Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DESA INTERNATIONAL, INC.
AND OTHER REGISTRANTS
(See Table of Other Registrants Below)
(Exact name of registrant as specified in its charter)
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DELAWARE 3433 22-2940760
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
2701 INDUSTRIAL DRIVE, BOWLING GREEN, KENTUCKY 42102
(502) 781-9600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
--------------------
ROBERT H. ELMAN
DESA INTERNATIONAL, INC.
2701 Industrial Drive
Bowling Green, Kentucky 42102
(502) 781-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
MICHAEL A. MATZKA, ESQ.
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, MA 02109
(617) 338-2800
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, chech the
following box and list the Securities Act registration number of the earlier
registration statement for the same offering.|_|
If this form is a post-effective amendment filed pursuant to Rule
462(b) of the Securities Act, chech the following box and list the Securities
Act registration number of the earlier registration statement for the same
offering. |_|
CALCULATION OF REGISTRATION FEE
Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Registered Price Per Unit Aggregate Offering Price RegistrationFee
- - - - ------------------------------------------------------------------------------------------------------------------------------------
97/8% Senior Subordinated Notes Due 2007 $130,000,000 100%(1) $130,000,000(1) $38,350
Guarantees of the 97/8% Senior Subordinated $130,000,000 None(2) None(2) ---
Notes Due 2007
<FN>
(1) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, the registration fee has been based on the book value of the
securities to be received by the Registrant in exchange for the securities to be issued hereunder in the Exchange Offer
described herein.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable for the Guarantees.
</FN>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant will
file a further amendment which specifically states that this Registration
Statement will thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement will become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
TABLE OF OTHER REGISTRANTS
===============================================================================================================================
Standard Address, Including Zip Code, and
Industry IRS Employer Telephone Number, Including Area
Jurisdiction of Classification Identification Code, of the Principal Executive
Name of Corporation Incorporation Code Number Offices
- - - - -------------------------------------------------------------------------------------------------------------------------------
DESA Holdings Corporation Delaware 3433 61-1251518 2701 Industrial Drive, Bowling
Green, Kentucky 42102
(502) 781-9600
===============================================================================================================================
SUBJECT TO COMPLETION, DATED JANUARY __, 1998
OFFER TO EXCHANGE
all outstanding
97/8% SENIOR SUBORDINATED NOTES DUE 2007
($130,000,000 principal amount outstanding)
for
97/8% SENIOR SUBORDINATED NOTES DUE 2007
of
DESA INTERNATIONAL, INC.
---------------
The Exchange Offer will expire at 5:00 p.m., New York City time
on ____________, 1998, unless extended
---------------
DESA International, Inc. a Delaware corporation ("DESA" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange its 97/8% Senior Notes Due 2007 (the "New Notes"), in
an offering which has been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
this Prospectus constitutes a part, for an equal principal amount of its
outstanding 97/8% Senior Notes Due 2007 (the "Old Notes"), of which an aggregate
of $130,000,000 in principal amount is outstanding as of the date hereof (the
"Exchange Offer"). The New Notes and the Old Notes are sometimes referred to
herein collectively as the "Notes." The form and terms of the New Notes will be
the same as the form and terms of the Old Notes except that the New Notes will
not bear legends restricting the transfer thereof. The New Notes will be
obligations of the Company entitled to the benefits of the Indenture, dated as
of November 26, 1997 (the "Indenture"), by and among the Company, Desa Holdings
Corporation, a Delaware corporation and the parent of the Company ("Holdings"),
and Marine Midland Bank as trustee (the "Trustee"), relating to the Notes. See
"Description of the New Notes." Following the completion of the Exchange Offer,
none of the New Notes will be entitled to any rights under the Registration
Rights Agreement, dated as of November 26, 1997 (the "Registration Rights
Agreement"), by and among the Company, Holdings and the Initial Purchasers named
therein.
See "Risk Factors" beginning on page __ for a discussion of certain factors
that should be considered in evaluating an investment in the New Notes.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDIC-
TION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF
WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR
BLUE SKY LAWS OF SUCH JURISDICTION.
The date of this Prospectus is __________,1998.
1
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $130,000,000 principal amount of the
Old Notes to the Initial Purchasers on November 26, 1997 (the "Closing Date")
pursuant to a Purchase Agreement, dated November 26, 1997 (the "Purchase
Agreement") among the Company and the Initial Purchasers. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, Holdings and the Initial Purchasers also entered into the
Registration Rights Agreement, dated November 26, 1997, pursuant to which the
Company granted certain registration rights for the benefit for the holders of
the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer-Purchase and Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of November 26, 1997 (the "Indenture"), among the Company, Holdings and
Marine Midland Bank, as trustee (the "Trustee"), and the New Notes and the Old
Notes will constitute a single series of debt securities under the Indenture.
The terms of the New Notes are identical in all material respects to the terms
of the Old Notes except that (i) the New Notes will have been registered under
the Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and will not be entitled to registration
rights, (ii) holders of New Notes will not be entitled to liquidated damages for
the Company's failure to register the Old Notes or New Notes under the
Registration Rights Agreement, and (iii) holders of New Notes will not be, and
upon the consummation of the Exchange Offer, holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to Marine Midland
Bank, as registrar of the Old Notes (in such capacity, the "Registrar") under
the Indenture, of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are validly tendered by holders
thereof pursuant to the Exchange Offer. See "The Exchange Offer-Termination of
Certain Rights," "-Procedures for Tendering Old Notes" and "Description of
Notes." In the event that the Exchange Offer is consummated, any Old Notes which
remain outstanding after consummation of the Exchange Offer and the New Notes
issued in the Exchange Offer will vote together as a single class for purposes
of determining whether holders of the requisite percentage in outstanding
principal amount of Notes have taken certain actions or exercised certain rights
under the Indenture.
The New Notes will bear interest at a rate of 97/8% per annum. Interest on
the New Notes is payable semiannually, commencing June 15, 1998, on June 15 and
December 15 of each year (each, an "Interest Payment Date") and shall accrue
from November 26, 1997 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or duly provided for. The
New Notes will mature on December 15, 2007. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to
December 15, 2002. Thereafter, the New Notes will be redeemable by the Company
at the redemption prices and subject to the conditions set forth in "Description
of Notes-Optional Redemption." Notwithstanding the foregoing, at any time on or
before December 15, 2000, the Company may, at its option, redeem up to 35% of
the original aggregate principal amount of Notes with the net proceeds from one
or more Public Equity Offerings (as defined) at the redemption price set forth
herein, plus accrued and unpaid interest, if any, through the redemption date;
provided, however, that at least 65% of the original aggregate principal amount
of Notes remain outstanding following such redemption. See "Description of
Notes-Redemption-Optional Redemption." Upon a Change of Control (as defined
herein), the Company (i) will be required to make an offer to repurchase all
outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest thereon and Liquidated Damages, if any, to the date of
repurchase and (ii) prior to December 15, 2002 will have the option to redeem
the Notes, in whole or in part, at a redemption price equal to the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the redemption date plus the Applicable Premium (as defined herein). There
can be no assurance that sufficient funds will be available to the Company at
the time of any Change of Control to make any required repurchases of Notes. See
"Risk Factors -- Potential Inability to Fund Change of Control Offer,"
"Description of Notes -- Repurchase at the Option of Holders -- Change of
Control" and "-- Optional Redemption upon Change of Control." Depending upon the
circumstances prevailing at the time of such a Change of Control, there is a
risk that the Company may be unable to satisfy such obligations. See "Risk
Factors-Potential Inability to Fund Change of Control Offer."
The Notes will be general unsecured obligations of the Company, will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture), including all obligations of the Company under
2
the New Credit Facility, and will be pari passu in right of payment with any
senior subordinated indebtedness of the Company. The Company conducts certain
operations through its foreign subsidiaries and, accordingly, the Notes will be
effectively subordinated to indebtedness and other liabilities of such foreign
subsidiaries. See "Description of Notes- Ranking." See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The Company's obligations under the Notes will be guaranteed (the
"Guarantees") on a senior subordinated basis by the Company's parent, DESA
Holdings Corporation ("Holdings") and each subsidiary of Holdings that
guarantees any indebtedness of the Company or any other obligor under the Notes
(the "Guarantors"). The Guarantees will be general unsecured obligations of the
Guarantors, will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Guarantors, including all obligations of the
Guarantors under the New Credit Facility and will rank pari passu in right of
payment with any senior subordinated indebtedness of the Guarantors.
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties in other transactions, the Company believes that
New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such holder (other than a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder is not an affiliate of the Company, is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. In addition, if such
holder is not a broker-dealer, it must represent that it is not engaged in, and
does not intend to engage in, a distribution of the New Notes. Each
broker-dealer that receives New Notes as a result of market-making or other
trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The Exchange Offer-Resales of
the New Notes." For a period of 180 days from the Expiration Date, the Company
will make this Prospectus, as amended or supplement available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In
addition, each Initial Purchaser has advised the Company that it currently
intends to make a market in the New Notes; however, the Initial Purchasers are
not obligated to do so and any market making activities may be discontinued by
the Initial Purchasers at any time. Therefore, there can be no assurance that an
active market for the New Notes will develop. If such a trading market develops
for the New Notes, future trading prices will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on such factors, the
New Notes may trade at a discount from their face value. See "Risk Factors-Lack
of Public Market."
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, The Depository
Trust Company (the "Depositary") and registered in the name of Cede & Co., as
nominee of the Depositary (such nominee being referred to herein as the "Global
Note Holder"). The use of the Global Old Note to represent certain of the Old
Notes permits the Depositary's participants, and anyone holding a beneficial
interest in an Old Note registered in the name of such a participant, to
transfer interests in the Old Notes electronically in accordance with the
Depositary's established procedures without the need to transfer a physical
certificate. New Notes issued in exchange for the Global Old Note will also be
issued initially as a note in global form (the "Global New Note" and, together
with the Global Old Note, the "Global Notes") and deposited with, or on behalf
of, the Depositary. After the initial issuance of the Global New Note, New Notes
in certificated form will be issued in exchange for a holder's proportionate
interest in the Global New Note only as set forth in the Indenture.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights
3
which terminate upon consummation of the Exchange Offer). Following consummation
of the Exchange Offer, the Holders of Old Notes will continue to be subject to
the existing restrictions upon transfer thereof and the Company will have no
further obligation to such Holders (other than to certain Holders under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors- Consequences of a Failure to
Exchange."
This Prospectus, together with the Letter of Transmittal is being sent to
all registered Holders of Old Notes as of __________, 1998.
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses.
4
TABLE OF CONTENTS
Page
Available Information.................................................. 5
Prospectus Summary..................................................... 7
Risk Factors........................................................... 23
The Exchange Offer..................................................... 27
Capitalization of the Company.......................................... 34
Pro Forma Condensed Consolidated Financial Data of Holdings............ 35
Selected Financial Data................................................ 42
Management's Discussion and Analysis of 45
Financial Condition and Results of Operations..........................
Business............................................................... 52
Management............................................................. 65
Security Ownership of Certain Beneficial Owners and Management......... 68
Certain Transactions................................................... 69
Description of Notes................................................... 70
Description of New Credit Facility..................................... 99
Description of Holding Preferred Stock................................. 101
Legal Matters.......................................................... 111
Independent Auditors................................................... 111
Index to Financial Statements.......................................... F-1
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
Upon the effectiveness of the Registration Statement filed with the
Commission, the Company will be subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, will be required to file reports and other information
with the Commission. In addition, upon registration of the guarantees of the New
Notes in connection with the Exchange Offer, each Subsidiary Guarantor will also
become subject to the reporting requirements of the Exchange Act, subject to
obtaining exemptive relief from the Commission or no-action advise from the
Commission staff.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
Such information may also be accessed electronically by means of the
Commission's homepage on the Internet at http://www.sec.gov., which contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission.
