdowns, the Company may experience
modest declines in sales and profitability during these quarters when
compared to other quarters during the year. Further, seasonal variations
in hide quality can impact the Company's financial performance. See Item 1
of this Form 10-K under the caption "Raw Materials."
Liquidity and Capital Resources
General. The Company's ongoing liquidity requirements arise
principally from its indebtedness and the funding of working capital.
Such requirements are primarily driven by mandatory interest and principal
payments, and fluctuations in raw material costs. Vendor credit from
cattlehide suppliers had been typically seven days from date of shipment,
but during 1997 were generally reduced to cash on delivery, except in such
situations were suppliers were secured by letters of credit. The Company
attributes the imposition of more restrictive terms to concerns of
suppliers about the Company's financial condition. The Company borrows
under its revolving credit facilities to meet its working capital needs.
The Company used $0.4 million for cash for operations during
1997, compared with $1.7 million of cash provided by operations during the
same period of 1996. The principal reasons for change in cash flow was
due to the increase in net losses, which were partially offset by the
increase in cash provided by the reduction of inventory. Days sales
outstanding ("DSO") in accounts receivable as of December 31, 1997 were 52
compared with 49 days as of December 31, 1996. The increase in DSO was
primarily due to changes in credit terms for certain customers and the
increase in Automotive sales, which typically carry longer payment terms.
Capital expenditures totaled $4.0 million during 1997. This
represents a decrease of approximately $3.6 million from the same period
in 1996.
On December 31, 1997, the Company's aggregate indebtedness was
$173.5 million, compared with $162.1 million for the same date in 1996.
This consisted of $135.6 million of principal and accrued interest on its
Notes and $37.9 million borrowed under the Replacement Credit Facility.
The Replacement Credit Facility was a $65 million facility, maturing on
October 31, 2001. Borrowing availability was based on accounts receivable
and inventory balances, less certain exclusions, amounts already borrowed
under the facility and letters of credit issued thereunder.
On January 14, 1998, the Company replaced the Replacement Credit
Facility with the New Credit Facility, a $55 million revolving credit
facility which is secured by essentially all the assets of the Company.
Loan availability is based on the Company's accounts receivable and
inventories balances after certain exclusions. The Company entered into
the New Credit Facility because it (1) provided additional borrowing
availability, (2) eliminated financial covenants for up to one year, (3)
offered more favorable pricing, and (4) provided for debtor-in-possession
and emergence financing terms which the Company considers attractive.
Availability under the New Credit Facility as of the February 28, 1998 was
approximately $2.9 million.
On January 31, 1998, the Company failed to make the semi-annual
interest payment which was due on its Notes and, as a consequence,
reclassified the Notes from long term debt to current liabilities. The
Company does not have the capital resources necessary to satisfy this
liability and, as a result, uncertainties exist concerning the Company's
ability to continue as a going concern.
On March 25, 1998, the Company announced that it had reached an
agreement in principle with its shareholders and an informal committee of
holders of the Notes to convert all of the Notes into 97% of the equity of
the Company outstanding on the date of conversion. Upon completion of the
necessary solicitation process, the Company anticipates that it will file
a petition with the United States Bankruptcy Court for approval of a
prenegotiated Joint Plan of Reorganization and make the exchange of the
Notes for common stock effective within a reasonable period of time
thereafter. There can be no assurances, however, that sufficient votes
will be obtained to gain approval of the Plan.
New Accounting Pronouncements
Information with respect to new accounting pronouncements is
included in Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company for the
three years ended December 31, 1997 are set forth beginning on page F-1 of
this Form 10-K. See Item 14 of this Form 10-K under the caption
"Exhibits, Financial Statement Schedules and Reports on Form 8-K" for a
complete list of the Company's financial statements and financial
statement schedules. The independent public accountants report of Arthur
Andersen LLP set forth on page F-1 to this Form 10-K includes an
explanatory paragraph regarding substantial doubts about the Company's
ability to continue as a going concern.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers
The following table sets forth the name, age and position with
the Company of each person who, as of February 28, 1998, is a director,
nominee for director, and/or executive officer of the Company:
Name Age Position with the Company
Anthony Biancanello 58 President and Chief Executive Officer
Kinzie L. Weimer 47 Senior Vice President, Chief Financial
Officer and Secretary
David R. Mathison 46 President of the Furniture and Automotive
Groups
Terry Horne 60 President of the Footwear & Specialty
Leather Group
Edwin M. Taylor, Jr. 49 Vice President, Human Resources and
Administration
George B. Stockman 48 Vice President, Environmental Affairs
Katalin E. Kutasi 41 Director
Thomas R. Cochill 58 Director
Michael J. Drabb 64 Director
Michael L. Pulte 60 Director
Anthony Biancanello has been a member of the Company's Board of
Directors since April 1996 and President and Chief Executive Officer of
the Company since May 1997. Mr. Biancanello is also President of Berwick
Capital, Inc., a private investment company he founded in 1990. Prior to
this he served as the President and Chief Executive Officer of Laudauer
Associates, Inc. Previously, he was the co-founder, in 1976, of The
Berwick Group, Inc., a general consulting company which he co-managed
until 1990. Prior to this, Mr. Biancanello was a senior consultant with
Arthur D. Little, Inc. from 1972 until 1976, and previously held senior
systems engineering positions with Sanders Associates, Inc. and the
Raytheon Company. Mr. Biancanello also serves as a director of Financial
Communications Company, Inc. Mr. Biancanello served as an officer in the
United States Navy with service in Vietnam. Mr. Biancanello also serves
as President and Chief Executive Officer of Leather U.S., Inc. and USLH.
Kinzie L. Weimer has served as Senior Vice President, Chief
Financial Officer and Secretary of the Company since December 1996. Mr.
Weimer previously served as Senior Vice President and Chief Financial
Officer of Dade International Inc. from 1995 to 1996, and as Vice
President and Chief Financial Officer of Eon Labs, Inc. from 1994 to 1995.
Mr. Weimer held a variety of financial management positions in the
General Electric Company from 1973 through 1993, including graduating from
GE's Financial Management Program in 1975. Mr. Weimer has also served,
since December 1996 as Vice President and Secretary of the Leather U.S.,
Inc. and USLH.
David R. Mathison has served as President of the Company's
Furniture Group since June 1996 and the Automotive Group since December
1997. Mr. Mathison was President of Mathison/Murray Coverings, Ltd. from
1994 to 1997. Prior to that, Mr. Mathison worked for the Company or its
predecessors for over ten years, including service as Vice President of
Sales at Lackawanna Leather from 1984 to 1991 and National Sales Manager
at Lackawanna Leather from 1981 to 1984.
Terry Horne has served as President of the Company's Footwear
and Specialty Leathers Group since April 1997. Mr. Horne was President of
Seidel Tanning Corporation from 1995 until he joined the Company in 1997.
From 1969 until his retirement in 1993, Mr. Horne served the Company and
its predecessors in a variety of sales management and executive rules,
including as Executive Vice President from 1991 through 1993.
Edwin M. Taylor, Jr. has served as Vice President of Human
Resources and Administration of the Company since August 1996. Mr. Taylor
was Director of Human Resources for the Company's Furniture Group from
1994 until assignment to his present position in 1996. Previously, Mr.
Taylor served in increasingly responsible positions in the Human Resources
functions of Meredith/Burda Printing Company (a subsidiary of R.R.
Donnelley and Sons Company since 1993) from 1979 to 1994.
George B. Stockman has served as Vice President of Environmental
Affairs since January 1995. Previously, Mr. Stockman was Vice President
of Manufacturing at the Company's Pfister & Vogel operations from December
1990 until December 1994, and, prior to 1990 served in a variety of
technical, environmental and manufacturing positions for Pfister & Vogel
since 1972.
Katalin E. Kutasi has been a member of the Company's Board of
Directors since May 1997. Ms. Kutasi is a Senior Vice President of Albion
Alliance LLC and has spent over ten years in the field of restructuring.
She is currently also a director of Quantegy Acquisition Corp., Riverside
Millworks, Inc. and Hotel Property Holdings, Inc.
Thomas R. Cochill has been a member of the Company's Board of
Directors since July 1997. Mr. Cochill served as President and CEO of
Webcraft Technologies, Inc. from 1992 through 1997. Prior to that, Mr.
Cochill was President of the Commercial Products Group of the Lehigh
Press, Inc. In addition to serving on the Board of the Company, Mr.
Cochill serves on the Board of Quantegy Acquisition Corp.
Michael J. Drabb has been a member of the Company's Board of
Directors since April 1996. Mr. Drabb has served as Executive Vice
President and Director of O'Brien Asset Management since 1993, and
previously, was Executive Vice President of The Mutual Life Insurance
Company of New York ("MONY") from 1989 until 1992. From 1987 to 1989, Mr.
Drabb was President of MONY Capital Management. In addition to serving on
the Boards of the Company, Leather U.S., Inc. and USLH, Mr. Drabb is a
Director of U.S. Foodservice, Inc. and several funds sponsored by the New
York Life Insurance and Annuity Corporation and MONY.
Michael L. Pulte has been a member of the Company's Board of
Directors since April 1996. Mr. Pulte served The Joseph Horne Co., Inc.
from 1977 until 1994, including positions as Chairman of the Board,
President and Chief Executive Officer from 1991 to 1994, Senior Vice
President, Chief Operating Officer and Director from 1987 to 1991, Senior
Vice President of Operations and Real Estate from 1979 to 1987 and Vice
President and Director of Stores from 1977 to 1979. Previously, Mr. Pulte
served in a variety of managerial and professional positions with The M.
O'Neil Company and the J. L. Hudson Company. Mr. Pulte has been a member
of several professional and civic association boards, and also serves as a
Director of Leather U.S., Inc. and USLH.
Item 11. Executive Compensation
The following table sets forth the cash and non-cash
compensation paid or accrued in 1997, 1996 and 1995 to the current and
former Chief Executive Officer of the Company, and the four other most
highly compensated executive officers at the end of 1997 whose combined
salary and bonus for 1997 exceeded $100,000.
Defined
Name and Other Contribution
Principal Position Year Salary Bonus Compensation(1) Plans
Anthony Biancanello 1997 -0- $50,000 $252,000(2) -0-
President and CEO 1996 -0- -0- -0- -0-
1995 -0- -0- -0- -0-
William F. Loftus 1997 -0- -0- $263,299(3) -0-
Former President and CEO 1996 -0- -0- $382,104(3) -0-
1995 -0- -0- -0- -0-
Kinzie L. Weimer 1997 $226,042 $50,000 -0- $5,758
Senior Vice President, 1996 $8,333 -0- -0- $720
Chief Financial Officer 1995 -0- -0- -0- -0-
and Secretary
David R. Mathison 1997 $103,846 $50,000 -0- $5,061
President of the Furniture 1996 -0- -0- -0- -0-
and Automotive Groups 1995 -0- -0- -0- -0-
Terry Horne 1997 $166,764 -0- $30,000( 4) $7,098
President of the Footwear 1996 -0- -0- $30,000( 4) $1,248
and Specialty Leather 1995 -0- -0- $70,000( 4) -0-
Group
Edwin M. Taylor, Jr. 1997 $171,384 -0- -0- $7,189
Vice President, Human 1996 $90,912 $20,000 -0- $2,652
Resources and 1995 $98,466 1,250 -0- $2,954
Administration
(1) Except as otherwise provided herein, no amounts for executive
perquisites and other personal benefits, securities or property are
shown because the aggregate dollar amount per executive is less than
the lesser of $50,000 or 10% of annual salary and bonus.
(2) Amounts paid to Berwick Capital in connection with Mr. Biancanellos'
service as President and Chief Executive Office pursuant to the
Company's agreement with Berwick Capital See Item 11 of this Form 10-
K under the caption "Employment Agreements."
(3) Amounts paid to Claymore Partners Ltd. in connection with Mr. Loftus'
service as President and Chief Executive Office pursuant to the
Company's agreement with Claymore Partners Ltd. See Item 11 of this
Form 10-K under the caption "Employment Agreements."
(4) Includes amounts paid pursuant to severance arrangements in
connection with Mr. Horne's previous employment with the Company and
its predecessors.
Director Compensation
The Company pays non-affiliated Directors an annual fee of
$15,000, plus $1,000 per meeting of the Board they attend ($500 for
meetings by teleconference). Additionally, the Company pays non-
affiliated Directors who are members of Board committees a $500 fee per
committee meeting held in connection with a Board meeting and a $1,000 fee
for separate committee meetings, and the chairman of any Board committee a
$500 quarterly fee. The Company also reimburses Directors for expenses
incurred in connection with travel to and from Board and Board committee
meetings. Messrs. Cochill, Drabb and Pulte are deemed non-affiliated
Directors. Mr. Biancanello, as President and Chief Executive Officer of
the Company, and Ms. Kutasi, as an employee of an affiliate of the largest
stockholder of the New Holding Company, are deemed affiliated Directors.
Long Term Incentive Plans
All long term incentive plans existing prior to the 1996 Holding
Company Recapitalization were terminated as of May, 1996.
Executive Incentive Compensation Plan. In December 1996, the
Board of Directors of the Company approved the United States Leather, Inc.
Executive Incentive Compensation Plan (the "Incentive Plan") for certain
key executive positions within the Company. The purpose of the Incentive
Plan is to motivate the key executive group in the Company to achieve
certain earnings goals set forth in the Company's annual business plan.
The amount of each participant's potential award under the Incentive Plan
(the "Target Award") is determined by the Board of Directors at the
beginning of each fiscal year as a percentage of such participant's annual
base salary. One-half of each participant's Target Award is based on
attaining the Company's earnings goal (the "Target Portion") and the other
half is based on a subjective evaluation of the participant's individual
performance (the "Discretionary Portion"). If the Company exceeds the
earnings goal of its business plan, the Target Portion of the Target Award
is increased, with a maximum increase of two times such Target Portion if
the actual earnings are 50% or greater than the earnings goal; however, in
no event will the amount paid to a participant in any given year exceed
twice the Target Award set for such participant. An aggregate of $203,750
was awarded under the Incentive Plan with respect to 1997. No awards were
made with respect to 1996.
Executive Equity Ownership Plan. In December 1996, the Board of
Directors of the Company approved the United States Leather, Inc.
Executive Equity Ownership Plan (the "Equity Ownership Plan") for certain
key executive positions within the Company. The purpose of the Equity
Ownership Plan is to incent the selected executives to increase the value
of the Company, and provide them an opportunity to share in such increased
value at such time as the Company may be sold by its present owners to new
owners. The Equity Ownership Plan provides for each selected executive to
defer all or part of his or her incentive compensation under the Incentive
Plan (such incentive compensation to be awarded in the year following that
in which it is earned) into the Equity Ownership Plan for a maximum of
three years. When the Company is sold, amounts deferred will be paid out
to each participant plus (1) interest accrued at predetermined rates on
such deferrals, and (2) matching Company contributions based on a formula
which is governed by the value of the Company at the time of sale. Such
matching contributions may range from zero to twice the amount contributed
by each executive. If the Company is not sold within the three-year life
of the Equity Ownership Plan, each participant will be paid the sum of his
or her deferred incentive compensation plus interest. The Equity
Ownership Plan also contains a retention feature which requires each
participant to forfeit both his or her contributions and any matching
payments should he or she voluntarily terminate his or her employment with
the Company prior to the date on which a sale is consummated. No
executives participated in the Equity Ownership Plan in 1997.
Option Grants. No stock options were granted in 1997 or 1996,
and none were outstanding from prior years as of December 31, 1997. All
rights under stock options granted in prior years terminated with the 1996
Holding Company Recapitalization.
Compensation Committee Interlocks and Insider Participation
The Board of Directors compensation committee consists of Mr.
Drabb and Mr. Pulte, with Mr. Pulte serving as chairman. No executive
officer of the Company has served as a director or member of the
compensation committee of any other entity of which one or more executive
officers has served on the Board of Directors of the Company.
Employment Agreements
Effective May 15, 1997, the Company entered into an agreement
with Berwick Capital Inc. ( Berwick') providing for Anthony Biancanellos'
service as President and Chief Executive Officer of the Company. Under
the terms of this agreement, Berwick is reimbursed at the rate of $2,000
per work day for work performed by Mr. Biancanello, plus out of pocket
expenses at cost. The Company also agreed to indemnify Berwick against
any liabilities that Berwick may incur in connection with its service to
the Company under the agreement.
Effective April 1, 1996, the Company entered into an agreement
with Claymore Partners Ltd. ("Claymore") providing for, among other
things, William F. Loftus' service as President and Chief Executive
Officer of the Company. Under the terms of this agreement, Claymore also
agreed to provide the Company with certain financial consulting and
business planning services. In exchange for the services provided,
Claymore is reimbursed at the rate of $200 per hour for work performed by
partners of Claymore (including Mr. Loftus) and $160 per hour for work
performed by senior associates of Claymore, plus in each case,
reimbursement for out of pocket expenses at cost. The Company also agreed
to indemnify Claymore against any liabilities that Claymore may incur in
connection with its service to the Company under the agreement. The
agreement with Claymore was terminated in June 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All 100 outstanding shares of the Company's common stock are
owned by USLH, which is a wholly-owned subsidiary of the New Holding
Company. The common stock of the New Holding Company is owned, in its
entirety, by The Equitable Life Assurance Society of the United States and
certain of its affiliates (87.23%) and First Plaza Group Trust (12.77%).
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements Page
Report of Independent Public Accountants . . . . . . . . . . . F-1
Consolidated Statements of Operations for the Years
Ended December 31, 1997, December 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - December 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Stockholders' Equity for
the Years Ended December 31, 1997, December 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, December 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . F-6
(a)(2) Financial Statement Schedules
None
(b) Reports on Form 8-K
The Company filed a Form 8-K dated September 24, 1997 with respect
to the meeting held that day of the holders of its 10-1/4% Senior
Notes Due 2003.
(c) Exhibits
The Exhibits filed or incorporated by reference herewith are as
specified in the Exhibit Index included herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 30, 1998 UNITED STATES LEATHER, INC.
By: /s/ Anthony Biancanello
Anthony Biancanello
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/Anthony Biancanello President and Chief Executive March 30, 1998
Anthony Biancanello Officer and Director
(Principal Executive Officer)
/s/Kinzie L. Weimer Senior Vice President, Chief March 30, 1998
Kinzie L. Weimer Financial Officer and
Secretary (Principal Financial
Officer and Principal
Accounting Officer)
/s/Katalin E. Kutasi Director March 30, 1998
Katalin E. Kutasi
/s/Thomas R. Cochill Director March 30, 1998
Thomas R. Cochill
/s/Michael J. Drabb Director March 30, 1998
Michael J. Drabb
/s/Michael L. Pulte Director March 30, 1998
Michael L. Pulte
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants
Which Have Not Registered Securities Pursuant to Section 12 of the Act
(c) No annual report or proxy material has been sent to the
Company's security holders
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of United States Leather, Inc.:
We have audited the accompanying consolidated balance sheets of
United States Leather, Inc. (a Wisconsin corporation) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 financial position of United
States Leather, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note (16) to the financial statements, the Company's
recurring losses from operations and an event of default on the Company's
$130 million 10-1/4% Senior Notes due 2003 resulting from the failure to make
the January, 1998 debt service payment raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note (16). The consolidated financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
February 19, 1998 (except with respect to the matter
discussed in Note (16), as to which
the date is March 25, 1998)
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
For the Years Ended December 31,
1997 1996 1995
Net Sales $305,476 $311,843 $360,660
Cost of Sales 297,103 293,111 307,556
-------- ------- -------
Gross profit 8,373 18,732 53,104
Selling, general and
administrative expenses 24,254 24,916 22,974
Restructuring expense -- 3,744 --
Asset valuation loss 101,000
Amortization of intangible
assets 4,631 4,134 3,529
-------- -------- -------
Income (loss) from operations (121,512) (14,062) 26,601
Interest expense 19,119 17,159 18,062
------- ------- -------
Income (loss) before taxes and
extraordinary item (140,631) (31,221) 8,539
Income tax provision (benefit) (1,273) (10,999) 4,373
-------- -------- -------
Net income (loss) before
extraordinary item (139,358) (20,222) 4,166
Extraordinary item, net of tax -- -- 417
-------- -------- -------
Net income (loss) ($139,358) ($20,222) $4,583
======== ======== =======
Per Common Share Data:
Net income (loss) before
extraordinary item ($1,393,580) ($202,220) $41,660
Extraordinary item -- - 4,170
---------- -------- -------
Basic and diluted earnings per
share ($1,393,580) ($202,220) $45,830
========== ======== =======
The accompanying notes are an integral part of these consolidated
statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
ASSETS As of December 31,
1997 1996
Current Assets:
Cash $1,054 $2,894
Accounts receivable, less allowances
of $2,587 and $2,892 32,336 35,819
Inventories 43,330 64,749
Prepaid expenses and other 822 1,228
Refundable income taxes -- 2,700
------- -------
Total current assets 77,542 107,390
Property, Plant and Equipment:
Land 2,213 2,213
Buildings and improvements 18,780 18,424
Machinery and equipment 56,766 57,178
Furniture and fixtures 2,438 2,746
Other 6,069 6,043
------- -------
86,266 86,604
Less-Accumulated depreciation (43,886) (36,811)
------- -------
Property, plant and equipment, net 42,380 49,793
Other Long-Term Assets:
Goodwill, net of amortization of
$22,115 in 1996 -- 101,371
Other 6,280 6,268
------- -------
Total assets $126,202 $264,822
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $130,144 $210
Revolving credit facility 37,932 31,795
Payable to bank 1,778 5,358
Accounts payable 7,335 7,898
Accrued liabilities 18,438 17,352
Income taxes payable -- 105
Deferred income taxes -- 555
------- -------
Total current liabilities 195,627 63,273
Long-Term Liabilities:
Long-term debt, less current maturities -- 130,047
Deferred income taxes -- 794
Other long-term liabilities 8,843 9,635
Stockholder's Equity:
Preferred Stock, $.01 par value-5,000,000
shares authorized, no shares issued -- --
Common Stock, voting, $.01 par value-
35,000,000 shares authorized,
100 shares issued 1 1
Additional paid-in capital 92,344 92,344
Cumulative translation adjustment (95) (112)
Accumulated deficit (170,518) (31,160)
-------- --------
Total stockholder's equity/(deficit) (78,268) 61,073
------- -------
Total liabilities and stockholder's
equity $126,202 $264,822
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Amounts in thousands)
Common Additional Cumulative Accumulated Total
Stock Paid-in Translation Deficit Stockholder's
Capital Adjustment Equity
BALANCE, December 31, 1994 $1 $92,344 -- ($14,298) $78,047
Net Income -- -- -- 4,583 4,583
Cumulative Translation Adjustment -- -- (192) -- (192)
Common Stock Dividends -- -- -- (1,173) (1,173)
----- ------- ------- -------- --------
BALANCE, December 31, 1995 $1 $92,344 ($192) ($10,888) $81,265
===== ======= ======= ======== ========
Net Loss -- -- -- (20,222) (20,222)
Cumulative Translation Adjustment -- -- 80 -- 80
Common Stock Dividends -- -- -- (50) (50)
----- ------- ------- -------- --------
BALANCE, December 31, 1996 $1 $92,344 ($112) ($31,160) $61,073
===== ======= ======= ======== ========
Net Loss -- -- -- (139,358) (139,358)
Cumulative Translation Adjustment -- -- 17 -- 17
Common Stock Dividends -- -- -- -- --
------ ------- ------- -------- --------
BALANCE, December 31, 1997 $1 $92,344 ($95) ($170,518) ($78,268)
====== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated
statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Years Ended December 31,
1997 1996 1995
Cash Flows from Operating Activities:
Net income (loss) ($139,358) ($20,222) $ 4,583
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 12,671 11,121 9,718
Noncash loss on asset disposals 412 55 9
Noncash gain on extraordinary item -- -- (417)
Noncash interest expense 946 1,213 1,455
Deferred income taxes (1,349) (10,773) (21)
Asset valuation loss 101,000 -- --
Change in assets and liabilities:
Accounts receivable 3,483 8,784 2,774
Inventories 21,419 9,137 (1,728)
Prepaid expenses and other 406 213 1,921
Other assets (2,372) 9 1,791
Accounts payable (563) (2,469) (4,010)
Accrued liabilities 1,086 4,349 (528)
Income taxes payable/receivable 2,595 (2,335) 772
Other long-term liabilities (792) 2,664 (3,791)
-------- -------- -------
Net cash (used)/provided by (416) 1,746 12,528
operating activities
Cash Flows from Investing Activities:
Capital expenditures (3,998) (7,612) (9,028)
Acquisition of A.R. Clarke & Co.,
Limited -- -- (4,914)
-------- -------- --------
Net cash used in investing
activities (3,998) (7,612) (13,942)
-------- -------- --------
Cash Flows from Financing Activities:
Payments of revolving credit (190,780) (93,049) (76,648)
facility
Borrowings under revolving credit 196,917 98,234 82,258
facility
Net change in payable to bank (3,580) 334 890
Senior debt refinancing fees -- (1,240) --
Purchase of Senior Notes -- -- (3,280)
Payment of long-term debt -- (163) (43)
Payment of common stock dividends -- (50) (1,173)
-------- -------- --------
Net cash provided by financing
activities 2,557 4,066 2,004
-------- -------- --------
Effect of Exchange Rate Changes on
Cash 17 80 (192)
-------- -------- --------
Net (decrease) increase in cash (1,840) (1,720) 398
Cash, beginning of period 2,894 4,614 4,216
-------- -------- --------
Cash, end of period $ 1,054 $ 2,894 $ 4,614
========= ======== ========
Supplemental cash flow disclosures:
Interest paid $18,228 $15,963 $16,663
Income taxes (1,826) (1,684) 5,021
The accompanying notes are an integral part of these consolidated
statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Amounts in thousands, except share and per share data)
(1) Basis of Presentation
1996 Holding Company Recapitalization:
On April 9, 1996, a series of transactions were completed with
the consent of United States Leather, Inc. ("the Company") which resulted
in a change in the ultimate ownership of the Company from U.S. Leather
Holdings, Inc. ("Old Holdings") to Leather U.S., Inc. (the "New Holding
Company"). Old Holdings had been in default under its senior debentures
(the "Old Holdings Debentures") due to the noncompliance by Old Holdings
of a financial covenant contained in the Old Holdings Debentures as of
December 31, 1995.
The holders of the Old Holdings Debentures foreclosed, with Old
Holdings consent, on their security which was the stock of Old Holdings'
direct subsidiary, United States Leather Holdings, Inc. ("USLH"), the
immediate parent of the Company. Such foreclosure resulted in the
satisfaction and cancellation of the Old Holdings Debentures. The
covenant default, and the subsequent consensus foreclosure, did not
constitute a default or a change in control under the terms of the
Company's existing public or bank debt.
Such foreclosure resulted in the elimination of any ownership in
the Company by Bear Stearns Acquisition Corp. VII, the majority
shareholder of Old Holdings, and vested complete ultimate share ownership
in the Company in The Equitable Life Assurance Society of the United
States and certain of its affiliates and First Plaza Group Trust. The
nominees of Bear Stearns Acquisition Corp. VII resigned from the Board of
Directors of the Company and were replaced by nominees of the New Holding
Company.
Subsequent to August, 1996, the Company is a direct subsidiary
of USLH, which, in turn, is a direct subsidiary of New Holdings Company.
The New Holding Company and USLH have no assets other than the shares of
common stock of their respective subsidiaries, and have no independent
operations.
Financial Restructuring:
The Company's financial statements for the year ended December
31, 1997 have been prepared on a going concern basis which contemplates
the realization of assets and settlement of liabilities and commitments in
the normal course of business. As discussed in Note (16) to the financial
statements, the Company's recurring losses from operations and an event of
default on the Company's $130 million 10-1/4% Senior Notes due 2003 resulting
from the failure to make the January 1998 debt service payment raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note
(16).
(2) Summary of Significant Accounting Policies
Revenue recognition:
Revenue is recognized upon shipment of the Company's products.
Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
Cash:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventories:
Substantially all of the Company's inventories are valued at the
lower of cost, determined on a last-in, first-out (LIFO) basis, or market.
Inventory costs include raw material, primarily cattlehides, labor and
factory overhead.
Property, plant and equipment:
Property, plant and equipment are stated at cost. Property,
plant and equipment is depreciated on a straight-line basis over the
following estimated useful lives:
Years
Buildings and improvements 30
Machinery and equipment 10
Furniture and fixtures 7
Computer equipment 3
Goodwill:
Goodwill is amortized on a straight-line basis over 40 years.
The Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance of goodwill
may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the
related segment's discounted net cash flows over the remaining life of its
assets in measuring whether the goodwill is recoverable. Amortization
expense was $3,168, $3,497, and $3,177, for 1997, 1996 and 1995,
respectively. See Note (15) for further discussion on the 1997 assessment
of the Company's goodwill and its impairment.
Other Assets:
Other assets include $5,202 and $5,306 of deferred financing
costs at December 31, 1997 and 1996, respectively. These costs are
amortized as interest expense over the terms of the related debt. Such
expense was $926, $1,093 and $1,329 for 1997, 1996 and 1995, respectively.
Accrued liabilities:
Accrued liabilities include $5,583 and $5,752 of accrued
interest payable as of December 31, 1997 and 1996, respectively.