5
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
data, including the Financial Statements and related notes thereto, appearing
elsewhere in this Prospectus. As used herein, references to "DESA" or the
"Company" are to DESA International, Inc. and its subsidiaries. References to
"fiscal year" are to the Company's fiscal year which ends on the Saturday
closest to February 28 in each year.
The Company
DESA is a leading manufacturer and marketer of zone heating/home comfort
products and specialty tools in the United States. Through its ability to
consistently offer consumers quality products with innovative features at
attractive price points, the Company has developed leading market positions in
(i) vent-free indoor heaters, (ii) vent-free hearth products, (iii) outdoor
heaters, (iv) consumer powder-actuated fastening systems and (v) electric chain
saws. In fiscal 1997, approximately 90% of the Company's sales were generated in
the United States and 10% were generated in international markets. Over 85% of
the domestic sales were in product categories where DESA is the market leader.
The Company has grown rapidly with sales increasing from $83.0 million in fiscal
1992 to $209.1 million in fiscal 1997, representing a compound annual growth
rate ("CAGR") of 20%. The Company's EBITDA increased from $10.6 million, or
12.8% of sales, in fiscal 1992, to $37.8 million, or 18.1% of sales, in fiscal
1997, representing a CAGR of 29%. For the twelve months ended November 29, 1997,
the Company had sales of $228.9 million and pro forma EBITDA of $40.5 million.
The Company sells its products through multiple consumer and commercial
channels of distribution including the leading home centers, mass merchants,
warehouse clubs, hardware cooperatives, specialty heating distributors,
construction and industrial equipment dealers, farm supply outlets and natural
gas utilities under brand names well- recognized by its customers. The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each channel and service these customers through a multi-brand approach to
capture the largest possible share of a given product market. In addition, the
Company has an established record of success in new product development and
product line extensions. Over the last five years, DESA has introduced over 100
new products and line extensions which generated approximately 56% of the
Company's sales growth over that time period.
Zone Heating Products (80% of Fiscal 1997 Domestic Gross Sales)
The zone heating market is comprised of indoor gas heaters, hearth products
(gas logs, fireplaces and stoves) and outdoor heaters. DESA is a leading
manufacturer of vent-free indoor and outdoor zone heating products in the United
States. DESA's domestic zone heating business has experienced a CAGR of over 27%
with gross revenues increasing from $46.2 million in fiscal 1992 to $155.1
million in fiscal 1997. DESA markets its zone heating products under well-known
brand names such as Reddy(R), Vanguard(R) and Comfort Glow(R). The Company's
zone heating business is organized into two primary product categories:
o Indoor vent-free heating appliances and hearth products (40% of Fiscal 1997
Domestic Gross Sales): Indoor heating appliances include vent-free liquid
propane and natural gas space heaters which provide economical supplemental
heat to a specific area as distinguished from central heating systems which
are used to heat entire buildings. Vent-free hearth products such as gas
logs, fireplaces and stoves are utilized for both decorative and economic
heating. Vent-free products utilize a more efficient burner system which
avoids the need for outside venting, whereas vented products require a
discharging of emissions outside of the building.
o Outdoor heating appliances (40% of Fiscal 1997 Domestic Gross Sales):
Outdoor heating products consist of portable units which generate heat by
either using a fan to discharge heated air to a specific area (forced air
heaters) or emitting heat throughout the surrounding area without the
assistance of a fan (convection heaters). Forced air heaters are fueled by
either kerosene, propane or natural gas, while convection heaters are
fueled only with propane or natural gas. Outdoor heaters are used in both
residential and commercial applications. Residential applications
6
include heating otherwise unheated garages and workshops. Commercial
applications include heating factories, warehouses, construction sites and
agricultural areas.
Specialty Tools (20% of Fiscal 1997 Domestic Gross Sales)
DESA's domestic specialty tools business has experienced a CAGR of 11% with
gross revenues increasing from $23.0 million in fiscal 1992 to $38.8 million in
fiscal 1997. Specialty tools products include powder actuated fastening systems
(tools and accessories) used to fasten wood to concrete or steel, stapling/rivet
tools and electrical products such as chain saws and portable generators. These
products are marketed under well-known brand names such as Remington(R),
Master(R) and Powerfast(R).
Competitive Strengths
Leading Market Positions in High Growth Segments. DESA is the domestic
market leader in outdoor heating appliances (70% market share), vent-free indoor
gas heating (59% market share), vent-free hearth products (31% market share),
powder actuated fastening systems (86% share of the consumer market, which
constitutes 26% of the total domestic market) and electric chain saws (36%
market share). By leveraging its strong market positions and customer
relationships in established product lines, DESA has increased sales by
introducing related products or line extensions of existing products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995) and fireboxes (introduced in fiscal 1997).
DESA's targeted market segments in the zone heating market have exhibited
strong historical growth. Vent-free indoor gas heater and hearth products, the
most rapidly growing segments in the $1.1 billion zone heating market, have
grown at a CAGR of approximately 44% over the last four years driven primarily
by the increasing consumer trend towards heating with natural gas and liquid
propane. The outdoor heater market has achieved a CAGR of 22% over the same
period.
Strong Relationships with a Diversified Distribution and Customer Base.
DESA has organized its sales and marketing organizations by channels of
distribution. The Company has built strong, long-term relationships with some of
the most rapidly growing retailers, including Home Depot, Lowe's, Sears,
Wal-Mart, W.W. Grainger, Ace Hardware and TruServ. The Company's products are
designed to appeal to a variety of end-users, ranging from do-it-yourself
("DIY") consumers to professional home builders. By building strong
relationships with the leading retailers and distributors within each of the
Company's channels, DESA is well-positioned to participate in the continued
growth of these key customers.
Broad Portfolio of Products with Well-Recognized Brand Names. DESA provides a
broad offering of quality products under numerous brand names which are
well-recognized by its customers. The Company's key brands include Reddy(R),
Remington(R), Vanguard(R) and Comfort Glow(R) for zone heating products and
Remington(R) for powder actuated fastening systems and electric chain saws. The
Company also manufactures products on a private label basis for W.W. Grainger,
Sears, John Deere and Homelite. DESA leverages its brand equity with its DIY
consumers, professionals and specialty dealers by continually providing its
customers new product offerings and product line extensions under its
established brand names.
Proven New Product Development Process. DESA has a proven ability to
consistently offer consumers products with innovative features at attractive
price points. The quality and breadth of DESA's customer relationships provide
the Company with valuable market data that serves as the foundation for the
Company's new product development and product line extension process. For
example, the Company's line of hearth products was initially introduced as the
result of shifting consumer preferences away from (i) wood-burning hearth
products to gas technology and (ii) vented gas products to vent-free units. Over
the last five years, new product introductions and product line extensions have
accounted for approximately 56% of the Company's sales growth.
7
Effective Cost Reduction Program and Strong Cash Flow. A core component of
the Company's strong financial performance over the last five years has been a
focused program to enhance margins through cost reduction. The Company has
exceeded its annual cost reduction goal of 3% of cost of sales in each of the
last three years. This cost reduction program has contributed to an increase in
gross profit margin from 33.6% in fiscal 1992 to 37.4% in fiscal 1997.
The Company has been able to achieve its sales growth while efficiently
managing working capital and maintaining low capital expenditures generating
$128.4 million in free cash flow (EBITDA less capital expenditures) for the last
five years.
Strong Management Team. DESA was founded in 1969 by a group including
Robert H. Elman, DESA's current Chairman and CEO. The top three executives of
the Company have worked together as a team for the last 13 years. These
individuals have served as the catalyst for instilling a spirit of "continuous
improvements" and achievement as a cultural standard within the Company. Senior
management is well-complemented by a broad team of experienced managers who have
been with DESA since 1985.
Business Strategy
DESA's objective is to continue to leverage its competitive strengths to
increase revenues and EBITDA. In addition, the Company believes there are
significant additional opportunities to enhance its overall market and
competitive position as follows:
Continue Aggressive Growth through DESA's Primary Channels and Customers.
DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its
products through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply stores, building supply chains and fireplace
specialty stores. These newer channels represent attractive markets across the
United States.
Capitalize on Favorable Trends for Vent-Free Gas Products. Recent housing
construction data reveals that over two-thirds of new homes today use gas as the
primary heating source compared to one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the number of homes utilizing gas will grow to 80 million by the
year 2010. This growing preference for gas represents a significant growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally, by focusing on vent-free gas products, which have
lower installation costs and provide increased fuel efficiency compared to
vented products, the Company is well-positioned to benefit from the fastest
growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in the
United States, the global DIY markets are experiencing attractive growth rates.
Five of the ten largest home improvement retailers in the world are based
outside of the United States. However, international sales comprised only 10% of
DESA's total sales in fiscal 1997.
Make Selected Acquisitions. The Company intends to seek selective
acquisitions where it can expand its existing product portfolio, utilize its
diversified distribution channels and achieve operational synergies. Over the
last five years, only 9% of the Company's sales growth has come through
acquisitions. Management believes that the markets in which it operates are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.
8
The Recapitalization
Holdings, its shareholders (the "Existing Shareholders") and J.W. Childs
Equity Partners, L.P. ("Childs") have entered into a Recapitalization Agreement
dated as of October 8, 1997 (the "Recapitalization Agreement") which provides
for the recapitalization of Holdings. Pursuant to the Recapitalization
Agreement, Holdings purchased from the Existing Shareholders all outstanding
shares of Holdings' capital stock, other than shares having an implied value of
$8.6 million which will continue to be held by certain Existing Shareholders,
including management, and which represent 10.4% of the outstanding shares of
Holdings' Common Stock immediately following the transaction.
Financing requirements for the Recapitalization, including $8.6 million in
non-cash sources and the retirement of existing debt of the Company and the
payment of fees and expenses, were $365.5 million (including $27.3 million in
seasonal borrowings) and were satisfied through the purchase by Childs and
certain other investors, including UBS Capital LLC (the "Equity Investors"), of
an aggregate $91.4 million in Holdings' equity securities together with an
aggregate $265.6 million in borrowings as follows: (i) the purchase by Childs,
and the other Equity Investors of shares of Holdings' Common Stock (representing
89.6% of the outstanding shares) for $73.8 million (the "Holdings Common Equity
Contribution"); (ii) the purchase by Childs and the other Equity Investors of
$17.6 million in liquidation value of cumulative exchangeable redeemable
preferred stock issued by Holdings (the "Holdings Preferred Stock"); (iii)
$130.0 million from the proceeds of the Offering; (iv) $100.0 million of
borrowings under a senior secured term loan facility among the Company,
Holdings, the several lenders from time to time parties thereto (collectively,
the "Banks"), and NationsBank, N.A., as administrative agent ("NationsBank"),
and Union Bank of Switzerland, New York Branch, as co-agent (the "Term Loan
Facility"); and (v) $35.5 million of borrowings under a $75.0 million senior
secured revolving credit facility among the Company, Holdings, the Banks, and
NationsBank (the "Revolving Credit Facility" and, together with the Term Loan
Facility and certain other facilities, the "New Credit Facility"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of the Notes,"
"Description of New Credit Facility" and "Description of Holdings Preferred
Stock."
The purchase of shares from the Existing Shareholders, the retirement of
existing debt of the Company, the issuance and sale by Holdings of the Holdings
Common Equity Contribution and of the Holdings Preferred Stock, the borrowing by
the Company of funds under the New Credit Facility, the Offering and the payment
of related fees and expenses are referred to herein collectively as the
"Recapitalization." It is intended that the Recapitalization be treated as a
recapitalization transaction for accounting purposes.