Payable to bank:
Payable to bank represents outstanding checks written by the
Company in excess of cash balances. This amount is classified as a
current liability by the Company.
Income taxes:
The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Under the liability method prescribed by SFAS No. 109, deferred
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.
Net income (loss) per share:
In 1997, the Financial Standards Board issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128") "Earnings Per Share".
This statement established a new standard for computing and presenting
earnings per share. Basic earnings per share has been computed based on
the weighed average number of common shares outstanding (100 in each of
1997, 1996, and 1995). Diluted earnings per share is the same as basic
earnings per share in each of 1997, 1996, and 1995 as there are no
dilutive securities.
Research and development:
Research and development costs are expensed as incurred.
Expenses were $1,904, $2,333 and $2,402 for 1997, 1996 and 1995,
respectively.
Refinancing expense:
The Company incurred expenditures of $369 and $1,225 in 1997 and
1996, respectively, in relation to the refinancing of the revolver
discussed in Note (8). These expenditures have been capitalized as
deferred financing costs and are included in Other Assets.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The Company's operations are affected by changes in the price of
hides. Hides are the key raw material component for the Company's
business. Hides are a by-product of the cattle slaughtered to meet the
worldwide demand for beef and beef products. Hide prices are subject to
cyclical, seasonal and other market fluctuations. Historically, the
Company has been generally successful in passing along hide price
increases to customers unless the demand for finished leather was weak.
Such increases take time to implement and when hide prices rise
significantly in a short period of time the Company's margins have
suffered until such time as the finished leather price increases are fully
implemented. Such finished leather price increases, however, may also
impact demand for leather goods by prompting customers to consider
alternative materials, especially in the furniture and automotive
segments. Hide price increases and decreases immediately impact the
Company's cost of goods sold because the Company recognizes such changes
through its LIFO method of accounting. Coupled with delays in passing
such changes through to selling prices for finished products, hide price
fluctuations have had a material impact on the Company's reported
financial results.
Foreign currency translation:
Foreign currency balance sheet accounts are translated into U.S.
dollars at the rates of exchange in effect at fiscal year end. Income and
expenses are translated at the average rates of exchange in effect during
the year. The related translation adjustments are made directly to a
separate component of stockholder's equity.
Reporting comprehensive income:
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") which is
effective for periods beginning after December 15, 1997, including interim
periods. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements, either in the statement of operations or a separate
statement. Additionally, SFAS 130 requires the display of the accumulated
balance of other comprehensive income. Adoption of this standard will not
have a material impact on the financial statements of the Company.
Reclassifications
Certain financial statement amounts have been reclassified to be
consistent with the 1997 presentation.
(3) Description of Business
The Company, which operates in a single business segment,
produces a broad line of semi-finished and finished leather and related
products which are sold domestically and internationally to a diverse
customer base in three principal markets:
Furniture Group - The Company, under the trade name Lackawanna
Leather, is a supplier of upholstery leather to the furniture industry.
Footwear and Specialty Leather Group - The Company is a producer
of finished leather for footwear, accessories, sporting goods, apparel and
other personal leather goods. Sales are made under the brand names of
Pfister & Vogel, A.L. Gebhardt, A.R. Clarke and Caldwell-Moser Leather.
Automotive Group - The Company is a producer of finished leather
for use in automobile interiors.
International sales include export sales from the Company's
domestic operations, and sales by A.R. Clarke, Ltd. (a division of the
Footwear and Personal Leather Goods Group) to markets other than the
United States, and sales, prior to discontinuation, from the Company's
German operations. International sales for the years 1997, 1996 and 1995
are as follows:
Area 1997 1996 1995
Asia $61,488 $46,471 $53,631
Europe 15,315 17,113 16,763
Americas 43,885 44,934 49,008
------- ------- -------
Total $120,688 $108,518 $119,402
======= ======= =======
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for fiscal years beginning
after December 15, 1997. SFAS 131 establishes standards for the reporting
of segment information. The Company is currently evaluating the impact
this standard will have on future reporting.
(4) Purchase of A.R. Clarke & Co., Limited
On January 30, 1995, the Company purchased substantially all of
the non-cash assets of A.R. Clarke & Co., Limited of Toronto, Canada for
$4,914 in cash, plus the assumption of certain liabilities approximating
$800. This acquisition was accounted for under the purchase method of
accounting and accordingly, the acquired company's results of operations
are included in the Company's consolidated statement of operations
beginning on January 31, 1995. No material amount of goodwill arose out
of this acquisition. The purchase was financed through borrowings under
the Company's revolving credit facility.
(5) Allowance for Doubtful Accounts
Information for the allowance for doubtful accounts is as
follows:
Balance Additions Write-offs Balance
Beginning Charged Net of End of
of Year to Income Recoveries Year
Year ended December 31, 1997 $2,892 929 1,234 2,587
Year ended December 31, 1996 3,924 1,752 2,784 2,892
Year ended December 31, 1995 3,113 927 116 3,924
The allowance for doubtful accounts is based on management's
estimate of amounts expected to be uncollectible considering historical
experience and the information management is able to obtain regarding the
financial condition of major customers. Due to the concentration of the
Company's customers in three key industries (furniture, footwear and
personal leather goods, and automotive), significant changes in these
markets could cause management's estimates of uncollectible accounts to
differ materially from the estimates used in the consolidated financial
statements as of December 31, 1997.
(6) Inventories
Inventories consisted of the following at December 31:
1997 1996
At lower of cost, using the first-in,
first-out (FIFO) cost method or market:
Raw materials and supplies . . . . . . . $14,150 $18,556
Work-in-process . . . . . . . . . . . . 17,322 29,655
Finished goods . . . . . . . . . . . . . 17,975 25,253
------- --------
Total FIFO inventories . . . . . . . 49,447 73,464
Difference between FIFO and LIFO cost
of inventories . . . . . . . . . . . . . . (6,117) (8,715)
------- --------
Total LIFO inventories . . . . . . . $43,330 $64,749
======= ========
During 1997, inventory quantities were reduced resulting in
liquidations of LIFO inventory layers carried at lower costs which
prevailed in prior years. Had these liquidations occurred at current
costs the effect of these liquidations would have been a reduced benefit
of $3,379.
(7) Lease Commitments
The Company leases certain manufacturing, warehouse,
transportation and office facilities and equipment. The leases generally
require the Company to pay tax, insurance and maintenance expenses
relating to the leased assets.
As of December 31, 1997, future minimum lease payments required
under operating leases are as follows:
Year
1998 $363
1999 263
2000 105
2001 56
2002 50
Thereafter 2
------
$839
======
Rent expense under operating leases for the years ended December
31, 1997, 1996 and 1995 was $565, $504 and $582 respectively.
(8) Revolving Credit Facility
At December 31, 1997 the Company had a five year, $65,000,
asset-based revolving credit facility (the "Replacement Credit Facility")
with a group of banks that was entered into in November 1996. The
Replacement Credit Facility was secured by essentially all of the assets
of the Company with the exception of real property. Loans under the
Replacement Credit Facility bore interest at a rate equal to prime plus
1.00%. The Company paid a 0.375% commitment fee on the unused portion of
the facility. The terms of the agreement covering the Replacement Credit
Facility required the Company to, among other things, maintain a minimum
quarterly ratio of FIFO earnings before interest expense, income tax
expense, depreciation expense and amortization expense ("FIFO EBITDA") to
interest expense, a minimum tangible FIFO asset to total debt ratio and
minimum EBITDA. The agreement also included restrictions related to
capital expenditures and further indebtedness.
Due to losses incurred in 1996 and 1997, the Company was not in
compliance with certain financial covenants as of December 31, 1997 and
1996. Beginning in February 1997, the Replacement Credit Facility was
amended several times to (a) eliminate FIFO EBITDA related covenants for
1996, (b) modify FIFO EBITDA related covenants, (c) increase the available
reserves for the remainder of 1997 and (d) reduce the maximum amount of
the credit facility to $65,000 from $80,000.
The maximum and average outstanding borrowings and the weighted
average interest rates under the Replacement Credit Facility were
calculated on daily borrowings outstanding. Letters of credit were $3,356
and $7,619 as of December 31, 1997 and 1996, respectively. These letters
of credit guaranteed the Company's compliance with certain contractual
obligations relating to imported raw material purchases.
Information regarding borrowings under the Revolving Credit
Facility is as follows:
1997 1996 1995
At period end -
Outstanding $37,932 $31,795 $26,610
Interest rate 9.50% 7.69% 8.10%
During the period -
Maximum outstanding $61,738 $36,842 $43,025
Average outstanding $46,914 $24,152 $33,108
Weighted average interest
rates 8.36% 8.17% 8.90%
On January 14, 1998, the Company replaced the Replacement Credit
Facility with the New Credit Facility, a $55,000 revolving facility which
is secured by essentially all the assets of the Company. Loans under the
New Revolving Credit Facility bear interest at a rate equal to prime plus
1.25% or LIBOR plus 3.00%. The Company pays a 0.375% commitment fee on
the unused portion of the facility. The terms of the agreement covering
the New Revolving Credit Facility require the Company to, among other
things, beginning in 1999 maintain a minimum ratio of FIFO earnings
before interest expense, income tax expense, depreciation expense and
amortization expense ("FIFO EBITDA") to fixed charges, a minimum tangible
net worth and minimum EBITDA. The agreement also includes restrictions
related to capital expenditures and further indebtedness.
(9) Long-Term Debt
Long-term debt consisted of the
following:
1997 1996
10 1/4% unsecured Senior Notes due
2003 (the "Senior Notes") interest
payable semi-annually January 31,
and July 31, net of unamortized
discount of $561 and $661 at
December 31, 1997 and 1996,
respectively $129,439 $129,339
Other 705 918
------- -------
Total debt 130,144 130,257
Less - current maturities (130,144) (210)
-------- -------
Long-term debt $ -- $130,047
======== =======
The terms of the Senior Notes contain certain covenants which
restrict, among other things, additional indebtedness, restricted payments
and investments. These covenants are generally less restrictive than
those contained in the Replacement Credit Facility. At December 31, 1996
the Company did not meet certain financial criteria established by such
covenants and therefore was prohibited from incurring any additional
indebtedness as defined in the Senior Note indenture. Further, an
acceleration of the amounts borrowed under the Replacement Credit Facility
after a default would cause a cross-default under the Senior Note
indenture.
On January 31, 1998 a semi annual interest payment was due on
the Senior Notes. This interest payment was not made and failure to make
the payment represents an event of default. As a consequence all of the
Senior Notes are classified as current at December 31, 1997. See Note
(16).
Based on quoted market prices or dealer quotes, the fair market
value of the outstanding Senior Notes was $57,200 and $113,100 at December
31, 1997 and 1996, respectively. The fair market value of the Replacement
Credit Facility discussed in Note 8 approximates its book value.
(10) Income Taxes
The Company is an indirect wholly-owned subsidiary of the New
Holding Company and it will join in the filing of a consolidated federal
income tax return with the New Holding Company. The income tax provision
and related tax accounts of the Company are prepared as if the Company
were filing on a stand-alone basis.
Income taxes have been provided for (benefitted) in the
accompanying financial statements as follows:
1997 1996 1995
Current:
Federal $ -- $(2,700) $3,792
Foreign 76 311 280
State -- -- 297
------ ------- -------
76 (2,389) 4,369
Deferred (1,349) (8,610) 4
------- -------- -------
($1,273) ($10,999) $4,373
======= ======== =======
A reconciliation of the statutory Federal income tax rate to the
effective income tax rate for the year ended December 31 is as follows:
Year ended December 31,
1997 1996 1995
Statutory Federal income tax rate ($35.0)% ($35.0)% 35.0%
State income taxes, net of Federal
income tax benefit (1.6) (2.8) 2.3
Benefit related to foreign sales
corporation -- 0.1 (5.5)
Nondeductible amortization of
intangibles 0.8 4.0 13.0
Asset valuation loss 24.4 -- --
Meals and entertainment -- 0.1 1.0
Valuation Allowance 11.6 -- --
Other (1.1) (1.6) 5.4
---- ---- ----
Effective income tax rate (0.9)% (35.2)% 51.2%
==== ==== ====
Temporary differences and credits which give rise to deferred
tax liabilities as of December 31 are as follows:
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $977 $1,099
Accrued liabilities 4,595 3,150
Other 118 87
Net operating loss carryforward 21,001 7,428
Valuation allowance (16,867) (500)
------ ------
Total deferred tax assets $ 9,824 $11,264
------ ------
Deferred tax liabilities:
Depreciation $5,383 $7,809
Inventory 4,441 4,804
------ ------
Total deferred tax liabilities $9,824 $12,613
------ ------
Net deferred tax liability $ -- $ 1,349
====== ======
The Company has tax benefits from net operating loss carryforwards
for Federal tax totaling $17,340 that expire through 2017. In addition
the Company has tax benefits from state net operating loss carryforwards
for state purposes of $3,661 that expire through 2017. At December 31,
1997, the Company has established valuation reserves for such deferred tax
assets to the extent they are not realizable through the turnaround of
other temporary differences.
(11) Stockholder's Equity
Common Stock
The Company has 35,000,000 shares of authorized Common Stock, $.01
par value, 100 shares of which are issued and outstanding.
Prior to 1996, certain members of management held shares in Old
Holdings, the Company's ultimate parent. Under the provisions of the
stockholders agreement between Old Holdings and the management
shareholders (the "Stockholders Agreement"), the Company was obligated to
purchase shares held by management, at the employee's option, at their
original purchase price (a net amount of approximately $1,870). In
January 1996, all of the management shareholders required the Company to
purchase their Old Holdings shares as provided for in the Stockholders
Agreement. Accordingly, the Company paid $1,755 to those shareholders in
January 1996.
Preferred Stock
The Company has 5,000,000 shares of authorized preferred stock, $.01
par value, none of which was issued and outstanding. The Board of
Directors is authorized to issue preferred stock with such voting powers,
dividends, or other rights as it may deem advisable.
(12) Profit Sharing and Pension Plans
Substantially all of the employees of United States Leather, Inc.
participate in profit sharing plans. Charges to income relating to these
plans were $1,527, $1,589 and $1,914 for the periods ending December 31,
1997, 1996 and 1995, respectively. Prior to 1995, the Company had
defined benefit pension plans covering substantially all of the employees
of Lackawanna and the salaried employees of United States Leather, Inc.
and Pfister & Vogel. In 1995, the Company terminated the plans and
settled the accumulated benefit obligation of $8,981 by making lump-sum
distributions, and purchasing non-participating annuity contracts.
Defined benefits were not provided under any successor plan. As a result,
the Company recognized a gain of $235 in 1995.
(13) Incentive Plans
Executive Incentive Compensation Plan. In December 1996, the Board
of Directors of the Company approved the United States Leather, Inc.