9
Sources and Uses of Funds
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
(dollars in
thousands)
Sources of Funds:
Cash Sources:
New Credit Facility:
Revolving Credit Facility(1) $ 35,500
Term Loan Facility 100,000
Issuance of Notes 130,000
Equity investment:
Issuance of Holdings Preferred Stock(2) 17,600
Issuance of Holdings Common Stock 73,815
Non-Cash Sources:
Holdings Common Stock retained by Existing Stockholders 8,585
--------
$365,500
========
Uses of Funds:
Recapitalization consideration $165,022
Repayment of existing debt 186,714
Fees and expenses 13,163
Working capital 601
--------
$365,500
========
--------
(1) The Revolving Credit Facility will provide for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been $10.7
million during the twelve months ended November 29, 1997. This amount
excludes letters of credit which will be issued to replace outstanding
letters of credit established to facilitate merchandise purchases, which
had an aggregate outstanding balance of $0.9 million as of November 29,
1997.
(2) Holdings may issue junior subordinated notes (the "Exchange Notes") in
exchange for the outstanding Holdings Preferred Stock under certain
circumstances. The Exchange Notes have substantially the same terms as the
Holdings Preferred Stock. See "Description of Holdings Preferred Stock" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- After the
Recapitalization."
10
The Equity Investors
Childs
J.W. Childs Equity Partners, L.P., is a $463 million institutional equity
fund managed by J.W. Childs Associates, L.P. ("JWCA"), a Boston-based private
investment firm. Childs acquires equity positions primarily in established small
and middle-market growth companies through friendly, management-led acquisitions
and recapitalizations. Childs' investment strategy is to leverage on the
operating and financial experience of its partners and to invest, along with
management, in growing companies with a history of profitable operations. In
addition to four partners with financial backgrounds, JWCA has three "operating"
partners who have each had prior experience as the chief executive officer of a
successful leveraged buyout. Childs invests in a wide variety of industries, but
places particular focus on those in which the partners with operation
backgrounds have had direct managerial experience: branded and non-branded
consumer products, specialty retailing, energy and light manufacturing.
UBS Capital
UBS Capital LLC ("UBS Capital") is a merchant banking affiliate of the
Union Bank of Switzerland. Headquartered in New York, New York, UBS Capital
engages in a wide range of private equity transactions including management
buyouts, growth equity investments and recapitalizations. UBS Capital and its
merchant banking affiliates have investments in over 40 portfolio companies and
manage a proprietary capital allocation from the Union Bank of Switzerland of
over $1.2 billion. UBS Capital and its affiliates have invested in a wide
variety of industries, including branded consumer products, specialty paper,
industrial products, sporting goods, telecommunications, retailing and software.
11
THE PRIOR OFFERING
The outstanding $130.0 million principal amount of Old Notes were sold by
the Company to the Initial Purchasers on the Closing Date pursuant to the
Purchase Agreement among the Company and the Initial Purchasers. The Initial
Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act. The Company, the Subsidiary Guarantors and the Initial
Purchasers also entered into the Registration Rights Agreement pursuant to which
the Company granted certain registration rights for the benefit of the holders
of the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer--Purpose and Effect."
THE EXCHANGE OFFER
The Exchange Offer The Company is offering upon the terms and subject
to the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal
amount of its 97/8% Senior Notes due 2007 (the
"New Notes," with the Old Notes and the New Notes
collectively referred to herein as the "Notes")
for each $1,000 in principal amount of the
outstanding Old Notes (the"Exchange Offer"). As of
the date of this Prospectus, $130.0 million in
aggregate principal amount of the Old Notes is
outstanding. See "The Exchange Offer--Terms of the
Exchange Offer."
Expiration Date 5:00 p.m., New York City time, on ___________,
1998 as the same may be extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Conditions of The Exchange Offer is not conditioned upon any
the Exchange Offer minimum principal amount of Old Notes being
tendered for exchange. The only condition to the
Exchange Offer is the declaration by the
Commission of the effectiveness of the
Registration Statement of which this Prospectus
constitutes a part. See "The Exchange
Offer--Conditions of the Exchange Offer."
Termination of Pursuant to the Registration Rights Agreement and
Certain Rights the Old Notes, holders of Old Notes (i) have
rights to receive Liquidated Damages and (ii) have
certain rights intended for the holders of
unregistered securities. "Liquidated Damages"
means damages of $0.05 per week per $1,000
principal amount of Old Notes (up to a maximum of
$0.30 per week per $1,000 principal amount) during
the period in which a Registration Default is
continuing pursuant to the terms of the
Registration Rights Agreement. Holders of New
Notes will not be and, upon consummation of the
Exchange Offer, holders of Old Notes will no
longer be, entitled to (i) the right to receive
the Liquidated Damages or (ii) certain other
rights under the Registration Rights Agreement
intended for holders of unregistered securities.
See "The Exchange Offer--Termination of Certain
Rights" and "--Procedures for Tendering Old
Notes."
Accrued Interest The New Notes will bear interest at a rate equal
to 97/8% per annum. Interest shall accrue from
_____________ or from the most recent Interest
Payment Date with respect to the Old Notes to
which interest was paid or duly provided for. See
"Description of Notes--Principal, Maturity and
Interest."
12
Procedures for Unless a tender of Old Notes is effected pursuant
Tendering Old Notes to the procedures for book-entry transfer as
provided herein, each holder desiring to accept
the Exchange Offer must complete and sign the
Letter of Transmittal, have the signature thereon
guaranteed if required by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company
and who wishes to tender Old Notes in the Exchange
Offer, should instruct such entity or person to
promptly tender on such Beneficial Owner's behalf.
See "The Exchange Offer--Procedures for Tendering
Old Notes."
Guaranteed Holders of Old Notes who wish to tender their Old
Delivery Procedures Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes or any other documents required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date (or complete the procedure
for book-entry transfer on a timely basis), may
tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of Old Upon effectiveness of the Registration Statement
Notes and Delivery of which this Prospectus constitutes a part and
of New Notes consummation of the Exchange Offer, the Company
will accept any and all Old Notes that are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly after
acceptance of the Old Notes. See "The Exchange
Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
TheExchange Agent Marine Midland Bank is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer--The Exchange Agent;
Assistance."
Fees and Expenses All expenses incident to the Company's
consummation of the Exchange Offer and compliance
with the Registration Rights Agreement will be
borne by the Company. The Company will also pay
certain transfer taxes applicable to the Exchange
Offer. See "The Exchange Offer--Fees and
Expenses."
13
Resales of Based on existing interpretations by the staff of
the New Notes the Commission set forth in no-action letters
issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer to
a holder in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a
holder (other than (i) a broker-dealer who
purchased the Old Notes directly from the Company
for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or (ii) a person that is
an affiliate of the Company within the meaning of
Rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such holder is acquiring the New
Notes in the ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. Each broker-dealer
that receives New Notes in exchange for Old Notes,
where such Old Notes were acquired by such broker
as a result of market-making or other trading
activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such
New Notes. See "The Exchange Offer--Resales of the
New Notes" and "Plan of Distribution."
Effect of Not Old Notes that are not tendered or that are not
Tendering Old Notes properly tendered will, following the expiration
for Exchange of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof.
The Company will have no further obligations to
provide for the registration under the Securities
Act of such Old Notes and such Old Notes will,
following the expiration of the Exchange Offer,
bear interest at the same rate as the New Notes.
Certain Federal The Company believes that the exchange pursuant to
Income Tax the Exchange Offer will not be a taxable event for
Consequences federal income tax purposes. See "Certain Federal
Income Tax Consequences of the Exchange Offer."
14
Description of New Notes
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. See "Exchange Offer--Termination of Certain Rights." The Exchange
Offer shall be deemed consummated upon the occurrence of the delivery by the
Company to the Registrar under the Indenture of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old
Note;" and "Description of Notes."
Securities Offered $130.0 million in aggregate principal amount of
97/8% Senior Subordinated Notes due 2007 (the
"Notes").
Maturity December 15, 2007
Interest The Notes will bear interest at the rate of 97/8%
per annum, payable semiannually on June 15 and
December 15, commencing June 15, 1998.
Optional Redemption The Notes may be redeemed at the option of the
Company, in whole or in part, on or after December
15, 2002 at a premium declining to par in 2005,
plus accrued and unpaid interest and Liquidated
Damages, if any, through the redemption date.
On or before December 15, 2000, the Company may,
at its option, redeem up to 35% of the original
aggregate principal amount of Notes with the net
proceeds from one or more Public Equity Offerings
(as defined) at the redemption price set forth
herein, plus accrued and unpaid interest, if any,
through the redemption date; provided, however,
that at least 65% of the original aggregate
principal amount of Notes remain outstanding
following such redemption.
Change of Control Upon a Change of Control (as defined herein), the
Company (i) will be required to make an offer to
repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon and Liquidated Damages, if any,
to the date of repurchase and (ii) prior to
December 15, 2002 will have the option to redeem
the Notes, in whole or in part, at a redemption
price equal to the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date plus the
Applicable Premium (as defined herein). There can
be no assurance that sufficient funds will be
available to the Company at the time of any Change
of Control to make any required repurchases of
Notes. See "Risk Factors-- Potential Inability to
Fund Change of Control Offer," "Description of
Notes-- Repurchase at the Option of Holders--
Change of Control" and "--Optional Redemption upon
Change of Control."
15
Ranking The Notes will be general unsecured obligations of
the Company, will be subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined in the Indenture),
including all obligations of the Company under the
New Credit Facility, and will be pari passu in
right of payment with any senior subordinated
indebtedness of the Company. The Company conducts
certain operations through its foreign
subsidiaries and, accordingly, the Notes will be
effectively subordinated to indebtedness and other
liabilities of such foreign subsidiaries. At
October 4, 1997, on a pro forma basis after giving
effect to the Recapitalization, the aggregate
principal amount of Senior Indebtedness of the
Company would have been approximately $135.9
million, all of which would have been Indebtedness
secured by substantially all of the assets of
Holdings and the Company pursuant to the New
Credit Facility, and the Company's foreign
subsidiaries would have had aggregate liabilities
of $3.2 million.
Guarantees The Company's obligations under the Notes will be
guaranteed (the "Guarantees") on a senior
subordinated basis by Holdings and each subsidiary
of Holdings that guarantees any indebtedness of
the Company or any other obligor under the Notes
(the "Guarantors"). The Guarantees will be general
unsecured obligations of the Guarantors, will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Guarantors,
including all obligations of the Guarantors under
the New Credit Facility and will rank pari passu
in right of payment with any senior subordinated
indebtedness of the Guarantors. On the date the
Notes are issued, none of the Company's
subsidiaries will guarantee the Notes.
Covenants The indenture pursuant to which the Notes will be
issued (the "Indenture") contains certain
covenants that, among other things, limit the
ability of the Company, Holdings and their
subsidiaries to incur additional Indebtedness and
issue preferred stock, pay dividends or make other
distributions, create certain liens, enter into
certain transactions with affiliates, sell assets
of the Company, Holdings or their subsidiaries,
issue or sell Equity Interests of the Company's or
Holdings' subsidiaries or enter into certain
mergers and consolidations. In addition, under
certain circumstances, the Company and Holdings
will be required to offer to purchase Notes at a
price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any,
to the date of purchase, with the proceeds of
certain Asset Sales (as defined). See "Description
of Notes."