Executive Incentive Compensation Plan (the "Incentive Plan") for certain
key executive positions within the Company. The purpose of the Incentive
Plan is to motivate the key executive group in the Company to achieve
certain earnings goals set forth in the Company's annual business plan.
The amount of each participant's potential award under the Incentive Plan
(the "Target Award") is determined by the Board of Directors at the
beginning of each fiscal year as a percentage of such participant's annual
base salary. One-half of each participant's Target Award is based on
attaining the Company's earnings goal (the "Target Portion") and the other
half is based on a subjective evaluation of the participant's individual
performance (the "Discretionary Portion"). If the Company exceeds the
earnings goal of its business plan, the Target Portion of the Target Award
is increased, with a maximum increase of two times such Target Portion if
the actual earnings are 50% or greater than the earnings goal; however, in
no event will the amount paid to a participant in any given year exceed
twice the Target Award set for such participant. An aggregate of $203,750
was awarded under the Incentive Plan with respect to 1997. No awards were
made with respect to 1996.
Executive Equity Ownership Plan. In December 1996, the Board of
Directors of the Company approved the United States Leather, Inc.
Executive Equity Ownership Plan (the "Equity Ownership Plan") for certain
key executive positions within the Company. The purpose of the Equity
Ownership Plan is to incent the selected executives to increase the value
of the Company, and provide them an opportunity to share in such increased
value at such time as the Company may be sold by its present owners to new
owners. The Equity Ownership Plan provides for each selected executive to
defer all or part of his or her incentive compensation under the Incentive
Plan (such incentive compensation to be awarded in the year following that
in which it is earned) into the Equity Ownership Plan for a maximum of
three years. When the Company is sold, amounts deferred will be paid out
to each participant plus (1) interest accrued at predetermined rates on
such deferrals, and (2) matching Company contributions based on a formula
which is governed by the value of the Company at the time of sale. Such
matching contributions may range from zero to twice the amount contributed
by each executive. If the Company is not sold within the three-year life
of the Equity Ownership Plan, each participant will be paid the sum of his
or her deferred incentive compensation plus interest. The Equity
Ownership Plan also contains a retention feature which requires each
participant to forfeit both his or her contributions and any matching
payments should he or she voluntarily terminate his or her employment with
the Company prior to the date on which a sale is consummated. No
executives participated in the Equity Ownership Plan in 1997.
(14) Environmental Matters
The Company's production facilities are subject to numerous
environmental laws and regulations concerning, among other things,
emissions to the air, discharges to the land, surface, subsurface strata
and water, and the generation, handling, storage, transportation and
treatment of waste byproducts and regulation regarding health and safety
matters. The Company believes that its business, operations and
facilities are being operated in substantial compliance in all material
respects with applicable environmental and health and safety laws and
regulations. The Company has been identified as a "potentially
responsible party" ("PRP") by the EPA at three off-site disposal
facilities and while it has responded to a section 104(e) request
concerning its use of another off-site disposal facility, it has not been
identified as a PRP at this site. Based on information currently
available regarding the estimated remediation costs at these sites and the
Company's relatively minimal contributions to such sites, the Company
believes that its ultimate liability will not materially adversely affect
its consolidated financial statements. In addition, the Company believes
that it is entitled to indemnification from the previous owners of its
divisions with respect to any potential liability at three of the four
sites, although no assurances can be given as to the ability of the
Company to enforce, or collect any amounts due under, such
indemnification.
(15) Long-Lived Assets Including Goodwill
In 1997, the Company recorded an asset valuation loss of $101.0
million consisting of $94.0 million of unamortized goodwill and $7.0
million for assets held for sale. During the third quarter of 1997 the
Company approved a plan to sell two of its operations: Caldwell Moser
Leather Co. and Berlin Leather. Both operations are part of the Company's
Footwear and Specialty Leather Group. The Company recorded a pretax charge
of $7.0 million in the third quarter to reduce the book value of the long-
lived assets (property, plant, equipment and goodwill) of these operations
to their estimated aggregated fair market value less costs to sell based
on a contingent selling arrangement with an investment banker. The assets
and sales of these two operations do not represent a material portion of
the Company's total assets or sales.
Although the Company began implementing strategic measures in 1996
which it believes will eventually improve the financial performance of the
Company, operating losses continued in 1996 and 1997. Pursuant to SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of', the Company deemed its long-lived assets
to be impaired as the future undiscounted cash flows of long-lived assets
would not be sufficient to recover the carrying value of such assets. The
assets therefore were adjusted to their fair value based on the estimated
present value of expected future cash flows. As a result, all unamortized
goodwill was written off with no reduction in the carrying amounts of
other long-lived assets.
(16) Financial Restructuring Developments and Going Concern Consideration
The Company is highly leveraged and certain recent developments have
had a material adverse effect on the Company's short term liquidity and
its ability to service its debts. On January 31, 1998, the Company failed
to make the semi-annual interest payment which was due on its 10-1/4% Senior
Notes due 2003 (the "Notes") and, as a consequence, reclassified the Notes
from long term debt to current liabilities. The Company does not have the
capital resources necessary to satisfy this liability and, as a result,
substantial doubt exists concerning its ability to continue as a going
concern.
On September, 24, 1997, the Company announced its intention to
restructure its debt by converting all or a substantial portion of the
Notes into equity in the Company. Since that time, extensive discussions
have taken place with certain material holders of the Notes to effect such
an exchange of debt for equity. On March 25, 1998, the Company announced
that it had reached an agreement in principle with its shareholders and an
informal committee of holders of the Notes to convert all of the Notes
into equity in the Company. Upon completion of the necessary solicitation
process, the Company anticipates that it will file a petition with the
United States Bankruptcy Court for approval of a prenegotiated Joint Plan
of Reorganization (the "Plan") and make the exchange of the Notes for
shares of common stock representing 97% of the then outstanding common
stock effective within a reasonable period of time thereafter. There can
be no assurances, however, that sufficient votes will be obtained to gain
approval of the Plan.
Although the Company had incurred losses in each of the last two
years, it believes that it has implemented measures which will stabilize
operations and permit it to reverse these losses and become profitable
again within a reasonable period of time. The capital restructuring
provided by the Plan represents an essential step in this stabilization
and return to profitability because it will (1) create greater liquidity
and borrowing capacity under the terms of the New Credit Facility, and (2)
enable the Company to compete more effectively and demand more favorable
terms from suppliers because it will reduce uncertainties in the
marketplace regarding the Company's financial stability. There can be no
assurances, however, that the measures the Company has implemented nor the
effect of the restructuring, if approved, will be sufficient to permit the
Company to remain an ongoing concern.
EXHIBIT INDEX
UNITED STATES LEATHER, INC.
ANNUAL REPORT ON FORM 10-K
Exhibit Exhibit
Number
3.1 Restated Articles of Incorporation of the Company, as
amended [Incorporated by reference to Exhibit 3.1 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 (File No. 33-64142)].
3.2 Bylaws of the Company, as amended [Incorporated by
reference to Exhibit 3.2 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (File No.
33-64142)].
4.1 Indenture dated August 2, 1993, between the Company and
M&I First National Bank, as Trustee, in respect of the
Company's 103% Senior Notes due 2003, including the form
of Note [Incorporated by reference to Exhibit 4.5 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 (File No. 33-64142)].
4.2 Revolving Credit Agreement dated as of January 14, 1998,
among United States Leather, Inc., A.R. Clarke Limited,
BankAmerica Business Credit, Inc. and the other banks
which may become parties thereto.
10.1 Letter Agreement with Claymore Partners, Ltd.
[Incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996].
10.2 United States Leather, Inc. Executive Incentive
Compensation Plan [Incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996].
10.3 United States Leather, Inc. Executive Equity Ownership
Plan [Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996].
10.4 Letter Agreement with Berwick Capital
12.1 Statement re: computation of ratios (deficiency) of
earnings to fixed charges
21 Subsidiaries of the Company [Incorporated by reference
to Exhibit 21 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1996].
27 Financial Data Schedule (EDGAR version only)
APPENDIX E
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
RESTATED ARTICLES OF INCORPORATION
UNITED STATES LEATHER, INC.
RESTATED ARTICLES OF INCORPORATION
OF
UNITED STATES LEATHER, INC.
The following Restated Articles of Incorporation dated as of
__________, 1998 duly adopted pursuant to the authority and provisions of
Chapter 180 of the Wisconsin Statutes, supersede and take the place of the
Corporation's heretofore existing Articles of Incorporation and all
amendments thereto adopted prior to the date hereof:
ARTICLE I
The name of the Corporation is United States Leather, Inc.
ARTICLE II
The period of the Corporation's existence is perpetual.
ARTICLE III
The purpose for which the Corporation is organized is to engage
in any lawful activities within the purposes for which corporations may be
organized under the Wisconsin Business Corporation Law, Chapter 180,
Wisconsin Statutes.
ARTICLE IV
The aggregate number of shares which the Corporation shall have
authority to issue is forty-five million (45,000,000) shares of a class
designated as "Common Stock," with a par value of $.01 per share.
A. COMMON STOCK.
(1) Dividends. Subject to the provisions of this Article IV,
the Board of Directors may, in its discretion, out of funds legally
available for the payment of dividends and at such times and in such
manner as determined by the Board of Directors, declare and pay dividends
on the Common Stock.
(2) Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of outstanding shares of Common Stock shall be entitled to receive
pro rata, according to the number of shares held by each, the remaining
assets of the Corporation available for distribution.
(3) Voting Rights. Except as otherwise provided by the
Wisconsin Business Corporation Law, only the holders of Common Stock shall
be entitled to vote for the election of directors of the Corporation and
for all other corporate purposes. Upon any such vote the holders of
Common Stock shall, except as otherwise provided by law, be entitled to
one vote for each share of Common Stock held by them respectively.
B. PROHIBITION OF ISSUANCE OF CERTAIN SECURITIES.
Anything herein to the contrary notwithstanding, the issuance of
nonvoting equity securities is prohibited.
C. PREEMPTIVE RIGHTS.
Except as the Board of Directors of the Corporation may
otherwise authorize or determine from time to time, no shareholder of the
Corporation shall have any preferential or preemptive right to subscribe
for or purchase from the Corporation any new or additional shares of
capital stock of the Corporation or securities convertible into shares of
capital stock, whether now or hereafter authorized.
ARTICLE V
A. POWERS, NUMBER AND TENURE OF DIRECTORS.
Subject to the rights of holders of Preferred Stock of the
Corporation, the Board of Directors of the Corporation shall consist of
five (5) directors. The general powers of the directors of the
Corporation shall be as set forth in Section 3.1 of Article III of the By-
laws of the Corporation (and as such Section shall exist from time to
time.
B. REMOVAL OF DIRECTORS.
Any director may be removed from office, with or without cause,
by the affirmative vote of shareholders holding more than one-half of the
voting power of the then outstanding shares of all classes of capital
stock of the Corporation generally possessing voting rights in the
election of directors.
C. VACANCIES.
Any vacancy occurring in the Board of Directors, including a
vacancy created by the removal of a director or an increase in the number
of directors, shall be filled by the affirmative vote of a majority of the
directors then in office, even if the number of directors then in office
is less than a quorum of the Board of Directors. Any director so elected
shall serve until the next election of the class for which such director
is chosen and until his or her successor is duly elected and qualified.
ARTICLE VI
The Corporation shall indemnify the officers and the directors
of the Corporation to the fullest extent permitted or required by the
Wisconsin Business Corporation Law.
ARTICLE VII
The address of the registered office of the Corporation is 777
East Wisconsin Avenue, Milwaukee, Wisconsin 53202, and the name of its
registered agent at such address is F&L Corp.
ARTICLE VIII
The Corporation shall have the express right to acquire and
dispose of its own shares on such terms and conditions as the Board of
Directors may from time to time determine and agree.
ARTICLE IX
A special meeting of the shareholders of the Corporation shall
be held as provided for in the By-laws of the Corporation, and shall also
be held as required by the Wisconsin Business Corporation Law; provided,
however, that unless otherwise required by the Wisconsin Business
Corporation Law, no special meeting may be called by shareholders of the
Corporation unless the holders of at least 15% of all the votes entitled
to be cast on any issue proposed to be considered at such meeting sign,
date and deliver to the Corporation one or more written demands for such
meeting in accordance with the applicable provisions of the By-laws of the
Corporation
ARTICLE X
These Restated Articles of Incorporation may be amended solely
as authorized hereby and by law at the time of amendment.
* * *
Pursuant to Section 180.1007(4) of the Wisconsin Business
Corporation Law, the undersigned officer of United States Leather, Inc., a
Wisconsin corporation (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is United States Leather, Inc.
2. The foregoing Restated Articles of Incorporation contain
amendments to the Articles of Incorporation requiring shareholder
approval.
3. The shareholders of the Corporation duly adopted the
foregoing Restated Articles of Incorporation (including such amendments)
on __________, 1998, in accordance with Section 180.1003 of the Wisconsin
Business Corporation Law.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as
of this ____ day of __________, 1998.
UNITED STATES LEATHER, INC.
By: ____________________________
Title:
________________
This instrument was drafted by, and should be returned to,
Thomas E. Hartman of the firm of Foley & Lardner, 777 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202-5367.
APPENDIX F
TO
DISCLOSURE STATEMENT OF UNITED STATES LEATHER, INC.
DATED MARCH 31, 1998
RESTATED BY-LAWS OF
UNITED STATES LEATHER, INC.
BY-LAWS
OF
UNITED STATES LEATHER, INC.
(a Wisconsin corporation)
ARTICLE I. OFFICES
1.1. Principal and Business Offices. The corporation may have such
principal and other business offices, either within or without the State
of Wisconsin, as the Board of Directors may designate or as the business
of the corporation may require from time to time.
1.2. Registered Office. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the
State of Wisconsin may be, but need not be, identical with the principal
office in the State of Wisconsin, and the address of the registered office
may be changed from time to time by the Board of Directors or by the
registered agent. The business office of the registered agent of the
corporation shall be identical to such registered office.
ARTICLE II. SHAREHOLDERS
2.1. Annual Meeting. The annual meeting of the shareholders (the
"Annual Meeting") shall be held on the second Thursday in the month of May
of each year, or at such other time and date as may be fixed by resolution
of the Board of Directors. In fixing a meeting date for any Annual
Meeting, the Board of Directors may consider such factors as it deems
relevant within the good faith exercise of its business judgment.
2.2. Purposes of Annual Meeting. At each Annual Meeting, the
shareholders shall elect directors. At any such Annual Meeting, only
other business properly brought before the meeting in accordance with
Section 2.15 of these by-laws may be transacted. If the election of
directors shall not be held on the date designated herein, or fixed as
herein provided, for any Annual meeting, or any adjournment thereof, the
Board of Directors shall cause the election to be held at a special
meeting of shareholders (a "Special Meeting") as soon thereafter as is
practicable.