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
16
Summary Unaudited Pro Forma Consolidated Financial Data of Holdings
The following sets forth summary unaudited pro forma consolidated financial data
of Holdings derived from the unaudited pro forma financial data contained
elsewhere herein. Certain management assumptions and adjustments relating to the
Recapitalization are set forth in the notes accompanying such unaudited pro
forma financial data. The following unaudited pro forma consolidated Statement
of Operating Data for the year ended March 1, 1997 gives effect to the
Recapitalization as if it had occurred on March 3, 1996. The following unaudited
pro forma consolidated Statement of Operating Data for the thirty-nine weeks
ended November 29, 1997 gives effect to the Recapitalization as if it had
occurred on March 2, 1997. The following unaudited pro forma consolidated
Balance Sheet Data gives effect to the Recapitalization as if it had occurred on
November 29, 1997. This pro forma information is not necessarily indicative of
the results that would have occurred had the Recapitalization been completed on
the dates indicated or the Company's actual or future results or financial
position. Holdings is a holding company which does not carry on operations and
the sole asset of which is 100% of the capital stock of the Company. The summary
pro forma consolidated financial data should be read in conjunction with the
information contained in the financial statements and notes thereto, "Pro Forma
Condensed Consolidated Financial Data," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
Pro Forma
----------------------------------
Fiscal Year Thirty-nine
Ended Weeks Ended
March 1, 1997 November 29, 1997
------------- -----------------
(in thousands, except ratios)
Statement of Operating Data:
Net sales (1) $ 209,105 $ 193,404
Cost of sales 130,890 123,243
--------- ---------
Gross profit 78,215 70,161
Selling and administrative expenses (2) 41,706 34,777
--------- ---------
Operating profit (3) $ 36,509 $ 35,384
========= =========
Other Data:
EBITDA (4) $ 38,729 $ 36,749
EBITDA margin 18.5% 19.0%
Capital expenditures $ 2,770 $ 3,690
Depreciation 2,432 2,363
Amortization 2,144 1,569
Cash interest expense (5) 21,323 17,069
Ratio of EBITDA to cash interest expense 1.8x 2.2x
Ratio of EBITDA less capital expenditures to cash
interest expenses 1.7x 1.9x
Ratio of earnings to fixed charges (6) 1.6x 1.9x
Balance Sheet Data at November 29, 1997:
Working capital $ 34,758
Total assets 157,780
Long-term debt 240,500
Stockholders' equity (deficit) (145,255)
17
- - - - ----------
<FN>
(1) Net sales constitute gross sales net of accruals for returns and allowances
and cash discounts.
(2) Excludes certain non-recurring charges of $9,451 attributable to the
Recapitalization. See the notes to "Unaudited Pro Forma Condensed Consolidated
Statement of Income Data."
(3) Operating profit is before amortization of intangibles and deferred finance
charges, management fees and miscellaneous expenses. Miscellaneous expenses
were $212 for the fiscal year ended March 1, 1997, $298 for the thirty-nine
weeks ended November 29, 1997.
(4) EBITDA is defined as income before income taxes plus interest expense and
depreciation, as well as amortization of intangibles and deferred charges and
management fees of $240 per annum and related expenses which are included in
other expenses. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness and because
management believes that EBITDA is a relevant measure of the Company's ability
to generate cash without regard to the Company's capital structure or working
capital needs. However, EBITDA should not be considered as an alternative to
net income as a measure of a company's operating results or to cash flows from
operating activities as a measure of liquidity. EBITDA as presented may not be
comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating EBITDA, investors should
also consider other factors which may influence operating and investing
activities, such as changes in operating assets and liabilities and purchases
of property and equipment.
(5) Pro forma cash interest expense includes interest expense on the Notes,
borrowings under the Term Loan Facility and average borrowings under the
Revolving Credit Facility for the applicable period and excludes amortization
of debt issuance costs. See note 2 to "Unaudited Pro Forma Condensed
Consolidated Statement of Income Data."
(6) For purposes of computing this ratio, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing cost and 33% of the rent expense from
operating leases which the Company believes is a reasonable approximation of
the interest factor included in the rent.
</FN>
18
Summary Financial Data
Set forth below are selected historical financial data and other historical
operating data of Holdings. The summary historical Statements of Operating Data
and Balance Sheet Data below for each of the years in the three year period
ended March 1, 1997 and as of March 2, 1996 and March 1, 1997 have been derived
from the audited consolidated financial statements of Holdings which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Offering Memorandum. The summary historical Statement of Operating Data
below for the year ended February 26, 1994 represents the unaudited pro forma
results of combining the consolidated income statement data of Holdings from its
date of incorporation, December 1, 1993, through February 26, 1994 with the
income statement data of the Company from February 28, 1993 through November 30,
1993, which statements for the three and nine month periods, not presented
separately herein, have also been audited by Ernst & Young LLP. The summary
historical Balance Sheet Data at February 26, 1994 has been derived from the
audited consolidated balance sheet of Holdings which has also been audited by
Ernst & Young LLP, but which is not included elsewhere herein. The summary
historical Statement of Operating Data and Balance Sheet Data at and for the
year ended February 27, 1993 have been derived from the audited consolidated
financial statements of the Company which have also been audited by Ernst &
Young LLP, but which are not included elsewhere herein. The summary historical
Statement of Operating Data for the thirty-nine weeks ended November 30, 1996
and November 29, 1997 and the summary historical Balance Sheet Data at November
29, 1997 have been derived from Holdings' unaudited consolidated financial
statements for those periods included elsewhere in the Prospectus and, in each
case, include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the unaudited interim periods. Results of operations for the thirty-nine
weeks ended November 29, 1997 are not necessarily indicative of the results that
may be expected for the entire year. The information presented below is
qualified in its entirety by, and should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Offering Memorandum.
Thirty-Nine
Fiscal Year Weeks Ended
----------- -----------
November 30, November 29,
1993 1994 1995 1996(1) 1997 1996 1997
---- ---- ---- ------- ---- ---- ----
(in thousands, except ratios) (unaudited)
Statement of Operating Data:
Net sales(2) $ 98,712 $ 122,777 $ 172,501 $ 186,324 $ 209,105 $ 173,587 $ 193,404
Cost of sales 66,902 80,444 107,484 116,217 130,890 108,587 123,243
--------- --------- --------- --------- --------- --------- ---------
Gross profit 31,810 42,333 65,017 70,107 78,215 65,000 70,161
Selling and administrative expenses 21,742 26,008 33,851 35,503 42,656 32,083 35,477
--------- --------- --------- --------- --------- --------- ---------
Operating profit(3) 10,068 16,325 31,166 34,604 35,559 32,917 34,684
Interest expense 4,186 4,349 5,777 7,073 14,509 11,105 11,321
Other expenses 578 875 2,124 2,325 2,601 1,830 2,082
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 5,304 11,101 23,265 25,206 18,449 19,982 21,281
Income taxes 2,154 4,702 10,064 10,703 7,733 8,378 8,769
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item 3,150 6,399 13,201 14,503 10,716 11,604 12,512
Extraordinary item -- 4,387 -- 2,638 -- -- 7,797
--------- --------- --------- --------- --------- --------- ---------
Net income $ 3,150 $ 2,012 $ 13,201 $ 11,865 $ 10,716 $ 11,604 $ 4,715
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges(4) 2.1x 2.9x 4.4x 4.0x 2.2x 2.1x 2.7x
Other Data:
EBITDA (5) $ 11,790 $ 18,198 $ 33,270 $ 36,853 $ 37,779 $ 35,019 $ 36,749
EBITDA margin 11.9% 14.8% 19.3% 19.8% 18.1% 20.2% 19.0%
Capital expenditures $ 1,655 $ 1,420 $ 1,499 $ 2,122 $ 2,770 $ 1,662 $ 3,690
Depreciation 1,927 1,938 2,148 2,332 2,432 2,127 2,363
Amortization 335 1,620(6) 1,966 1,963 2,104 1,571 1,569
Balance Sheet Data (at period end):
Cash and cash equivalents $ 462 $ 1,597 $ 16,170 $ 145 $ 5,058 $ 393 $ 201
Working capital (deficit) 5,563 6,680 9,738 (1,194) (8,566) 35,680 34,758
Total assets 27,867 84,055 107,259 85,545 91,984 137,105 157,780
Long-term debt 27,956 62,000 49,700 149,709 130,600 163,194 240,500
Stockholders' equity (deficit) (13,210) 2,279 16,194 (95,402) (84,754) (83,577) (145,255)
19
- - - - ----------
<FN>
(1) 53-week fiscal year. Holdings was party to a recapitalization in January 1996 which impacted interest expense,
stockholders' equity and long-term debt.
(2) Net sales constitute gross sales net of accruals for returns and allowances and cash discounts.
(3) Operating profit is before amortization of intangibles and deferred charges and certain management fees and miscellaneous
expenses. Management fees and related expenses amounted to $38, $25, $114, $279 and $285 for fiscal 1993, 1994, 1995, 1996
and 1997, respectively, and $234 and $215 for the thirty-nine weeks ended November 30, 1996 and November 29, 1997,
respectively. Miscellaneous (income)/expenses amounted to $205, $65, $44, $83 and $212 for fiscal 1993, 1994, 1995, 1996
and 1997, respectively, and $25 and $298 for the thirty-nine weeks ended November 30, 1996 and November 29, 1997,
respectively.
(4) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense and amortization of deferred financing cost and 33% of the rent expense from operating leases
which the Company believes is a reasonable approximation of the interest factor included in the rent.
(5) EBITDA is defined as income before taxes plus interest expense and depreciation, amortization of intangibles and deferred
charges and management fees and related expenses which are included in other expenses on the Statement of Operating Data.
EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and
because management believes that EBITDA is a relevant measure of the Company's ability to generate cash without regard to
the Company's capital structure or working capital needs. However, EBITDA should not be considered as an alternative to net
income as a measure of a company's operating results or to cash flows from operating activities as a measure of liquidity.
EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon the non-cash
charges included. When evaluating EBITDA, investors should also consider other factors which may influence operating and
investing activities, such as changes in operating assets and liabilities and purchases of property and equipment.
(6) Includes amortization of $835 included in extraordinary item.
</FN>
20
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of the Notes should consider the specific factors set forth below.
Significant Leverage and Debt Service
The Company and its subsidiaries have significant outstanding indebtedness
and are significantly leveraged. As of November 29, 1997, the Company had
outstanding consolidated indebtedness of $262.9 million (excluding letters of
credit in the aggregate amount of $0.9 million). See "Capitalization." In
addition, subject to the limitations set forth in the Indenture, the Company and
its subsidiaries may incur additional indebtedness (including Senior
Indebtedness), including up to $41.2 million under the New Credit Facility. In
addition, the Indenture permits Holdings, under certain circumstances, to
exchange all outstanding Holdings Preferred Stock for Exchange Notes in an
aggregate principal amount equal to the aggregate liquidation preference of the
Holdings Preferred Stock so exchanged. The Exchange Notes will require Holdings
to make semi-annual interest payments thereon at a rate of 12% per annum.
Subject to compliance with the debt agreements of Holdings and the Company, such
payments must be made in cash. The Indenture restricts, but does not prohibit,
Holdings from making such cash interest payments. Under the Exchange Notes,
Holdings may defer the payment of interest payable on or before November 30,
2002, with any such deferred interest bearing interest at 12% per annum,
compounded semi-annually. Holdings will be required to make a catch-up payment
immediately prior to the first interest payment date after the fifth anniversary
of the date of issuance to the extent the aggregate amount of such deferred
interest exceeds an amount equal to one year's interest on the originally issued
Exchange Notes. The Indenture restricts the ability of Holdings to make such
catch-up payment. See "Description of the Notes -- Certain Covenants --
Restricted Payments" and "Description of Holdings Preferred Stock -- Exchange
Notes".
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including (i) the Company's
vulnerability to adverse general economic and industry conditions, (ii) the
Company's ability to obtain additional financing for future capital
expenditures, general corporate or other purposes and (iii) the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal and interest on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
The Company's ability to make scheduled payments on the principal of, or
interest or Liquidated Damages (if any) on, or to refinance, its indebtedness
will depend on its future operating performance and cash flow, which are subject
to prevailing economic conditions, prevailing interest rate levels, and
financial, competitive, business and other factors, many of which are beyond its
control, as well as the availability of borrowings under the New Credit Facility
or successor facilities. However, based upon the current and anticipated level
of operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility and its other sources of
liquidity, will be adequate to meet its anticipated cash requirements for the
foreseeable future for working capital, capital expenditures, interest payments
and principal payments. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its indebtedness, it may be required to refinance all or a portion of
its existing indebtedness, including the Notes, or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
Finally, in order to pay the principal balance of the Notes due at maturity, the
Company may have to obtain alternative financing.
Subordination of Notes
The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including borrowings under the New Credit Facility. In addition,
the Company conducts certain operations through its foreign subsidiaries, and
accordingly, the Notes will be effectively subordinated to indebtedness and
other liabilities of its foreign subsidiaries. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all Senior Indebtedness has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on
21
any or all of the Notes then outstanding. In addition, under certain
circumstances the Company will not be able to make payment of its obligations
under the Notes in the event of a default under certain Senior Indebtedness. The
aggregate principal amount of Senior Indebtedness of the Company, as of November
29, 1997, would have been $132.9 million on a pro forma basis after giving
effect to the Recapitalization. Additional Senior Indebtedness may be incurred
by the Company from time to time, subject to certain restrictions. See
"Description of Notes -- Subordination."
Future Acquisitions
The Company expects to pursue strategic acquisitions. The Company has
entered into an agreement to acquire the Heath-Zenith business of Heath Holding
Corp. See "Business--Recent Developments." No assurance may be given that such
acquisition will ultimately be consummated. Except for the proposed acquisition
of the Heath-Zenith business, the Company has no present understandings,
commitments or agreements with respect to any such acquisitions, the Company
continually evaluates potential acquisition opportunities. The Company is unable
to predict whether any of these opportunities will result in acquisitions.
Acquisitions by the Company could result in the incurrence of additional
indebtedness, which could materially adversely affect the Company's business,
financial condition and results of operations. Acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies and the diversion
of management's attention from other business concerns. In the event that any
such acquisition were to occur, there can be no assurance that the Company's
business, financial condition and results of operations would not be materially
adversely affected. See "Business -- Business Strategy."
Dependence on Brand Names
In fiscal 1997, the majority of the Company's net sales are sales of
products bearing the Company's principal proprietary names of Reddy(R),
Remington(R), Vanguard(R), Comfort Glow(R), Master(R), and Powerfast(R).
Accordingly, the Company's future success may depend in part upon the goodwill
associated with the Company's principal brand names. Most of the Company's brand
names are registered in the United States and certain foreign countries. The
Company owns the rights to all of the registrations with the exception of
Remington, (used in connection with approximately 15% of sales), which is used
pursuant to a perpetual, royalty-free license.
No assurance can be given that the Company will be able to develop or
acquire licenses to use other popular trademarks in the future. Further, there
can be no assurance that the steps taken by the Company or any licensor to
protect the proprietary rights in such brand names will be adequate to prevent
the misappropriation thereof in the United States or abroad. In addition, the
laws of some foreign countries do not protect proprietary rights in brand names
to the same extent as do the laws of the United States.
Risk of Loss of Material Customers
In fiscal year 1997, sales to Home Depot and Lowe's accounted for 13% and
11% of the Company's net sales, respectively. For the nine months ended November
29, 1997, sales to Home Depot and Lowe's accounted for 16% and 14% of the
Company's net sales, respectively. In fiscal year 1997, sales to the Company's
top ten customers accounted for 49% of the Company's total sales.
Consistent with industry practices, the Company does not operate under
long-term written supply contracts with any of its customers. The business,
financial condition, and results of operations of the Company could be
materially adversely affected by loss of Home Depot or Lowe's as continuing
major customers of the Company.
Seasonality of Business
The Company's business is subject to seasonal fluctuation. In fiscal 1997,
sales and operating income during the second and third quarters of the year
averaged approximately 71% and 90% respectively, of the annual totals. The
Company's needs for working capital and the corresponding debt levels tend to
peak in the second and third fiscal quarters. The amount of the Company's sales
generated during the second and third fiscal quarters generally depends
22
upon a number of factors, including the level of retail sales for heating
products during the fall and winter, weather conditions affecting the level of
sales of heating products, general economic conditions and other factors beyond
the Company's control.
Dependence on Key Personnel
The Company's business is managed by a number of key personnel, the loss of
which could have a material adverse effect on the Company. In addition, as the
Company's business develops and expands, the Company believes that its future
success will depend greatly on its continued ability to attract and retain
highly skilled and qualified personnel. Currently the Company has entered into
employment agreements with Robert H. Elman (Chairman, Chief Executive Officer
and Director), Terry G. Scariot (President, Director) and John M. Kelly
(Executive Vice President), and will enter into amended employment agreements
with them upon consummation of the Recapitalization. See "Management --
Employment Agreements with Executive Officers." However, there can be no
assurance that key personnel will continue to be employed by the Company after
the expiration of such amended employment agreements or that the Company will be
able to attract and retain qualified personnel in the future. Failure by the
Company to retain or attract such personnel could have a material adverse effect
on the Company.
Control by Investors
Following the Recapitalization, the Company will be controlled by Childs,
which will beneficially own shares representing 67.5% of the common equity in
Holdings. Accordingly, Childs and affiliates will have the power to elect the
Holdings' board of directors (which will, in turn, elect the Company's board of
directors), appoint new management and cause the approval of any action
requiring the approval of the holders of the Company's Common Stock, including
adopting amendments to the Company's Articles of Incorporation and approving
mergers or sales of substantially all of the Company's assets. The directors
caused to be elected by Childs will have the authority to make decisions
affecting the capital structure of the Company, including the issuance of
additional indebtedness and the declaration of dividends.
Restrictive Covenants
The New Credit Facility and the Indenture will contain restrictive
covenants, which limit the discretion of the management of the Company with
respect to certain business matters. These covenants will place certain
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay dividends
or make other restricted payments, to make investments, loans and guarantees and
to sell or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The New Credit Facility will also contain a
number of financial covenants that will require the Company to meet certain
financial ratios and tests and provide that a "change of control" will
constitute an event of default. See "Description of Notes -- Certain Covenants"
and "Description of New Credit Facility." A failure to comply with the
obligations contained in the New Credit Facility or the Indenture, if not cured
or waived, could permit acceleration of the related indebtedness and
acceleration of indebtedness under other instruments that contain
cross-acceleration or cross-default provisions. In the case of an event of
default under the New Credit Facility, the lenders under the New Credit Facility
would be entitled to exercise the remedies available to a secured lender under
applicable law. If the Company were obligated to repay all or a significant
portion of its indebtedness, there can be no assurance that the Company would
have sufficient cash to do so or that the Company could successfully refinance
such indebtedness. Other indebtedness of the Company that may be incurred in the
future may contain financial or other covenants more restrictive than those
applicable to the New Credit Facility or the Notes.
Potential Inability to Fund Change of Control Offer
Upon a Change in Control (as defined in the Indenture), each holder will
have the right to require the Company to repurchase all or any part of such
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of repurchase. See
"Description of Notes -- Repurchase at the Option of Holders -- Change of
Control." However, there can be no assurance that sufficient funds will be
available to the Company at the time of the Change of Control to make any
required repurchases of Notes tendered.
23
Moreover, restrictions in the New Credit Facility may prohibit the Company from
making such required purchases; therefore, any such repurchases would constitute
an event of default under the New Credit Facility absent a waiver.
Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time.
Fraudulent Conveyance and Preference Considerations
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Guarantors, at the time it incurred the indebtedness
evidenced by the Notes or its Guarantees, as the case may be, (i)(a) was or is
insolvent or rendered insolvent by reason of such occurrence or (b) was or is
engaged in a business or transaction of which the assets remaining with the
Company or such Guarantor were unreasonably small or constitute unreasonably
small capital or (c) intended or intends to incur, or believed, believes or
should have believed that it would incur, debts beyond its ability to repay such
debts as they mature and (ii) the Company or such Guarantor received or receives
less than the reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, the Notes and the Guarantees could be
invalidated or subordinated to all other debts of the Company or such
Guarantors, as the case may be. The Notes or Guarantees could also be
invalidated or subordinated if it were found that the Company or the Guarantor
party thereto, as the case may be, incurred indebtedness in connection with the
Notes or its Guarantees with the intent of hindering, delaying or defrauding
current or future creditors of the Company or such Guarantor, as the case may
be. In addition, the payment of interest and principal by the Company pursuant
to a Guarantee could be voided and required to be returned to the person making
such payment, or to a fund for the benefit of the creditors of the Company, as
the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the sum of all of its assets at a fair valuation or if the present
fair saleable value of its assets were less than the amount that would be
required to pay its probable liability on its existing debt, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Guarantor with respect to the Notes or a Guarantees,
respectively, or after the issuance of a Guarantees, or if the Company or such
Guarantor anticipated becoming insolvent at the time of such payment or
issuance, all or a portion of such payment or such Guarantees could be avoided
as a preferential transfer, and the receipt of any such payment could be
required to return such payment.
To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for any other reason, holders of Notes would cease to have any
claim in respect of such Guarantor and would be creditors solely of the Company
and any Guarantor whose Guarantees was not avoided or held unenforceable. In
such event, the claims of holders of Notes against the issuer of an invalid
Guarantees would be subject to the prior payment of all liabilities and
preferred stock claims of such Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of holders of Notes relating to
any voided portions of any Guarantees. The Company currently has no significant
subsidiaries.
On the basis of its historical financial information, recent operating
history and projected financial data, the Company believes that, after giving
effect to the indebtedness incurred in connection with the Recapitalization, it
will not be insolvent, will not have unreasonably small assets or capital for
the businesses in which it is engaged and will not incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however, as
to what standard a court would apply in making such determinations.
24
THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes, the Company, Holdings and the
Initial Purchasers entered into the Registration Rights Agreement, which
requires the Company to file with the Commission a registration statement under
the Securities Act with respect to an issue of senior subordinated notes of the
Company with terms identical to the Old Notes (except with respect to
restrictions on transfer) and to use their best efforts to cause such
registration statement to become effective under the Securities Act by no later
than Marach 26, 1998 and, upon the effectiveness of such registration statement,
to offer to the holders of the Old Notes the opportunity, for a period of 30
business days (or longer if required by applicable law) from the date the notice
of the Exchange Offer is mailed to holders of the Old Notes, to exchange their
Old Notes for a like principal amount of New Notes. The Exchange Offer is being
made pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder.
Under existing interpretations of the staff of the Commission enunciated in
no-action letters issued to third parties, the New Notes would, in general, be
freely transferable after the Exchange Offer without further registration under
the Securities Act by holders thereof (other than (i) a broker-dealer who
acquires such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangements with any person to participate in the distribution of such New
Notes. Eligible holders wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes.
Terms of the Exchange Offer
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is neither an affiliate of the Company nor a broker-dealer tendering
Old Notes acquired directly from the Company for its own account, (ii) any New
Notes to be received by it were acquired in the ordinary course of its business
and (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection with
any resales of New Notes, any broker-dealer (a "Participating Broker-Dealer")
who acquired Old Notes for its own account as a result of market-making
activities or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the New
Notes. The Commission has taken the position, in no-action letters issued to
third parties, that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes (other than a resale of an
unsold allotment from the original sales of Old Notes) with the prospectus
contained in the Registration Statement. Under the Registration Rights
Agreement, the Company and the Guarantors are required to allow Participating
Broker-Dealers (and other persons, if any, subject to similar prospectus
delivery requirements) to use the prospectus contained in the Registration
Statement in connection with the resale of such New Notes, provided, however,
they shall not be required to amend or supplement such prospectus for a period
exceeding 180 days after the consummation of the Exchange Offer.