2.3. Special Meetings.
(a) A Special Meeting may be called only by (i) the Chairman of
the Board, (ii) the President or (iii) the Board of Directors and shall be
called by the Chairman of the Board or President upon the demand, in
accordance with this Section 2.3, of the holders of record of shares
representing at least 10% of all the votes entitled to be cast on any
issue proposed to be considered at the Special Meeting.
(b) In order that the corporation may determine the
shareholders entitled to demand a Special Meeting, the board of Directors
may fix a record date to determine the shareholders entitled to make such
a demand (the "Demand Record Date"). The Demand Record Date shall not
precede the date upon which the resolution fixing the Demand Record Date
is adopted by the Board of Directors and shall not be more than 10 days
after the date upon which the resolution fixing the Demand Record Date is
adopted by the Board of Directors. Any shareholder of record seeking to
have shareholders demand a Special Meeting shall, by sending written
notice to the Secretary of the corporation by hand or by certified or
registered mail, return receipt requested, request the Board of Directors
to fix a Demand Record Date. The Board of Directors shall promptly, but
in all events within 10 days after the date on which a valid request to
fix a Demand Record Date is received, adopt a resolution fixing the Demand
Record Date and shall make a public announcement of such Demand Record
Date. If no Demand Record Date has been fixed by the Board of Directors
within 10 days after the date on which such request is received by the
Secretary, the Demand Record Date shall be the 10th day after the first
date on which a valid written request to set a Demand Record Date is
received by the Secretary. To be valid, such written request shall set
forth the purpose or purposes for which the Special Meeting is to be held,
shall be signed by one or more shareholders of record (or their duly
authorized proxies or other representatives), shall bear the date of
signature of each such shareholder (or proxy or other representative) and
shall set forth all information about each such shareholder and about the
beneficial owner or owners, if any, on whose behalf the request is made
that would be required to be set forth in a shareholder's notice described
in paragraph (a)(ii) of Section 2.15 of these by-laws.
(c) In order for a shareholder or shareholders to demand a
Special Meeting, a written demand or demands for a Special Meeting by the
holders of record as of the Demand Record Date of shares representing at
least 10% of all the votes entitled to be cast on any issue proposed to be
considered at a Special Meeting must be delivered to the corporation. To
be valid, each written demand by a shareholder for a Special Meeting shall
set forth the specific purpose or purposes for which the Special Meeting
is to be held (which purpose or purposes shall be limited to the purpose
or purposes set forth in the written request to set a Demand Record Date
received by the corporation pursuant to paragraph (b) of this Section
2.3), shall be signed by one or more persons who as of the Demand Record
Date are shareholders of record (or their duly authorized proxies or other
representatives), shall bear the date of signature of each such
shareholder (or proxy or other representative), and shall set forth the
name and address, as they appear in the corporation's books, of each
shareholder signing such demand and the class and number of shares of the
corporation which are owned of record and beneficially by each such
shareholder, shall be sent to the Secretary by hand or by certified or
registered mail, return receipt requested, and shall be received by the
Secretary within 60 days after the Demand Record Date.
(d) The corporation shall not be required to call a Special
Meeting upon demand of a shareholder or shareholders representing less
than 15% of all votes entitled to be cast on any issue proposed to be
considered at such Special Meeting, unless, in addition to the documents
required by paragraph (c) of this Section 2.3, the Secretary receives a
written agreement signed by each Soliciting Shareholder (as defined
below), pursuant to which each Soliciting Shareholder, jointly and
severally, agrees to pay the corporation's costs of holding the Special
Meeting, including the costs of preparing and mailing proxy materials for
the corporation's own solicitation, provided that if each of the
resolutions introduced by any Soliciting Shareholder at such meeting is
adopted, and each of the individuals nominated by or on behalf of any
Soliciting Shareholder for election as a director at such meeting is
elected, then the Soliciting Shareholder shall not be required to pay such
costs. For purposes of this paragraph (d), the following terms shall have
the meanings set forth below:
(i) "Affiliate" of any Person (as defined herein) shall
mean any Person controlling, controlled by or under common control
with such first Person.
(ii) "Participant" shall have the meaning assigned to such
term in Rule 14a-11 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(iii) "Person" shall mean any individual, firm,
corporation, partnership, joint venture, association, trust,
unincorporated organization or other entity.
(iv) "Proxy" shall have the meaning assigned to such term
in Rule 14a-1 promulgated under the Exchange Act.
(v) "Solicitation" shall have the meaning assigned to such
term in Rule 14a-11 promulgated under the Exchange Act.
(vi) "Soliciting Shareholder" shall mean, with respect to
any Special Meeting demanded by a shareholder or shareholders, any of
the following Persons:
(A) if the number of shareholders signing the
demand or demands of meeting delivered to the corporation
pursuant to paragraph (c) of this Section 2.3 is 10 or
fewer, each shareholder signing any such demand;
(B) if the number of shareholders signing the
demand or demands of meeting delivered to the corporation
pursuant to paragraph (c) of this Section 2.3 is more than
10, each Person who either (I) was a Participant in any
Solicitation of such demand or demands or (II) at the time
of the delivery to the corporation of the documents
described in paragraph (c) of this Section 2.3 had engaged
or intended to engage in any Solicitation or Proxies for
use at such Special Meeting (other than a Solicitation of
Proxies on behalf of the corporation); or
(C) any Affiliate of a Soliciting Shareholder,
if a majority of the directors then in office determine,
reasonably and in good faith, that such Affiliate should be
required to sign the written notice described in paragraph
(c) of this Section 2.3 and/or the written agreement
described in this paragraph (d) in order to prevent the
purposes of this Section 2.3 from being evaded.
(e) Except as provided in the following sentence, any Special
Meeting shall be held at such hour and day as may be designated by
whichever of the Chairman of the Board, the President or the Board of
Directors shall have called such meeting. In the case of any Special
Meeting called by the Chairman of the Board upon the demand of
shareholders (a "Demand Special Meeting"), such meeting shall be held at
such hour and day as may be designated by the Board of Directors;
provided, however, that the date of any Demand Special Meeting shall be
not more than 60 days after the Meeting Record Date (as defined in Section
2.6 hereof); and provided further that in the event that the directors
then in office fail to designate an hour and date for a Demand Special
Meeting within 10 days after the date that valid written demands for such
meeting by the holders of record as of the Demand Record Date of shares
representing at least 10% of all the votes entitled to be cast on each
issue proposed to be considered at the special Meeting are delivered to
the corporation (the "Delivery Date"), then such meeting shall be held at
2:00 P.M. local time on the 60th day after the Delivery Date or, if such
60th day is not a Business Day (as described below), on the first
preceding Business Day. In fixing a meeting date for any Special Meeting
the Chairman of the Board, the President or the Board of Directors may
consider such factors as he or it deems relevant within the good faith
exercise of his or its business judgment, including, without limitation,
the nature of the action proposed to be taken, the facts and circumstances
surrounding any demand for such meeting, and any plan of the Board of
Directors to call an Annual Meeting or a Special Meeting for the conduct
of related business.
(f) The corporation may engage regionally or nationally
recognized independent inspectors of elections to act as an agent of the
corporation for the purpose of promptly performing a ministerial review of
the validity of any purported written demand or demands for a Special
Meeting received by the Secretary. For the purpose of permitting the
inspectors to perform such review, no purported demand shall be deemed to
have been delivered to the corporation until the earlier of (i) 5 Business
Days following receipt by the Secretary of such purposed demand and (ii)
such date as the independent inspectors certify to the corporation that
the valid demands received by the Secretary represent at least 10% of all
the votes entitled to be cast on each issue proposed to be considered at
the Special Meeting. Nothing contained in this paragraph (f) shall in any
way be construed to suggest or imply that the Board of Directors or any
shareholder shall not be entitled to contest the validity of any demand,
whether during or after such 5 Business Day period, or to take any other
action (including, without limitation, the commencement, prosecution or
defense of any litigation with respect thereto).
(g) For purposes of these by-laws, "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of Wisconsin are authorized or obligated by law
or executive order to close.
2.4. Place of Meeting. The Board of Directors, the Chairman of the
Board or the President may designate any place, either within or without
the State of Wisconsin, as the place of meeting for any Annual Meeting or
for any Special Meeting, or for any postponement thereof. If no
designation is made, the place of meeting shall be the principal office of
the corporation in the State of Wisconsin. Any meeting may be adjourned
to reconvene at any place designated by vote of the Board of Directors,
the Chairman of the Board or the President.
2.5. Notice of Meeting. Written or printed notice stating the place,
day and hour of any Annual meeting or Special Meeting shall be delivered
not less than 10 days (unless a longer period is required by the Wisconsin
Business Corporation Law) nor more than 70 days before the date of such
meeting, either personally or by mail, by or at the direction of the
Secretary to each shareholder of record entitled to vote at such meeting
and to other shareholders as may be required by the Wisconsin Business
Corporation Law. In the event of any Demand Special Meeting, such notice
of meeting shall be sent not more than 30 days after the Delivery Date.
If mailed, notice pursuant to this Section 2.5 shall be deemed to be
effective when deposited in the United States mail, addressed to the
shareholder at his address as it appears on the stock transfer books of
the corporation, with postage thereon prepaid. Unless otherwise required
by the Wisconsin Business Corporation Law or the articles of incorporation
of the corporation, a notice of an Annual Meeting need not include a
description of the purpose for which the meeting is called. In the case
of any Special Meeting, (a) the notice of meeting shall describe any
business that the Board of Directors shall have theretofore determined to
bring before the meeting and (b) in the case of a Demand Special Meeting,
the notice of meeting (i) shall describe any business set forth in the
statement of purpose of the demands received by the corporation in
accordance with Section 2.3 of these by-laws and (ii) shall contain all of
the information required in the notice received by the corporation in
accordance with section 2.15(b) of these by-laws. If an Annual Meeting or
Special Meeting is adjourned to a different date, time or place, the
corporation shall not be required to give notice of the new date, time or
place if the new date, time or place is announced at the meeting before
adjournment; provided, however, that if a new Meeting Record Date for an
adjourned meeting is or must be fixed, the corporation shall give notice
of the adjourned meeting to persons who are shareholders as of the new
Meeting Record Date.
2.6. Fixing of Record Date. The Board of Directors may fix in
advance a date not less than 10 days and not more than 70 days prior to
the date of any Annual Meeting or Special Meeting as the record date for
the determination of shareholders entitled to notice of, or to vote at,
such meeting (the "Meeting Record Date"). In the case of any Demand
Special Meeting, (i) the Meeting Record Date shall be not later than the
30th day after the Delivery Date and (ii) if the Board of Directors fails
to fix the Meeting Record Date within 30 days after the Delivery Date,
then the close of business on such 30th day shall be the Meeting Record
Date. The shareholders of record on the Meeting Record Date shall be the
shareholders entitled to notice of and to vote at the meeting. Except as
provided by the Wisconsin Business Corporation Law for a court-ordered
adjournment, a determination of shareholders entitled to notice of or to
vote at any Annual Meeting or Special Meeting is effective for any
adjournment of such meeting unless the Board of Directors fixes a new
Meeting Record Date, which it shall do if the meeting is adjourned to a
date more than 120 days after the date fixed for the original meeting.
The Board of Directors may also fix in advance a date as the record date
for the purpose of determining shareholders entitled to take any other
action or determining shareholders for any other purpose. Such record
date shall be not more than 70 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be
taken. The record date for determining shareholders entitled to a
distribution (other than a distribution involving a purchase, redemption
or other acquisition of the corporation's shares) or a share dividend is
the date on which the Board of Directors authorizes the distribution or
share dividend, as the case may be, unless the Board of Directors fixes a
different record date.
2.7. Voting Records. After a Meeting Record Date has been fixed, the
corporation shall prepare a list of the names of all of the shareholders
entitled to notice of the meeting. The list shall be arranged by class or
series of shares, if any, and show the address of and number of shares
held by each shareholder. Such list shall be available for inspection by
any shareholder, beginning two business days after notice of the meeting
is given for which the list was prepared and continuing to the date of the
meeting, at the corporation's principal office or at a place identified in
the meeting notice in the city where the meeting will be held. A
shareholder or his agent may, on written demand, inspect and, subject to
the limitations imposed by the Wisconsin Business Corporation Law, copy
the list, during regular business hours and at his expense, during the
period that it is available for inspection pursuant to this Section 2.7.
The corporation shall make the shareholders' list available at the meeting
and any shareholder or his agent or attorney may inspect the list at any
time during the meeting or any adjournment thereof. Refusal or failure to
prepare or make available the shareholders' list shall not affect the
validity of any action taken at a meeting of shareholders.
2.8. Quorum and Voting Requirements; Postponements; Adjournments.
(a) Shares entitled to vote as a separate voting group may take
action on a matter at an Annual Meeting or Special Meeting only if a
quorum of those shares exists with respect to that matter. If the
corporation has only one class of stock outstanding, such class shall
constitute a separate voting group for purposes of this Section 2.8.
Except as otherwise provided in the articles of incorporation of the
corporation or the Wisconsin Business Corporation Law, a majority of the
votes entitled to be cast on the matter shall constitute a quorum of the
voting group for action on that matter. Once a share is represented for
any purpose at any Annual Meeting or Special Meeting, other than for the
purpose of objecting to holding the meting or transacting business at the
meeting, it is considered present for purposes of determining whether a
quorum exists for the remainder of the meeting and for any adjournment of
that meeting unless a new Meeting Record Date is or must be set for the
adjourned meeting. If a quorum exists, except in the case of the election
of directors, action on a matter shall be approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing
the action, unless the articles of incorporation of the corporation or the
Wisconsin Business Corporation Law requires a greater number of
affirmative votes. Unless otherwise provided in the articles of
incorporation of the corporation, each director to be elected shall be
elected by a plurality of the votes cast by the shares entitled to vote in
the election of directors at any Annual Meeting or Special Meeting at
which a quorum is present.
(b) The Board of Directors acting by resolution may postpone
and reschedule any previously scheduled Annual Meeting or Special Meeting;
provided, however, that a Demand Special Meeting shall not be postponed
beyond the 60th day following the Delivery Date. Any Annual Meeting or
Special Meeting may be adjourned from time to time, whether or not there
is a quorum, (i) at anytime, upon a resolution of shareholders if the
votes cast in favor of such resolution by the holders of shares of each
voting group entitled to vote on any matter theretofore properly brought
before the meeting exceed the number of votes cast against such resolution
by the holders of shares of each such voting group or (ii) at any time
prior to the transaction of any business at such meeting, by the President
or the Board of Directors (acting by resolution). No notice of the time
and place of adjourned meetings need be given except as required by the
Wisconsin Business Corporation Law. At any adjourned meeting at which a
quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
2.9. Conduct of Meeting. The President, and in his absence, a Vice
President in the order provided under Section 4.7, and in their absence,
any person chosen by the shareholders present shall call any Annual
Meeting or Special Meeting to order and shall act as chairman of such
meeting, and the Secretary of the corporation shall act as secretary of
all Annual Meetings and Special Meetings, but, in the absence of the
Secretary, the presiding officer may appoint any other person to act as
secretary of the meeting.