If (a) the Company and the Guarantors fail to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company and the
Guarantors fail to Consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Company and the Guarantors will pay Liquidated Damages to each Holder
of Transfer Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per
25
week per $1,000 principal amount of Notes constituting Transfer Restricted
Securities held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount constituting
Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.50 per week per $1,000 principal amount of Notes
constituting Transfer Restricted Securities. Liquidated Damages accrued as of
any interest payment date will be payable on such date. Following the cure of
all Registration Defaults, the accrual of Liquidated Damages will cease.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue $1,000 in principal amount of New Notes (and
integral multiples in excess thereof) in exchange for an equal principal amount
of outstanding Old Notes tendered and accepted in the Exchange Offer. Holders
may tender some or all of their Old Notes pursuant to the Exchange Offer in any
denomination of $1,000 or in integral multiples in excess thereof.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will not bear legends restricting the
transfer thereof. The New Notes will evidence the same debt as the Old Notes.
The New Notes will be issued under and entitled to the benefits of the
Indenture.
As of the date of this Prospectus, $130,000,000 million aggregate principal
amount of the Old Notes are outstanding and CEDE & Co., the nominee of DTC, is
the only registered holder thereof. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be eligible for trading in the
PORTAL Market, the National Association of Securities Dealers' screen based,
automated market trading of securities eligible for resale under Rule 144A, and
to be issued and transferable in book-entry form through the facilities of DTC.
The New Notes will also be issuable and transferable in book-entry form through
DTC.
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of __________, 1998 (the "Record Date").
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. See "Exchange Agent." The Exchange Agent will act as agent for
the tendering holders of Old Notes for the purpose of receiving New Notes from
the Company and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
26
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"Fees and Expenses."
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder. Old Notes that are not tendered for exchange in the Exchange Offer
will remain outstanding and continue to accrue interest, but will not be
entitled to any rights or benefits under the Registration Rights Agreement.
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on
___________, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Notes not previously accepted, if any of the conditions set forth
herein under "Termination" shall have occurred and shall not have been waived by
the Company (if permitted to be waived by the Company), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
and (ii) to amend the terms of the Exchange Offer in any manner ,deemed by it to
be advantageous to the holders of the Old Notes. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the Old Notes of such amendment.
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
Interest on the New Notes
The New Notes will bear interest from the last Interest Payment Date on
which interest was paid on the Old Notes, or if interest has not yet been paid
on the Old Notes, from October 24, 1997. Such interest will be paid with the
first interest payment on the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes.
The New Notes will bear interest at a rate of 97/8% per annum. Interest on
the New Notes will be payable semi-annually, in arrears on each Interest Payment
Date following the consummation of the Exchange Offer. Untendered Old Notes that
are not exchanged for New Notes pursuant to the Exchange Offer will bear
interest at a rate of 97/8% per annum after the Expiration Date.
Procedures for Tendering
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless the book-entry transfer procedures
27
described below are used) and any other required documents, to the Exchange
Agent for receipt prior to 5:00 p.m., New York City time, on the Expiration
Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make bookentry delivery of the Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's procedure for such transfer Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth in
this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date.
DELIVERY OP DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder or
any person whose Old Notes are held of record by DTC who desires to deliver such
Old Notes by book-entry Transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") that is a participant
in a recognized medallion signature guarantee program unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
submit evidence satisfactory to the Company of their authority to so act with
the Letter of Transmittal.
28
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Notes nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering holder of such Old Notes unless otherwise provided in the Letter of
Transmittal as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder of the Old Notes, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby, and guaranteeing that, within
three business days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing the Old Notes
(unless the book-entry transfer procedures are to be used) to be tendered in
proper form for transfer and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
into the Exchange Agent's account at DTC of Old Notes delivered electronically)
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
29
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no New Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes that have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "Procedures for Tendering" at any time prior to
the Expiration Date.
Termination
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if: (i) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer, which, in the Company's
judgment, might materially impair the Company's ability to proceed with the
exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission in a manner, which, in the Company's judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period.
Exchange Agent
The Marine Midland Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail: By Hand or Overnight Delivery:
By Facsimile for Eligible Institutions:
(212) ___________.
30
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer will
be borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or by telephone.
The Company will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, Letters of Transmittal
and related documents to the beneficial owners of the Old Notes and in handling
or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes not tendered or accepted for exchange are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records on
the date of the exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company upon the consummation of the Exchange Offer.
The expenses of the Exchange Offer will be amortized by the Company over the
term of the New Notes under generally accepted accounting principles.
31
CAPITALIZATION OF THE COMPANY
The following table sets forth, as of November 29, 1997, the consolidated
capitalization of the Company. This table should be read in conjunction with
"Description of the Notes," "Description of New Credit Facility," "Description
of Holdings Preferred Stock" and the Consolidated Financial Statements and the
notes thereto appearing elsewhere in this Offering Memorandum.
(dollars in
thousands)
New Credit Facility Revolving Credit Facility(1) $ 32,855
Term Loan Facility 100,000
Senior Subordinated Notes 130,000
---------
Total Long-Term Debt 262,855
Stockholders' equity (deficit)(2) (23,872)
---------
Total Capitalization $ 238,983
=========
- - - - ----------
(1) The Revolving Credit Facility will provide for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been $10.7
million during the twelve months ended November 29, 1997. This amount
excludes letters of credit which will be issued to replace outstanding
letters of credit established to facilitate merchandise purchase, which had
an aggregate outstanding balance of $0.9 million as of November 29, 1997.
(2) The following are the components to reconcile the Company's Stockholders'
Equity to Pro Forma Holdings' Stockholders' Equity:
November 29, 1997
-----------------
DESA DESA Holdings
International DESA Holdings Consolidated
------------- ------------- ------------
(dollars in thousands)
Historical Stockholders' Equity $ (23,872) $(121,383) $(145,255)
32
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA OF HOLDINGS
The following Unaudited Pro Forma Condensed Consolidated Financial Data are
based on the historical audited consolidated financial statements of Holdings
included elsewhere in this Prospectus, adjusted to give effect to the pro forma
adjustments described in the notes thereto. The Unaudited Pro Forma Condensed
Consolidated Statement of Income Data of Holdings for the year ended March 1,
1997 gives effect to the Recapitalization and the proposed acquisition of the
Heath/Zenith business as if they had occurred on March 3, 1996. The Unaudited
Pro Forma Condensed Consolidated Statement of Income Data for the thirty-nine
weeks ended November 29, 1997 gives effect to the Recapitalization and the
proposed Heath/Zenith acquisition as if they had occurred on March 2, 1997. The
Unaudited Pro Forma Statements of Income Data exclude non- recurring transaction
fees of $9.5 million associated with the Recapitalization. The Unaudited Pro
Forma Condensed Consolidated Balance Sheet Data of Holdings reflects the pro
forma adjustments related to the proposed Heath/Zenith acquisition as though it
had occurred on November 29, 1997. The historical information utilized for
Heath/Zenith is based upon its financial statements for the twelve months ended
December 31, 1996 and the nine months ended October 5, 1997.
The pro forma adjustments are based upon available data and certain
assumptions that Holdings believes are reasonable. The Unaudited Pro Forma
Condensed Consolidated Financial Data are not necessarily indicative of
Holdings' financial position or results of operations that might have occurred
had the Recapitalizationor the Heath/Zenith acquisition been completed as of the
dates indicated above and do not purport to represent what Holdings'
consolidated financial position or results of operations might be for any future
period or date. The Unaudited Pro Forma Condensed Consolidated Financial Data
should be read in conjunction with the Consolidated Financial Statements of
Holdings and the information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Offering Memorandum.
The Recapitalization was accounted for as a recapitalization.
33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME DATA
Year Ended March 1, 1997
(in thousands)
Pro Forma
Pro Forma Adjustments for
DESA Adjustments for Heath/Zenith Heath/Zenith
Historical Recapitalization Pro Forma Historical Acquisition Pro Forma
---------- ---------------- --------- ---------- ----------- ---------
Net sales $ 209,105 $ $ 209,105 $ 44,415 $ $ 253,520
Cost of sales 130,890 130,890 34,758 (209)(9) 165,439
--------- --------- --------- --------- ---------
Gross profit 78,215 78,215 9,657 209 88,081
Selling and administrative expenses 42,656 (950)(1) 41,706 7,837 (984)(8)(9) 48,531
(28)(10)
--------- --------- --------- --------- --------- ---------
Operating profit 35,559 950 36,509 1,820 1,221 39,550
Interest expense 14,509 6,814 21,323 559 1,970(6) 23,852
Other expenses 2,601 (45)(3) 2,596 (150) 826(7) 3,272
40 (4)
--------- --------- --------- --------- --------- ---------
Income before income taxes 18,449 (5,859) 12,590 1,411 (1,575) 12,426
Income taxes 7,733 (2,461)(5) 5,272 494 (563)(5) 5,203
--------- --------- --------- --------- --------- ---------
Income before extraordinary item. $ 10,716 $ (3,398) $ 7,318 $ 917 $ (1,012) $ 7,223
========= ========= ========= ========= ========= =========
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income Data
34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME DATA
Thirty-nine Weeks Ended November 29, 1997
(in thousands)
Pro Forma
Pro Forma Adjustments for
DESA Adjustments for Heath/Zenith Heath/Zenith
Historical Recapitalization Pro Forma Historical Acquisition Pro Forma
---------- ---------------- --------- ---------- ----------- ---------
Net sales $193,404 $ $193,404 $ 41,151 $ $234,555
Cost of sales 123,243 123,243 31,409 (152)(9) 154,500
-------- --------- -------- -------- ---------
Gross profit 70,161 70,161 9,742 152 80,055
Selling and administrative expenses 35,477 (700)(1) 34,777 6,256 (714)(8)(9) 40,298
(21)(10)
-------- --------- --------- -------- -------- ---------
Operating profit 34,684 700 35,384 3,486 887 39,757
Interest expense 11,321 5,748 (2) 17,069 587 1,363 (6) 19,019
Other expenses 2,082 (35)(3) 2,077 (106) 619 (7) 2,590
30 (4)
-------- --------- --------- -------- -------- ---------
Income before income taxes 21,281 (5,043) 16,238 3,005 (1,095) 18,148
Income taxes 8,769 (1,981)(5) 6,788 901 (99)(5) 7,590
-------- --------- --------- -------- -------- ---------
Income before extraordinary item $ 12,512 $ (3,062) $ 9,450 $ 2,104 $ (996) $ 10,558
======== ========= ========= ======== ======== =========
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income Data
35
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME DATA
(In thousands)
Thirty-nine Weeks
Fiscal Year Ended Ended
March 1, 1997 November 29, 1997
------------- -----------------
Pro Forma Adjustments:
(1) To eliminate historical payments made under existing management bonus plan
and to reflect payments under the management bonus plan to be adopted in
connection with the Recapitalization, as follows:
Management incentive compensation plan that will be
adopted by the Company $ 500 $ 500
Less: Existing management incentive compensation plan (1,450) (1,200)
-------- --------
Pro forma adjustment $ (950) $ (700)
======== ========
(2) The pro forma adjustment to interest expense for the Recapitalization
reflects the following:
Interest expense related to new debt:
New Revolving Credit Facility $ 43 $ 926
New Term Loans 8,074 6,226
New Senior Subordinated Notes 12,838 9,627
Commitment Fee: Line of Credit 181 180
Other interest and bank charges 187 110
-------- --------
Subtotal 21,323 17,069
Less: Interest expense relating to Existing Credit Facility (14,509) (11,321)
-------- --------
Pro forma adjustment $ 6,814 $ 5,748
======== ========
(3) To eliminate historical management fees and related expenses and to
reflect management fees to be paid subsequent to the
Recapitalization, as follows:
Management fee subsequent to the Recapitalization $ 240 $ 180
Less: Historical management fee (285) (215)
-------- --------
Pro forma adjustment $ (45) $ (35)
======== ========
(4) To eliminate amortization of historical deferred financing costs and to
reflect amortization of deferred financing costs to be incurred in
connection with the Recapitalization:
Amortization of deferred financing costs to be incurred in connection
with the Recapitalization $ 1,016 $ 762
Less: Amortization of historical deferred financing costs (976) (732)
-------- --------
Pro forma adjustment $ 40 $ 30
======== ========
36
Thirty-nine Weeks
Fiscal Year Ended Ended
March 1, 1997 November 29, 1997
------------- -----------------
(5) To record the income tax benefit related to pro forma adjustments; computed
using an effective tax rate of 42%.
(6) The pro forma adjustment to interest expense for the Heath/Zenith
acquisition reflects the following:
Interest expense related to new debt:
Working capital advance $ 726 $ 561
Acquisition advance 1,653 1,276
Note payable 150 113
-------- --------
Subtotal 2,529 1,950
Less: Interest expense relating to Existing Credit Facility (559) (587)
-------- --------
Pro forma adjustment $ 1,970 $ 1,363
======== ========
(7) To eliminate amortization of historical goodwill and to reflect amortization
of goodwill to be incurred in connection with the Heath/Zenith acquisition:
Amortization of goodwill to be incurred in connection with the acquisition $ 677 $ 508
Less: Amortization of historical goodwill 149 111
-------- --------
Pro forma adjustment $ 826 $ 619
======== ========
(8) To eliminate historical management fees and related expenses and to
reflect management fees to be paid subsequent to the
Heath/Zenith acquisition, as follows:
Management fee subsequent to the acquisition $ -- $ --
Less: Historical management fee (217) (169)
-------- --------
Pro forma adjustment $ (217) $ (169)
======== ========
(9) To reflect synergies related to the Heath/Zenith acquisition, as follows:
Cost of Sales $ (209) $ (152)
Selling, general & administrative (767) (546)
-------- --------
Pro forma adjustment $ (976) $ (697)
======== ========
(10) To eliminate depreceiation recorded in Selling, General & Administrative
expenses that is related to the real estate which is not being acquired in
the Heath/Zenth acquisition: $ (28) $ (21)
-------- --------
Pro forma adjustment $ (28) $ (21)
======== ========
37
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(in thousands)
As of November 29, 1997
-----------------------
DESA Heath/Zenith Pro Forma
Historical Historical(A) Adjustments Pro Forma
---------- ------------- ----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 201 $ 131 $ $ 332
Accounts receivable (net)
Trade 65,586 8,268 73,854
Other -- 1,079 1,079
Inventories 27,133 10,539 37,672
Other current assets 2,331 1,721 4,052
--------- --------- --------- ---------
Total current assets 95,251 21,738 -- 116,989
Fixed assets (net) 11,409 1,040 (713)(4) 11,736
Goodwill(B) 39,999 (1,651) 29,746 (5) 67,094
Other assets 11,121 1,561 12,682
--------- --------- --------- ---------
Total assets $ 157,780 $ 22,688 $ 28,033 $ 208,501
========= ========= ========= =========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 25,114 $ 4,580 $ (1,273)(1) $ 28,421
Accrued liabilities 10,319 6,121 16,440
Note payable -- 7,160 (7,160)(2) 2,000
2,000 (3)
Income taxes payable 2,705 -- (210)(3) 2,495
Current portion of long-term debt 22,355 221 (221)(2) 22,555
200 (3)
--------- --------- -------- ---------
Total current liabilities 60,493 18,082 (6,664) 71,911
Long-term debt 240,500 313 (313)(2) 269,500
29,000 (3)
Deferred tax liabilities 1,663 -- 1,663
Other liabilities 379 -- 379
--------- --------- -------- ---------
Total liabilities $ 303,035 18,395 22,023 343,453
Commitments
Redeemable preferred stock 17,600 -- 17,600
Stockholders' equity (deficit) (162,855) 4,293 6,400 (3) (152,552)
(390)(3)
--------- --------- -------- ---------
(deficit) $ 157,780 $ 22,688 $ 28,033 $ 208,501
========= ========= ========= =========
<FN>
(A) Heath/Zenith based upon October 5, 1997 financial statements
(B) Heath/Zenith historical goodwill is negative goodwill
</FN>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
38
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
Pro Forma Adjustments:
(1) To eliminate payable to affiliate $ (1,273)
=========
(2) To reflect payment of debt, as follows:
Note payable $ (7,160)
Bank debt (534)
Pro forma adjustment $ (7,694)
(3) To reflect the sources and uses of cash and cash equivalents
used to finance the Heath/Zenith acquisition, as follows:
Sources:
New Credit Facility-Revolving Credit Facility $ 9,200
New Credit Facility-Acquisition Facility 20,000
Sale of Common Stock 6,400
Note payable 2,000
--------
$ 37,600
========
Uses:
Purchase of Heath/Zenith $ 37,000
Financing costs 600
--------
$ 37,600
========
(4) To eliminate real estate not being acquired as part of the Heath/Zenith
acquisition $ (713)
========
(5) To reflect goodwill associated with the Heath/Zenith acquisition $ 28,746
========
39
SELECTED FINANCIAL DATA
Set forth below are selected historical financial data and other historical
operating data of Holdings. The summary historical Statements of Operating Data
and Balance Sheet Data below for each of the years in the three year period
ended March 1, 1995 and as of March 2, 1996 and March 1, 1997 have been derived
from the audited consolidated financial statements of Holdings which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Prospectus. The summary historical Statement of Operating Data below for
the year ended February 26, 1994 represents the unaudited pro forma results of
combining the consolidated income statement data of Holdings from its date of
incorporation, December 1, 1993, through February 26, 1994 with the income
statement data of the Company from February 28, 1993 through November 30, 1993,
which statements for the three and nine month periods, not presented separately
herein, have also been audited by Ernst & Young LLP. The summary historical
Balance Sheet Data at February 26, 1994 has been derived from the audited
consolidated balance sheet of Holdings which has also been audited by Ernst &
Young LLP, but which is not included elsewhere herein. The summary historical
Statement of Operating Data and Balance Sheet Data at and for the year ended
February 27, 1993 have been derived from the audited consolidated financial
statements of the Company which have also been audited by Ernst & Young LLP, but
which are not included elsewhere herein. The summary historical Statement of
Operating Data for the thirty-nine weeks ended November 30, 1996 and November
29, 1997 and the summary historical Balance Sheet Data at November 29, 1997 have
been derived from Holdings' unaudited consolidated financial statements for
those periods included elsewhere in the Offering Memorandum and, in each case,
include, in the opinion of management, all adjustments consisting of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. Results of operations for the thirty-nine weeks ended
November 29, 1997 are not necessarily indicative of the results that may be
expected for the entire year. The information presented below is qualified in
its entirety by, and should be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
Thirty-one
Fiscal Year Weeks Ended
----------- -----------
November 30, November 29,
1993 1994 1995 1996(1) 1997 1996 1997
---- ---- ---- ------- ---- ---- ----
(in thousands, except ratios) (unaudited)
Statement of Operating Data:
Net sales(2) $ 98,712 $ 122,777 $ 172,501 $ 186,324 $ 209,105 $ 173,587 $ 193,404
Cost of sales 66,902 80,444 107,484 116,217 130,890 108,587 123,243
--------- --------- --------- --------- --------- --------- ---------
Gross profit 31,810 42,333 65,017 70,107 78,215 65,000 70,161
Selling and administrative expenses 21,742 26,008 33,851 35,503 42,656 32,083 35,477
--------- --------- --------- --------- --------- --------- ---------
Operating profit(3) 10,068 16,325 31,166 34,604 35,559 32,917 34,684
Interest expense 4,186 4,349 5,777 7,073 14,509 11,105 11,321
Other expenses 578 875 2,124 2,325 2,601 1,830 2,082
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 5,304 11,101 23,265 25,206 18,449 19,982 21,281
Income taxes 2,154 4,702 10,064 10,703 7,733 8,378 8,769
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item 3,150 6,399 13,201 14,503 10,716 11,604 12,512
Extraordinary item -- 4,387 -- 2,638 -- -- 7,797
--------- --------- --------- --------- --------- --------- ---------
Net income $ 3,150 $ 2,012 $ 13,201 $ 11,865 $ 10,716 $ 11,604 $ 4,715
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges(4) 2.1x 2.9x 4.4x 4.0x 2.2x 2.1x 2.7x
Other Data:
EBITDA (5) $ 11,790 $ 18,198 $ 33,270 $ 36,853 $ 37,779 $ 35,019 $ 36,749
EBITDA margin 11.9% 14.8% 19.3% 19.8% 18.1% 20.2% 19.0%
Capital expenditures $ 1,655 $ 1,420 $ 1,499 $ 2,122 $ 2,770 $ 1,662 $ 3,690
Depreciation 1,927 1,938 2,148 2,332 2,432 2,127 2,363
Amortization 335 1,620(6) 1,966 1,963 2,104 1,571 1,569
Balance Sheet Data (at period end):
Cash and cash equivalents $ 462 $ 1,597 $ 16,170 $ 145 $ 5,058 $ 393 $ 201
Working capital (deficit) 5,563 6,680 9,738 (1,194) (8,566) 35,680 34,758
Total assets 27,867 84,055 107,259 85,545 91,984 137,105 157,780
Long-term debt 27,956 62,000 49,700 149,709 130,600 163,194 240,500
Stockholders' equity (deficit) (13,210) 2,279 16,194 (95,402) (84,754) (83,577) (145,255)
- - - - ----------
<FN>
(1) 53-week fiscal year. Holdings was party to a recapitalization in January 1996 which impacted interest expense,
stockholders' equity and long term debt.
40
(2) Net sales constitute gross sales net of an accrual for returns and allowances and cash discounts.
(3) Operating income is before amortization of intangibles and deferred charges and certain management fees and miscellaneous
expenses. Management fees and related expenses amounted to $38, $25, $114, $279 and $285 for the fiscal years 1993, 1994,
1995, 1996 and 1997, respectively, and $234 and $215 for the thirty-nine weeks ended November 30, 1996 and November 29,
1997, respectively. Miscellaneous (income)/expenses amounted to $205, $65, $44, $83 and $212 for fiscal 1993, 1994, 1995,
1996 and 1997, respectively, and $25 and $298 for the thirty-nine weeks ended November 30, 1996 and November 29, 1997,
respectively.
(4) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing cost and 33% of rent expense from operating leases which
the Company believes is a reasonable approximation of the interest factor included in the rent.
(5) EBITDA is defined as income before taxes plus interest expense and depreciation as well as amortization of intangibles and
deferred charges and management fees and related expenses which are included in other expenses on the Statement of
Operating Data. EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to
service and/or incur indebtedness and because management believes that EBITDA is a relevant measure of the Company's
ability to generate cash without regard to the Company's capital structure or working capital needs. However, EBITDA should
not be considered as an alternative to net income as a measure of a company's operating results or to cash flows from
operating activities as a measure of liquidity. EBITDA as presented may not be comparable to similarly titled measures used
by other companies, depending upon the non- cash charges included. When evaluating EBITDA, investors should also consider
other factors which may influence operating and investing activities, such as changes in operating assets and liabilities
and purchases of property and equipment.
(6) Includes amortization of $835 included in extraordinary item.
(7) The Company's business is subject to a pattern of seasonal fluctuation. As such, the Company's needs for working capital
tend to peak in the second and third fiscal quarters.