2.10. Proxies. At any Annual Meeting or Special Meeting, a
shareholder entitled to vote may vote in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for the
shareholder by signing an appointment form, either personally or by his
attorney-in-fact. An appointment of proxy is effective when received by
the Secretary or other officer or agent of the corporation authorized to
tabulate votes. An appointment is valid for 11 months from the date of
its signing unless a different period is expressly provided in the
appointment form. Unless otherwise provided, a proxy may be revoked at
any time before it is voted, either by written notice filed with the
Secretary or the acting secretary of the meeting or by oral notice given
by the shareholder to the presiding officer during the meeting. The
presence of a shareholder who has filed his appointment of proxy shall not
of itself constitute a revocation. The Board of Directors shall have the
power and authority to make rules establishing presumptions as to the
validity and sufficiency of proxies.
2.11. Voting of Shares.
(a) Each outstanding share shall be entitled to one vote upon
each matter submitted to a vote at an Annual Meeting or Special Meeting,
except to the extent that the voting rights of the shares of any class or
classes are enlarged, limited or denied by the Wisconsin Business
Corporation Law or the articles of incorporation of the corporation.
(b) Shares held by another corporation, if a sufficient number
of shares entitled to elect a majority of the directors of such other
corporation is held directly or indirectly by this corporation, shall not
be entitled to vote at any Annual Meeting or Special Meeting, but shares
held in a fiduciary capacity may be voted.
2.12. Acceptance of Instruments Showing Shareholder Action. If
the name signed on a vote, consent, waiver or proxy appointment
corresponds to the name of a shareholder, the corporation if acting in
good faith, may accept the vote, consent, waiver or proxy appointment and
give it effect as the act of a shareholder. If the name signed on a vote,
consent, waiver or proxy appointment does not correspond to the name of a
shareholder, the corporation may accept the vote, consent, waiver or proxy
appointment and give it effect as the act of the shareholder if any of the
following apply:
(a) The shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity.
(b) The name purports to be that of a personal representative,
administrator, executor, guardian, or conservator representing the
shareholder and, if the corporation requests, evidence of fiduciary status
acceptable to the corporation is presented with respect to the vote,
consent, waiver or proxy appointment.
(c) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the corporation requests,
evidence of this status acceptable to the corporation is presented with
respect to the vote, consent, waiver or proxy appointment.
(d) The name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
corporation requests, evidence acceptable to the corporation of the
signatory's authority to sign for the shareholder is presented with
respect to the vote, consent, waiver or proxy appointment.
(e) Two or more persons are the shareholders as co-owners or
fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all
co-owners.
The corporation may reject a vote, consent, waiver or proxy
appointment if the Secretary or other officer or agent of the corporation
who is authorized to tabulate votes, acting in good faith, has reasonable
basis for doubt about the validity of the signature on its or about the
signatory's authority to sign for the shareholder.
2.13. Waiver of Notice by Shareholders. A shareholder may waive
any notice required by the Wisconsin Business Corporation Law, the
articles of incorporation of the corporation or these by-laws before or
after the date and time stated in the notice. The waiver shall be in
writing and signed by the shareholder entitled to the notice, contain the
same information that would have been required in the notice under
applicable provisions of the Wisconsin Business Corporation Law (except
that the time and place of meeting need not be stated) and be delivered to
the corporation for inclusion in the corporate records. A shareholder's
attendance at any Annual Meeting or Special Meeting, in person or by
proxy, waives objection to all of the following: (a) lack of notice or
defective notice of the meeting, unless the shareholder at the beginning
of the meeting or promptly upon arrival objects to holding the meeting or
transacting business at the meeting; and (b) consideration of a particular
matter at the meeting that is not within the purpose described in the
meeting notice, unless the shareholder objects to considering the matter
when it is presented.
2.14. Unanimous Consent without Meeting. Any action required or
permitted by the articles of incorporation of the corporation or these by-
laws or any provision of the Wisconsin Business Corporation Law to be
taken at an Annual Meeting or Special Meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall
be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof.
2.15. Notice of Shareholder Business and Nomination of Directors.
(a) Annual Meetings.
(i) Nominations of persons for election to the Board of
Directors of the corporation and the proposal of business to be
considered by the shareholders may be made at an Annual Meeting (A)
pursuant to the corporation's notice of meeting, (B) by or at the
direction of the Board of Directors or (C) by any shareholder of the
corporation who is a shareholder of record at the time of giving of
notice provided for in this by-law and who is entitled to vote at the
meeting and complies with the notice procedures set forth in this
Section 2.15.
(ii) For nominations or other business to be properly
brought before an Annual Meeting by a shareholder pursuant to clause
(C) of paragraph (a)(i) of this Section 2.15, the shareholder must
have given timely notice thereof in writing to the Secretary of the
corporation. To be timely, a shareholder's notice shall be received
by the Secretary of the corporation at the principal offices of the
corporation not less than 60 days nor more than 90 days prior to the
second Thursday in the month of May; provided, however, that in the
event that the date of the Annual Meeting is advanced by more than 30
days or delayed by more than 60 days from the second Thursday in the
month of May, notice by the shareholder to be timely must be so
received not earlier than the 90th day prior to the date of such
Annual Meeting and not later than the close of business on the later
of (x) the 60th day prior to such Annual Meeting and (y) the 10th day
following the day on which public announcement of the date of such
meeting is first made. Such shareholder's notice shall be signed by
the shareholder of record who intends to make the nomination or
introduce the other business (or his duly authorized proxy or other
representative), shall bear the date of signature of such shareholder
(or proxy or other representative) and shall set forth: (A) the name
and address, as they appear on this corporation's books, of such
shareholder and the beneficial owner or owners, if any, on whose
behalf the nomination or proposal is made; (B) the class and number
of shares of the corporation which are beneficially owned by such
shareholder or beneficial owner or owners; (C) a representation that
such shareholder is a holder of record of shares of the corporation
entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to make the nomination or introduce the other
business specified in the notice; (D) in the case of any proposed
nomination for election or re-election as a director, (I) the name
and residence address of the person or person to be nominated, (II) a
description of all arrangements or understandings between such
shareholder or beneficial owner or owners and each nominee and any
other person or persons (naming such person or persons) pursuant to
which the nomination is to be made by such shareholder, (III) such
other information regarding each nominee proposed by such shareholder
as would be required to be disclosed in solicitations of proxies for
elections of directors, or would be otherwise required to be
disclosed, in each case pursuant to Regulation 14A under the Exchange
Act, including any information that would be required to be included
in a proxy statement filed pursuant to Regulation 14A had the nominee
been nominated by the Board of Directors and (IV) the written consent
of each nominee to be named in a proxy statement and to serve as a
director of the corporation if so elected; and (E) in the case of any
other business that such shareholder proposes to bring before the
meeting, (I) a brief description of the business desired to be
brought before the meeting and, if such business includes a proposal
to amend these by-laws, the language of the proposed amendment, (II)
such shareholder's and beneficial owner's or owners' reasons for
conducting such business at the meeting and (III) any material
interest in such business of such shareholder and beneficial owner or
owners.
(iii) Notwithstanding anything in the second sentence
of paragraph (a)(ii) of this Section 2.15 to the contrary, in the
event that the number of directors to be elected to the Board of
Directors of the corporation is increased and there is no public
announcement naming all of the nominees for director or specifying
the size of the increased Board of Directors made by the corporation
at least 70 days prior to the second Thursday in the month of May, a
shareholder's notice required by Section 2.15 shall also be
considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be received by the
Secretary at the principal offices of the corporation not later than
the close of business on the 10th day following the day on which such
public announcement is first made by the corporation.
(b) Special Meetings. Only such business shall be conducted at
a Special Meeting as shall have been described in the notice of meeting
sent to shareholders pursuant to Section 2.5 of these by-laws.
Nominations of person for election to the Board of Directors may be made
at a Special Meeting at which directors are to be elected pursuant to such
notice of meeting (i) by or at the direction of the Board of Directors or
(ii) by any shareholder of the corporation who (A) is a shareholder of
record at the time of giving such notice of meeting, (B) is entitled to
vote at the meeting and (C) complies with the notice procedures set forth
in this Section 2.15. Any shareholder desiring to nominate persons for
election to the Board of Directors at such a Special Meeting shall cause a
written notice to be received by the Secretary of the corporation at the
principal offices of the corporation not earlier than 90 days prior to
such Special Meeting and not later than the close of business on the later
of (x) the 60th day prior to such Special Meeting and (y) the 10th day
following the day on which public announcement is first made of the date
of such Special Meeting and of the nominees proposed by the Board of
Directors to be elected to such meeting. Such written notice shall be
signed by the shareholder of record who intends to make the nomination (or
his duly authorized proxy or other representative), shall bear the date of
signature of such shareholder (or proxy or other representative) and shall
set forth: (A) the name and address, as they appear on the corporation's
books, of such shareholder and the beneficial owner or owners, if any, on
whose behalf the nomination is made; (B) the class and number of shares of
the corporation which are beneficially owned by such shareholder or
beneficial owner or owners; (C) a representation that such shareholder is
a holder of record of shares of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to make
the nomination specified in the notice; (D) the name and residence address
of the person or persons to be nominated; (E) a description of all
arrangements or understandings between such shareholder or beneficial
owner or owners and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination is to be made by
such shareholder; (F) such other information regarding each nominee
proposed by such shareholder as would be required to be disclosed in
solicitations of proxies for elections of directors, or would be otherwise
required to be disclosed, in each case pursuant to Regulation 14A under
the Exchange Act, including any information that would be required to be
included in a proxy statement filed pursuant to Regulation 14A had the
nominee been nominated by the Board of Directors; and (G) the written
consent of each nominee to be named in a proxy statement and to serve as a
director or the corporation if so elected.
(c) General.
(i) Except as provided in the corporation's articles of
incorporation, only persons who are nominated in accordance with the
procedures set forth in this Section 2.15 shall be eligible to serve
as directors. Only such business shall be conducted at an Annual
Meeting or Special Meeting as shall have been brought before such
meeting in accordance with the procedures set forth in this Section
2.15. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made in accordance with the procedures set
forth in this Section 2.15 and, if any proposed nomination or
business is not in compliance with this Section 2.15, to declare that
such defective proposal shall be disregarded.
(ii) For purposes of this Section 2.15, "public
announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this
Section 2.15, a shareholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section
2.15. Nothing in this Section 2.15 shall be deemed to limit the
corporation's obligation to include shareholder proposals in its
proxy statement if such inclusion is required by Rule 14a-8 under the
Exchange Act.
ARTICLE III. BOARD OF DIRECTORS
3.1. General Powers; Number and Tenure.
(a) All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation shall be
managed under the direction of, its Board of Directors.
(b) Except as provided in the corporation's articles of
incorporation, the number of directors of the corporation shall be five
(5) who are elected by the shareholders for a one year term at the annual
meeting of shareholders.
(c) Notwithstanding the provisions of Section 3.1(b), the term
of a director who is an officer of the corporation shall immediately cease
at any time that such director is no longer an officer of the corporation.
3.2. Resignations and Qualifications. A director may resign at any
time by delivering written notice which complies with the Wisconsin
Business Corporation Law to the Chairman of the Board or to the
corporation. A director's resignation is effective when the notice is
delivered unless the notice specifies a later effective date. Directors
need not be residents of the State of Wisconsin or shareholders of the
corporation.
3.3. Regular Meeting. A regular meeting of the Board of Directors
shall be held without other notice than this by-law immediately after the
Annual Meeting, and each adjourned session thereof. The place of such
regular meeting shall be the same as the place of the Annual Meeting which
precedes it, or such other suitable place as may be announced at such
Annual Meeting. The Board of Directors may provide, by resolution, the
time and place, either within or without the State of Wisconsin, for the
holding of additional regular meetings without other notice than such
resolution.
3.4. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the
President or any two directors. The Chairman of the Board or the
President may fix any place, either within or without the State of
Wisconsin, as the place for holding any special meeting of the Board of
Directors, and, if no other place is fixed, the place of the meeting shall
be the principal office of the corporation in the State of Wisconsin.
3.5. Notice; Waiver. Notice of each meeting of the Board of
Directors (unless otherwise provided in or pursuant to Section 3.3) shall
be given by written notice delivered or communicated in person, by
telegram, facsimile or other form of wire or wireless communication, or by
mail or private carrier to each director at his business address or such
other address as a director shall have designated in writing and filed
with the Secretary, in each case not less than 48 hours prior to the time
of the meeting. If mailed, such notice shall be deemed to be effective
when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, such notice shall be
deemed to be effective when the telegram is delivered to the telegraph
company. If notice is give by private carrier, such notice shall be
deemed to be effective when the notice is delivered to the private
carrier. Whenever any notice whatever is required to be given to any
director of the corporation under the articles of incorporation of the
corporation or these by-laws or any provision of the Wisconsin Business
Corporation Law, a waiver thereof in writing, signed at any time, whether
before or after the time of meeting, by the director entitled to such
notice, shall be deemed equivalent to the giving of such notice. The
corporation shall retain any such waiver as part of the permanent
corporate records. A director's attendance at or participation in a
meeting waives any required notice to him of the meeting unless the
director at the beginning of the meeting or promptly upon his arrival
objects to holding the meeting or transacting business at the meeting and
does not thereafter vote for or assent to action taken at the meeting.
Neither the business to be transacted at, nor the purpose of, any regular
or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
3.6. Quorum. Except as otherwise provided by the Wisconsin Business
Corporation Law or by the articles of incorporation of the corporation or
these by-laws, a majority of the directors set forth in Section 3.1 shall
constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but a majority of the directors present (though less
than such quorum) may adjourn the meeting from time to time without
further notice.
3.7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
Board of Directors, unless the act of a greater number is required by the
Wisconsin Business Corporation Law or by the articles of incorporation of
the corporation or these by-laws.
3.8. Conduct of Meetings. The Chairman of the Board, and in his
absence, a Vice President in the order provided under Section 4.7, and in
their absence, any director chosen by the directors present, shall call
meetings of the Board of Directors to order and shall act as chairman of
the meeting. The Secretary of the corporation shall act as secretary of
all meetings of the Board of Directors but in the absence of the
Secretary, the presiding officer may appoint any Assistant Secretary or
any director or other person present to act as secretary of the meeting.
Minutes of any regular or special meetings of the Board of Directors shall
be prepared and distributed to each director.
3.9. Compensation. The Board of Directors, irrespective of any
personal interest of any of its members, may establish reasonable
compensation of all directors for services to the corporation as
directors, officers or otherwise, or may delegate such authority to an
appropriate committee. The Board of Directors also shall have authority
to provide for or delegate authority to an appropriate committee to
provide for reasonable pensions, disability or death benefits, and other
benefits or payments, to directors, officers and employees and to their
estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the
corporation.
3.10. Presumption of Assent. A director of the corporation who
is present at a meeting of the Board of Directors or a committee thereof
of which he is a member at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless any of the
following occurs: (a) the director objects at the beginning of the
meeting or promptly upon his arrival to holding the meeting or transacting
business at the meeting; (b) the director's dissent or abstention from the
action taken is entered in the minutes of the meeting; or (c) the director
delivers written notice that complies with the Wisconsin Business
Corporation Law of his dissent or abstention to the presiding officer of
the meeting before its adjournment or to the corporation immediately after
adjournment of the meeting. Such right to dissent or abstain shall not
apply to a director who voted in favor of such action.
3.11. Committees. The Board of Directors by resolution adopted
by the affirmative vote of a majority of the number of directors set forth
in Section 3.1 may create one or more committees, appoint members of the
Board of Directors to serve on the committees and designate other members
of the Board of Directors to serve as alternates. Alternate members of a
committee shall take the place of any absent member or members at any
meeting of such committee upon request of the President or upon request of
the chairman of the meeting. Each committee shall have two or more
members who shall, unless otherwise provided by the Board of Directors,
serve at the pleasure of the Board of Directors. A committee may be
authorized to exercise the authority of the Board of Directors, except
that a committee may not do any of the following: (a) authorize
distributions; (b) approve or propose to shareholders action that the
Wisconsin Business Corporation Law requires to be approved by
shareholders; (c) fill vacancies on the Board of Directors or, unless the
Board of Directors provides by resolution that vacancies on a committee
shall be filled by the affirmative vote of the remaining committee
members, on any Board committee; (d) amend the articles of incorporation
of the corporation; (e) adopt, amend or repeal by-laws; (f) approve a plan
of merger not requiring shareholder approval; (g) authorize or approve
requisition of shares, except according to a formula or method prescribed
by the Board of Directors; and (h) authorize or approve the issuance or
sale or contract for sale of shares, or determine the designation and
relative rights, preferences and limitations of a class or series of
shares, except that the Board of Directors may authorize a committee to do
so within limits prescribed by the Board of Directors. Unless otherwise
provided by the Board of Directors in creating the committee, a committee
may employ counsel, accountants and other consultants to assist it in the
exercise of its authority.
3.12. Telephonic Meetings. Except as herein provided and
notwithstanding any place set forth in the notice of the meeting or these
by-laws, members of the Board of Directors (and any committee thereof) may
participate in regular or special meetings by, or through the use of, any
means of communication by which all participants may simultaneously hear
each other, such as by conference telephone. If a meeting is conducted by
such means, then at the commencement of such meeting the presiding officer
shall inform the participating directors that a meeting is taking place at
which official business may be transacted. Any participant in a meeting
by such means shall be deemed present in person at such meeting.
Notwithstanding the foregoing, no action may be taken at any meeting held
by such means on any particular matter which the presiding officer
determines, in his sole discretion, to be inappropriate under the
circumstances for action at a meeting held by such means. Such
determination shall be made and announced in advance of such meeting.
3.13. Unanimous Consent without Meeting. Any action required or
permitted by the articles of incorporation of the corporation or these by-
laws or any provision of the Wisconsin Business Corporation Law to be
taken by the Board of Directors (or any committee thereof) at a meeting
may be taken without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by all members of the Board of Directors
or of the committee, as the case may be, then in office. Such action
shall be effective when the last director or committee member signs the
consent, unless the consent specifies a different effective date.
ARTICLE IV. OFFICERS
4.1. Number. The principal officers of the corporation shall be a
Chairman of the Board of Directors, a President, any number of Vice
Presidents, a Secretary, and a Treasurer, each of whom shall be elected by
the Board of Directors. Such other officers and assistant officers as may
be deemed necessary may be elected or appointed by the Board of Directors.
The Board of Directors may also authorize any duly appointed officer to
appoint one or more officers or assistant officers. Any two or more
offices may be held by the same person.
4.2. Election and Term of Office. The officers of the corporation to
be elected by the Board of Directors shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held
after each Annual Meeting. If the election of officers shall not be held
at such meeting, such election shall be held as soon thereafter as
conveniently may be. Each officer shall hold office until his successor
shall have been duly elected or until his prior death, resignation or
removal.
4.3. Removal. The Board of Directors may remove any officer and,
unless restricted by the Board of Directors or these by-laws, a officer
may remove any officer or assistant officer appointed by that officer, at
any time, with or without cause and notwithstanding the contract rights,
if any, of the officer removed. Election or appointment shall not of
itself create contract rights.
4.4. Resignations and Vacancies. An officer may resign at any time
by delivering notice to the corporation that complies with the Wisconsin
Business Corporation Law. The resignation shall be effective when the
notice is delivered, unless the notice specifies a later effective date
and the corporation accepts the later effective date. A vacancy in any
principal office because of death, resignation, removal, disqualification
or otherwise, shall be filled by the Board of Directors for the unexpired
portion of the term. If a resignation of a officer is effective at a
later date as contemplated by this Section 4.4, the Board of Directors may
fill the pending vacancy before the effective date if the Board provides
that the successor may not take office until the effective date.
4.5. Chairman of the Board. The Chairman of the Board, if present
and acting, shall preside at all meetings of the Board of Directors and
perform all such other duties as may be prescribed by the Board from time
to time.
4.6. President. The President shall preside at all Annual Meetings
and Special Meetings and at all meetings of the Board of Directors. The
President shall be the principal executive officer of the corporation and,
subject to the control of the Board of Directors, shall in general
supervise and control all of the business and affairs of the corporation.
He shall have authority, subject to such rules as may be prescribed by the
Board of Directors, to appoint such agents and employees of the
corporation as he shall deem necessary, to prescribe their powers, duties
and compensation, and to delegate authority to them. Such agents and
employees shall hold office at the discretion of the President. He shall
have authority to sign, execute and acknowledge, on behalf of the
corporation, all deeds, mortgages, bonds, stock certificates, contracts,
leases, reports and all other documents or instruments necessary or proper
to be executed in the course of the corporation's regular business, or
which shall be authorized by resolution of the Board of Directors; and,
except as otherwise provided by law or the Board of Directors, he may
authorize any officer or agent of the corporation to sign, execute and
acknowledge such documents or instruments in his place and stead.
4.7. The Vice Presidents. In the absence of the President or in the
event of his death, inability or refusal to act, or in the event for any
reason it shall be impracticable for the President to act personally, the
Vice President (or in the event there be more than one Vice President, the
Vice Presidents in the order designated by the Board of Directors, or in
the absence of any designation, then in the order of their election) shall
perform the duties of the President, and, when so acting, shall have all
the powers of and be subject to all the restrictions upon the President.
Any Vice President may sign, with the Secretary or Assistant Secretary,
certificates for shares of the corporation and shall perform such other
duties and have such authority as from time to time may be delegated or
assigned to him by the President or the Board of Directors. The execution
of any instrument of the corporation by any Vice President shall be
conclusive evidence, as to third parties, of his authority to act in the
stead of the President.
4.8. The Secretary. The Secretary shall: (a) keep the minutes of
Annual Meetings and Special Meetings and of meetings of the Board of
Directors in one or more books provided for that purpose (including
records of actions taken without a meeting); (b) see that all notices are
duly given in accordance with the provisions of these by-laws or as
required by the Wisconsin Business Corporation Law; (c) be custodian of
the corporate records and of the seal of the corporation and see that the
seal of the corporation is affixed to all documents the execution of which
on behalf of the corporation under its seal is duly authorized; (d)
maintain a record of the shareholders of the corporation, in the form that
permits preparation of a list of the names and addresses of all
shareholders, by class or series of shares and showing the number and
class or series of shares held by each shareholder; (e) sign with the
President, or a Vice President, certificates for shares of the
corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; (f) have general charge of the stock
transfer books of the corporation; and (g) in general perform all duties
incident to the office of Secretary and have such other duties and
exercise such authority as from time to time may be delegated or assigned
to him by the President or by the Board of Directors.
4.9. The Treasurer. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the
corporation; (b) maintain appropriate accounting records; (c) receive and
give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the
corporation in such banks, trust companies or other depositaries as shall
be selected in accordance with the provisions of Section 5.4; and (d) in
general perform all of the duties incident to the office of Treasurer and
have such other duties and exercise such other authority as from time to
time may be delegated or assigned to him by the President or by the Board
of Directors. If required by the Board of Directors, the Treasurer shall
give a bond for the faithful discharge of his duties in such sum and with
such surety or sureties as the Board of Directors shall determine.
4.10. Assistant Secretaries and Assistant Treasurers. There
shall be such number of Assistant Secretaries and Assistant Treasurers as
the Board of Directors may from time to time authorize. The Assistant
Secretaries may sign with the President or a Vice President certificates
for shares of the corporation the issuance of which shall have been
authorized by a resolution of the Board of Directors. The Assistant
Treasurers shall respectively, if required by the Board of Directors, give
bonds for the faithful discharge of their duties in such sums and with
such sureties as the Board of Directors shall determine. The Assistant
Secretaries and Assistant Treasurers, in general, shall perform such
duties and have such authority as shall from time to time be delegated or
assigned to them by the Secretary or the Treasurer, respectively, or by
the President or the Board of Directors.
4.11. Other Assistants and Acting Officers. The Board of
Directors shall have the power to appoint, or to authorize any duly
appointed officer of the corporation to appoint, any person to act as
assistant to any officer, or as agent for the corporation in his stead, or
to perform the duties of such officer whenever for any reason it is
impracticable for such officer to act personally, and such assistant or
acting officer or other agent so appointed by the Board of Directors or
the appointing officer shall have the power to perform all the duties of
the office to which he is so appointed to be an assistant, or as to which
he is so appointed to act, except as such power may be otherwise defined
or restricted by the Board of Directors or the appointing officer.
4.12. Salaries. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors or by a duly authorized
committee thereof, and no officer shall be prevented from receiving such
salary by reason of the fact that he is also a director of the
corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS; SPECIAL CORPORATE ACTS
5.1. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute or
deliver any instrument in the name of and on behalf of the corporation,
and such authorization may be general or confined to specific instances.
In the absence of other designation, all deeds, mortgages and instruments
of assignment or pledge made by the corporation shall be executed in the
name of the corporation by the President or one of the Vice Presidents and
by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer; the Secretary or an Assistant Secretary, when necessary or
required, shall affix the corporate seal thereto; and when so executed no
other party to such instrument or any third party shall be required to
make any inquiry into the authority of the signing officer or officers.
5.2. Loans. No indebtedness for borrowed money shall be contracted
on behalf of the corporation and no evidences of such indebtedness shall
be issued in its name unless authorized by or under the authority of a
resolution of the Board of Directors. Such authorization may be general
or confined to specific instances.
5.3. Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers,
agent or agents of the corporation and in such manner as shall from time
to time be determined by or under the authority of a resolution of the
Board of Directors.
5.4. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in
such banks, trust companies or other depositaries as may be selected by or
under the authority of a resolution of the Board of Directors.
5.5. Voting of Securities Owned by this Corporation. Subject always
to the specific directions of the Board of Directors, (a) any shares or
other securities issued by any other corporation and owned or controlled
by this corporation may be voted at any meeting of security holders of
such other corporation by the President of this corporation if he be
present or in his absence by any Vice President of this corporation who
may be present, and (b) whenever, in the judgment of the President, or in
his absence, of any Vice President, it is desirable for this corporation
to execute a proxy or written consent in respect to any shares or other
securities issued by any other corporation and owned by this corporation,
such proxy or consent shall be executed in the name of this corporation by
the President or one of the Vice Presidents of this corporation, without
necessity of any authorization by the Board of Directors, affixation of
corporate seal or countersignature or attestation by another officer. Any
person or persons designated in the manner above stated as the proxy or
proxies of this corporation shall have full right, power and authority to
vote the shares or other securities issued by such other corporation and
owned by this corporation the same as such shares or other securities
might be voted by this corporation.
5.6. No Nominee Procedures. The corporation has not established, and
nothing in these by-laws shall be deemed to establish, any procedure by
which a beneficial owner of the corporation's shares that are registered
in the name of a nominee is recognized by the corporation as the
shareholder under Section 180.0723 of the Wisconsin Business Corporation
Law.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1. Certificates for Shares. Certificates representing shares of
the corporation shall be in such form, consistent with the Wisconsin
Business Corporation Law, as shall be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the corporation.
All certificates surrendered to the corporation for transfer shall be
canceled and no new certificate shall be issued until the former
certificate for a like number of shares shall have been surrendered and
canceled, except as provided in Section 6.6.
6.2. Facsimile Signatures and Seal. The seal of the corporation on
any certificates for shares may be a facsimile. The signature of the
President, a Vice President and the Secretary or Assistant Secretary upon
a certificate may be facsimiles if the certificate is manually signed on
behalf of a transfer agent, or a registrar, other than the corporation
itself or a employee of the corporation.
6.3. Signature by Former Officers. In case any officer, who has
signed or whose facsimile signature has been placed upon any certificate
for shares, shall have ceased to be such officer before such certificate
is issued, it may be issued by the corporation with the same effect as if
he were such officer at the date of its issue.
6.4. Transfer of Shares. Prior to due presentment of a certificate
for shares for registration of transfer the corporation may treat the
registered owner of such shares as the person exclusively entitled to
vote, to receive notifications and otherwise to have and exercise all the
rights and power of an owner. Where a certificate for shares is presented
to the corporation with a request to register for transfer, the
corporation shall not be liable to the owner or any other person suffering
loss as a result of such registration of transfer if (a) there were on or
with the certificate the necessary endorsements, and (b) the corporation
had no duty to inquire into adverse claims or has discharged any such
duty. The corporation may require reasonable assurance that said
endorsements are genuine and effective and compliance with such other
regulations as may be prescribed by or under the authority of the Board of
Directors.
6.5. Restrictions on Transfer. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the corporation upon the transfer of such shares.
6.6. Lost, Destroyed or Stolen Certificates. The Board of Directors
may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged
to have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate of stock to be lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the person requesting
such new certificate or certificates, or his or her legal representative,
to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to
the certificate alleged to have been lost, stolen or destroyed.
6.7. Consideration for Shares. The Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or
intangible property or benefit to the corporation, including cash,
promissory notes, services performed, contracts for services to be
performed or other securities of the corporation. Before the corporation
issues shares, the Board of Directors shall determine that the
consideration received or to be received for the shares to be issued is
adequate. In the absence of a resolution adopted by the Board of
Directors expressly determining that the consideration received or to be
received is adequate, Board approval of the issuance of the shares shall
be deemed to constitute such a determination. The determination of the
Board of Directors is conclusive insofar as the adequacy of consideration
for the issuance of shares relates to whether the shares are validly
issued, fully paid and nonassessable. The corporation may place in escrow
shares issued in whole or in part for a contract for future services or
benefits, a promissory note, or other property to be issued in the future,
or make other arrangements to restrict the transfer of the shares, and may
credit distributions in respect of the shares against their purchase
price, until the services are performed, the benefits or property are
received or the promissory note is paid. If the services are not
performed, the benefits or property are not received or the promissory
note is not paid, the corporation may cancel, in whole or in part, the
shares escrowed or restricted and the distributions credited.
6.8. Stock Regulations. The Board of Directors shall have the power
and authority to make all such further rules and regulations not
inconsistent with the statutes of the State of Wisconsin as it may deem
expedient concerning the issue, transfer and registration of certificates
representing shares of the corporation.
ARTICLE VII. SEAL
7.1. The Board of Directors may provide a corporate seal in an
appropriate form.
ARTICLE VIII. FISCAL YEAR
8.1. The fiscal year of the corporation shall be as fixed by
resolution of the Board of Directors.
ARTICLE IX. INDEMNIFICATION
9.1. Certain Definitions. All capitalized terms used in this Article
IX and not otherwise hereinafter defined in this Section 9.1 shall have
the meaning set forth in Section 180.0850 of the Statute (as defined
herein). The following terms (including any plural forms thereof) used in
this Article IX shall be defined as follows:
(a) "Affiliate" shall include, without limitation, any
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise that directly or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control
with, the Corporation.
(b) "Authority" shall mean the entity selected by the Director
or Officer to determine his or her right to indemnification pursuant to
Section 9.4.
(c) "Board" shall mean the entire then elected and serving
Board of Directors of the Corporation, including all members thereof who
are Parties to the subject Proceeding or any related Proceeding.
(d) "Breach of Duty" shall mean the Director or Officer
breached or failed to perform his or her duties to the Corporation and his
or her breach of or failure to perform those duties is determined, in
accordance with Section 9.4, to constitute misconduct under Section
180.0851(2)(a)1, 2, 3 or 4 of the Statute.
(e) "Corporation," as used herein and as defined in Statute and
incorporated by reference into the definitions of certain other
capitalized terms used herein, shall mean this Corporation, including,
without limitation, any successor corporation or entity to this
Corporation by way of merger, consolidation or acquisition of all or
substantially all of the capital stock or assets of this Corporation.
(f) "Director or Officer" shall have the meaning set forth in
the Statute; provided, that, for purposes of this Article IX, it shall be
conclusively presumed that any Director or Officer serving as a director,
officer, partner, trustee, member of any governing or decision-making
committee, employee or agent of an Affiliate shall be so serving at the
request of the Corporation.
(g) "Disinterested Quorum" shall mean a quorum of the Board who
are not Parties to the subject Proceeding or any related Proceeding.
(h) "Party" shall have the meaning set forth in the Statute;
provided, that, for purposes of this Article IX, the term "Party" shall
also include any Director or Officer or employee who is or was a witness
in a Proceeding at a time when he or she has not otherwise been formally
named a Party thereto.
(i) "Proceeding" shall have the meaning set forth in the
Statute; provided, that, in accordance with Section 180.0859 of the
Statute and for purposes of this Article IX, the term "Proceeding" shall
also include all Proceedings (i) brought under (in whole or in part) the
Securities Act of 1933, as amended, the Exchange Act, their respective
state counterparts, and/or any rule or regulation promulgated under any of
the foregoing; (ii) brought before an Authority or otherwise to enforce
rights hereunder; (iii) any appeal from a Proceeding; and (iv) any
Proceeding in which the Director or Officer is a plaintiff or petitioner
because he or she is a Director or Officer; provided, however, that any
such Proceeding under this subsection (iv) must be authorized by a
majority vote of a Disinterested Quorum.
(j) "Statute" shall mean Sections 180.0850 through 180.0859,
inclusive, of the Wisconsin Business Corporation Law, Chapter 180 of the
Wisconsin Statutes, as the same shall then be in effect, including any
amendments thereto, but, in the case of any such amendment, only to the
extent such amendment permits or requires the Corporation to provide
broader indemnification rights than the Statute permitted or required the
Corporation to provide prior to such amendment.
9.2. Mandatory Indemnification. To the fullest extent permitted or
required by the Statute, the Corporation shall indemnify a Director or
Officer against all Liabilities incurred by or on behalf of such Director
or Officer in connection with a Proceeding in which the Director or
Officer is a Party because he or she is a Director or Officer.
9.3. Procedural Requirements.
(a) A Director or Officer who seeks indemnification under
Section 9.2 shall make a written request therefor to the Corporation.
Subject to Section 9.3(b), within 60 days of the Corporation's receipt of
such request, the Corporation shall pay or reimburse the Director or
Officer for the entire amount of Liabilities incurred by the Director or
Officer in connection with the subject Proceeding (net of any Expenses
previously advanced pursuant to Section 9.5).
(b) No indemnification shall be required to be paid by the
Corporation pursuant to Section 9.2 if, within such 60-day period, (i) a
Disinterested Quorum, by a majority vote thereof, determines that the
Director or Officer requesting indemnification engaged in misconduct
constituting a Breach of Duty or (ii) a Disinterested Quorum cannot be
obtained.
(c) In either case of nonpayment pursuant to Section 9.3(b),
the Board shall immediately authorize by resolution that an Authority, as
provided in Section 9.4, determine whether the Director's or Officer's
conduct constituted a Breach of Duty and, therefor, whether
indemnification should be denied hereunder.
(d) (i) If the Board does not authorize an Authority to
determine the Director's or Officer's right to indemnification hereunder
within such 60-day period and/or (ii) if indemnification of the requested
amount of Liabilities is paid by the Corporation, then it shall be
conclusively presumed for all purposes that a Disinterested Quorum has
affirmatively determined that the Director or Officer did not engage in
misconduct constituting a Breach of Duty and, in the case of subsection
(i) above (but not subsection (ii)), indemnification by the Corporation of
the requested amount of Liabilities shall be paid to the Director or
Officer immediately.
9.4. Procedural Requirements.
(a) If the Board authorizes an Authority to determine a
Director's or Officer's right to indemnification pursuant to Section 9.3,
then the Director or Officer requesting indemnification shall have the
absolute discretionary authority to select one of the following as such
Authority:
(i) An independent legal counsel; provided, that such
counsel shall be mutually selected by such Director or Officer and by
a majority vote of a Disinterested Quorum or, if a Disinterested
Quorum cannot be obtained, then by a majority vote of the Board;
(ii) A panel of three arbitrators selected from the panels
of arbitrators of the American Arbitration Association in Wisconsin;
provided, that (A) one arbitrator shall be selected by such Director
or Officer, the second arbitrator shall be selected by a majority
vote of a Disinterested Quorum or, if a Disinterested Quorum cannot
be obtained, then by a majority vote of the Board, and the third
arbitrator shall be selected by the two previously selected
arbitrators, and (B) in all other respects, such panel shall be
governed by the American Arbitration Association's then existing
Commercial Arbitration Rules; or
(iii) A court pursuant to and in accordance with
Section 180.0854 of the Statute.
(b) In any such determination by the selected Authority there
shall exist a rebuttable resumption that the Director's or Officer's
conduct did not constitute a Breach of Duty and that indemnification
against the requested amount of Liabilities is required. The burden of
rebutting such a presumption by clear and convincing evidence shall be on
the Corporation or such other party asserting that such indemnification
should not be allowed.
(c) The Authority shall make its determination within 60 days
of being selected and shall submit a written opinion of its conclusion
simultaneously to both the Corporation and the Director or Officer.
(d) If the Authority determines that indemnification is
required hereunder, the Corporation shall pay the entire requested amount
of Liabilities (net of any Expenses previously advanced pursuant to
Section 9.5), including interest thereon at a reasonable rate, as
determined by the Authority, within 10 days of receipt of the Authority's
opinion; provided, that, if it is determined by the Authority that a
Director or Officer is entitled to indemnification against Liabilities'
incurred in connection with some claims, issues or matters, but not as to
other claims, issues or matters, involved in the subject Proceeding, the
Corporation shall be required to pay (as set forth above) only the amount
of such requested Liabilities as the Authority shall deem appropriate in
light of all of the circumstances of such Proceeding.
(e) The determination by the Authority that indemnification is
required hereunder shall be binding upon the Corporation regardless of any
prior determination that the Director or Officer engaged in a Breach of
Duty.
(f) All expenses incurred in the determination process under
this Section 9.4 by either the Corporation or the Director or Officer,
including, without limitation, all Expenses of the selected Authority,
shall be paid by the Corporation.
9.5. Mandatory Advance of Expenses.
(a) The Corporation shall pay or reimburse from time to time or
at any time, within 10 days after the receipt of the Director's or
Officer's written request therefor, the reasonable Expenses of the
Director or Officer as such Expenses are incurred; provided, the following
conditions are satisfied:
(i) The Director or Officer furnishes to the Corporation
an executed written certificate affirming his or her good faith
belief that he or she has not engaged in misconduct which constitutes
a Breach of Duty; and
(ii) The Director or Officer furnishes to the Corporation
an unsecured executed written agreement to repay any advances made
under this Section 9.5 if it is ultimately determined by an Authority
that he or she is not entitled to be indemnified by the Corporation
for such Expenses pursuant to Section 9.4.
(b) If the Director or Officer must repay any previously
advanced Expenses pursuant to this Section 9.5, such Director or Officer
shall not be required to pay interest on such amounts.
9.6. Indemnification and Allowance of Expenses of Certain Others.
(a) The Board may, in its sole and absolute discretion as it
deems appropriate, pursuant to a majority vote thereof, indemnify a
director or officer of an Affiliate (who is not otherwise serving as a
Director or Officer) against all Liabilities, and shall advance the
reasonable Expenses, incurred by such director or officer in a Proceeding
to the same extent hereunder as if such director or officer incurred such
Liabilities because he or she was a Director or Officer, if such director
or officer is a Party thereto because he or she is or was a director or
officer of the Affiliate.
(b) The Corporation shall indemnify an employee who is not a
Director or Officer, to the extent he or she has been successful on the
merits or otherwise in defense of a Proceeding, for all Expenses incurred
in the Proceeding if the employee was a Party because he or she was an
employee of the Corporation.
(c) The Board may, in its sole and absolute discretion as it
deems appropriate, pursuant to a majority vote thereof, indemnify (to the
extent not otherwise provided in Section 9.6(b) hereof) against
Liabilities incurred by, and/or provide for the allowance of reasonable
Expenses of, an employee or authorized agent of the Corporation acting
within the scope of his or her duties as such and who is not otherwise a
Director or Officer.
9.7. Insurance. The Corporation may purchase and maintain insurance
on behalf of a Director or Officer or any individual who is or was an
employee or authorized agent of the Corporation against any Liability
asserted against or incurred by such individual in his or her capacity as
such or arising from his or her status as such, regardless of whether the
Corporation is required or permitted to indemnify against any such
Liability under this Article IX.
9.8. Notice to the Corporation. A Director, Officer or employee
shall promptly notify the Corporation in writing when he or she has actual
knowledge of a Proceeding which may result in a claim of indemnification
against Liabilities or allowance of Expenses hereunder, but the failure to
do so shall not relieve the Corporation of any liability to the Director,
Officer or employee hereunder unless the Corporation shall have been
irreparably prejudiced by such failure (as determined, in the case of
Directors or Officers, by an Authority selected pursuant to Section
9.4(a)).
9.9. Severability. If any provision of this Article IX shall be
deemed invalid or inoperative, or if a court of competent jurisdiction
determines that any of the provisions of this Article IX contravene public
policy, this Article IX shall be construed so that the remaining
provisions shall not be affected, but shall remain in full force and
effect, and any such provisions which are invalid or inoperative or which
contravene public policy shall be deemed, without further action or deed
by or on behalf of the Corporation, to be modified, amended and/or
limited, but only to the extent necessary to render the same valid and
enforceable; it being understood that it is the Corporation's intention to
provide the Directors and Officers with the broadest possible protection
against personal liability allowable under the Statute.
9.10. Nonexclusivity of Article IX. The rights of a Director,
Officer or employee (or any other person) granted under this Article IX
shall not be deemed exclusive of any other rights to indemnification
against Liabilities or allowance of Expenses which the Director, Officer
or employee (or such other person) may be entitled to under any written
agreement, Board resolution, vote of shareholders of the Corporation or
otherwise, including, without limitation, under the Statute. Nothing
contained in this Article IX shall be deemed to limit the Corporation's
obligations to indemnify against Liabilities or allow Expenses to a
Director Officer or employee under the Statute.
9.11. Contractual Nature of Article IX: Repeal or Limitation of
Rights. This Article IX shall be deemed to be a contract between the
Corporation and each Director, Officer and employee of the Corporation and
any repeal or other limitation of this Article IX or any repeal or
limitation of the Statute or any other applicable law shall not limit any
rights of indemnification against Liabilities or allowance of Expenses
then existing or arising out of events, acts or omissions occurring prior
to such repeal or limitation, including, without limitation, the right to
indemnification against Liabilities or allowance of Expenses for
Proceedings commenced after such repeal or limitation to enforce this
Article IX with regard to acts, omissions or events arising prior to such
repeal or limitation.
ARTICLE X. AMENDMENTS
10.1. By Shareholders. Except as otherwise provided by the
articles of incorporation of the corporation and these by-laws, the by-
laws of the corporation may be altered, amended or repealed and new by-
laws may be adopted by the shareholders at any Annual Meeting or Special
Meeting at which a quorum is in attendance.
10.2. By Directors. Except as otherwise provided in the articles
of incorporation of the corporation and these by-laws, the by-laws of the
corporation may also be altered, amended or repealed and new by-laws may
be adopted by the Board of Directors by affirmative vote of a majority of
the number of directors present at any meeting at which a quorum is in
attendance; provided, however, that the shareholders in altering,
adopting, amending or repealing a particular by-law may provide therein
that the Board of Directors may not amend, repeal or readopt that by-law.
10.3. Implied Amendments. Any action taken or authorized by the
shareholders or by the Board of Directors, which would be inconsistent
with the bylaws then in effect but is taken or authorized by affirmative
vote of not less than the number of shares or the number of directors
required to amend the by-laws so that the by-laws would be consistent with
such action, shall be given the same effect as though the by-laws had been
temporarily amended or suspended so far, but only so far, as is necessary
to permit the specific action so taken or authorized.