</FN>
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with "Selected
Financial Data" and the audited Consolidated Financial Statements of Holdings
and the notes thereto included elsewhere in this Offering Memorandum.
The Company is organized into two primary product categories: (a) Zone
Heating Products (80% of domestic fiscal 1997 gross sales), which includes
indoor room heaters, hearth products and outdoor heaters, and (b) Specialty
Tools (20% of domestic fiscal 1997 gross sales), which includes powder actuated
fastening systems (tools and accessories) and electrical products. The Company
records sales upon shipment of products to its customers. Net sales constitute
gross sales net of an accrual for returns and allowances and cash discounts.
The Company has experienced strong historical growth, with net sales and
EBITDA increasing at CAGRs of 20% and 29%, respectively, from fiscal 1992 to
fiscal 1997. The Company's growth has been driven by strong performance across
all product categories from both new product introductions and internally
generated growth. The Company has made only three small acquisitions from fiscal
1992 to fiscal 1997. Since fiscal 1992, new product introductions have generated
approximately 56% of the Company's sales growth. The Company focuses on its new
product development efforts on products that (i) are complementary to its
current product offerings or that utilize the Company's established
technologies, and (ii) can be sold through the Company's well-established
distribution channels. The Company's strategy is to introduce its new hearth
products in the specialty heating channel (i.e., liquid propane distributors and
natural gas utilities) and then expand the distribution to the consumer channel
(i.e., home centers and mass merchandisers). As part of this strategy, the
Company began selling its line of vent-free fireplace products, introduced to
the specialty heating channel in fiscal 1995, to Lowe's in fiscal 1997 and to
Home Depot in fiscal 1998.
Zone heating product revenues have been driven by factors such as (i) the
effectiveness of zone heating products for area heating, (ii) the increased
availability of these products as a result of the growth in home improvement
retailers, (iii) the cost efficiency of natural gas and propane as heating
fuels, (iv) favorable regulatory trends and (v) seasonal weather conditions.
Specialty tools revenues have been driven by demand of DIY consumers and
commercial contractors.
In fiscal 1997, approximately $19.6 million or 9.4% of DESA's net sales
were generated outside the U.S. DESA adapts its domestic product line to
accommodate local requirements, government regulations and user preferences in
each international market.
Principally due to sales of zone heating products, DESA's business is
seasonal, as depicted by the following table which sets forth certain operating
results of DESA for each of the four consecutive fiscal quarters in the periods
ending March 1, 1997 and March 2, 1996 (dollars in thousands):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Fiscal 1997
Total Net Sales $ 24,267 $ 60,021 $ 89,299 $ 35,518 $209,105
Operating Profit 926 12,844 19,150 2,639 35,559
Fiscal 1996
Total Net Sales $ 25,986 $ 67,986 $ 66,092 $ 26,260 $186,324
Operating Profit 3,838 15,452 14,037 1,277 34,604
Approximately 70% of annual sales occur in the second and third fiscal
quarters (June-November) as the Company's zone heating customers place early
booking orders for shipment in anticipation of the winter selling season.
Approximately 60% of the Company's annual sales volume are booked in the
five-month period of March through July.
42
DESA has not historically been capital intensive. The Company has focused
on investing in programs which either reduce operating costs or facilitate new
product development. The Company has a long-standing cost reduction program and
has exceeded its annual cost reduction goal of 3% of cost of sales in each of
the last three fiscal years. Historically, the Company's cost reduction efforts
have been focused on indoor vent-free heaters and outdoor heaters. In fiscal
1998, the Company's cost reduction efforts are focused on some of its newer
products, such as vent-free hearth products.
Historical Capital Expenditures
(dollars in thousands)
Fiscal Year
-----------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Replacement Expenditures, Cost Reduction Programs, New
Products and Capacity $1,331 $1,132 $1,420 $1,499 $2,122 $2,770
Acquisitions/Buildings/Other 754(1) 523(2) 0 664(3) 0 0
Total Capital Expenditures $2,085 $1,655 $1,420 $2,163 $2,122 $2,770
====== ====== ====== ====== ====== ======
- - - - ----------
<FN>
(1) Acquisition of a vented heater product line and an electric generator product line
(2) Bowling Green, Kentucky office building expansion to replace leased offices
(3) Acquisition of an outdoor heater product line
</FN>
Results of Operations
The following table sets forth certain income statement information for
Holdings for the fiscal years ended February 25, 1995, March 2, 1996 and March
1, 1997 and the thirty-nine week periods ended November 30, 1996 and November
29, 1997:
Fiscal Year Ended Thirty-nine Weeks Ended
----------------------------------------------------------- -----------------------------------------------
Percentage Percentage Percentage Percentage Percentage
of of of November 30, of November 29, of
1995 Net Sales 1996 Net Sales 1997 Net Sales 1996 Net Sales 1997 Net Sales
---- --------- ---- --------- ---- --------- ---- --------- ---- ---------
Net sales $172,501 100.0% $186,324 100.0% $209,105 100.0% $173,587 100.0% $193,404 100.0%
Cost of sales 107,484 62.3% 116,217 62.4% 130,890 62.6% 108,587 62.6% 123,243 63.7%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit 65,017 37.7% 70,107 37.6% 78,215 37.4% 65,000 37.4% 70,161 36.3%
Selling and
administrative
expenses 33,851 19.6% 35,503 19.1% 42,656 20.4% 32,083 18.5% 35,477 18.3%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating profit 31,166 18.1% 34,604 18.5% 35,559 17.0% 32,917 19.0% 34,684 17.9%
Other expenses 2,124 1.2% 2,325 1.2% 2,601 1.2% 1,830 1.1% 2,082 1.1%
Interest expense 5,777 3.3% 7,073 3.8% 14,509 6.9% 11,105 6.4% 11,321 5.9%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income before
provision for
taxes 23,265 13.6% 25,206 13.5% 18,449 8.9% 19,982 11.5% 21,281 11.0%
Provision for
income taxes 10,064 5.8% 10,703 5.7% 7,733 3.7% 8,378 4.8% 8,769 4.6%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income before
extraordinary
item 13,201 7.8% 14,503 7.8% 10,716 5.2% 11,604 6.7% 12,512 6.4%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Extraordinary item -- 0.0% 2,638 1.4% -- 0.0% -- 0.0% 7,797 4.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net income $ 13,201 7.8% $ 11,865 6.4% $ 10,716 5.2% $ 11,604 6.7% $ 4,715 2.4%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
43
Thirty-nine Weeks Ended November 29, 1997 Compared to Thirty-nine Weeks Ended
November 30, 1996
Net Sales. Total net sales increased 11.2% from $173.6 million for the
thirty-nine weeks ended November 30, 1996 to $193.4 million for the thirty-nine
weeks ended November 29, 1997. Indoor heating and hearth product sales increased
36.7% from $67.6 million to $92.4 million due to increased acceptance of hearth
products in both the Company's consumer channel (e.g., Home Depot and Lowe's)
and its traditional specialty gas channel (i.e., liquid propane distributors)
and the growth of DESA's existing customers. Outdoor heating products sales
declined 12.1% from $64.3 million to $56.5 million due to the impact of the mild
1996/1997 winter weather which left certain of the Company's customers with
higher than anticipated inventory levels. Specialty tools product sales
increased 9.8% to $32.4 million due to DESA's expansion within the consumer
channel.
Cost of Sales. Cost of sales increased 13.4% from $108.6 million for the
thirty-nine weeks ended November 30, 1996 to $123.2 million for the thirty-nine
weeks ended November 29, 1997. The increase was primarily associated with the
increase in net sales over the same period. Gross profit margin decreased from
37.4% to 36.3%. The decrease in gross profit margin resulted primarily from the
decrease in sales of outdoor heating products, which have higher gross profit
margins than hearth products and specialty tools. In addition, gross profit was
adversely impacted as a result of inefficiencies relating to the expansion of
hearth products capacity at the Shelbyville plant (new paint system, fabrication
equipment/tooling and workforce training).
Selling and Administrative Expenses. Selling and administrative expenses
increased 10.6% from $32.1 million for the thirty-nine weeks ended November 30,
1996 to $35.5 million for the thirty-nine weeks ended November 29, 1997. The
increase was due primarily to the increase in net sales over the same period.
However, these costs declined as a percentage of sales from 18.5% to 18.3% due
to increased operating leverage as a result of the increase in sales during the
period.
Operating Profit. Due to the factors described above, operating profit
increased 5.5%, from $32.9 million for the thirty-nine weeks ended November 30,
1996 to $34.7 million for the thirty-nine weeks ended November 29, 1997.
Interest Expense. Interest expense increased modestly from $11.1 million for
the thirty-nine weeks ended November 30, 1996 to $11.3 million for the
thirty-nine weeks ended November 29, 1997, as higher current working capital
requirements were largely offset by the debt reductions due to increased fiscal
year 1997 cash flow.
Income Tax. Income taxes increased 6.5% from $8.4 million for the thirty-nine
weeks ended November 30, 1996 to $8.9 million for the thirty-nine weeks ended
November 29, 1997. The overall effective income tax rate was 42% for both
periods.
Net Income. Net income before extraordinary item increased 6.9% from $11.6
million for the thirty-nine weeks ended November 30, 1996 to $12.4 million for
the thirty-nine weeks ended November 29, 1997 due to the factors described
above.
Extraordinary Item. The extraordinary item of $7.8 million in the thirty-nine
weeks ended November 29, 1997 reflects the costs of the Recapitalization.
Year Ended March 1, 1997 (52 weeks) Compared to the Year Ended March 2, 1996 (53
weeks)
Net sales. Net sales increased 12.2% from $186.3 million for the year ended
March 2, 1996 to $209.1 million for the year ended March 1, 1997. Indoor heating
product sales increased 10.1% from $69.3 million to $76.3 million driven by
higher hearth product sales due primarily to increased penetration of the
consumer channel. Outdoor heating product sales increased 18.2% from $75.2
million to $88.9 million due to an increase in promotion, expansion in the
hardware/home center channel and higher sales resulting from the colder
1996/1997 winter weather in Europe. Specialty tool sales increased 5.0% from
$41.8 million to $43.9 million due primarily to continued growth in the consumer
channel
44
of powder actuated tools and related accessories and the expansion of one of the
Company's chain saw models to a major customer which replaced a competitive
product.
Cost of Sales. Cost of sales increased 12.7% from $116.2 million in fiscal
year 1996 to $130.9 million in fiscal year 1997. The increase was primarily due
to sales growth of 12.2% for the same period. As a percentage of sales, gross
profit margin decreased slightly from 37.6% to 37.4%. Gross margins were
negatively affected by a shift in product mix which was partially offset by cost
reductions and margin improvements realized as a result of increased production
volume resulting from sales growth.
Selling and Administrative Expenses. Selling and administrative expenses
increased 20.3% from $35.5 million in fiscal year 1996 to $42.7 million in
fiscal year 1997 due primarily to the sales growth of 12.2% for the same period.
Selling and administrative expenses increased as a percentage of sales from
19.1% in fiscal 1996 to 20.4% in fiscal 1997 due to a consumer advertising
program, key account volume rebate program, warranty expense and executive
recruiting expenses.
Operating Profit. Operating profit increased 2.9% from $34.6 million in
fiscal 1996 to $35.6 million in fiscal 1997 due to the factors mentioned above.
Interest Expense. Interest expense increased 104.2% from $7.1 million in
fiscal year 1996 to $14.5 million in fiscal year 1997. The higher interest
expense relates to the increased borrowings associated with the recapitalization
of Holdings in January 1996.
Income Taxes. Income taxes (exclusive of extraordinary item) decreased by
28.0% from $10.7 million in fiscal 1996 to $7.7 million in fiscal year 1997. The
overall effective income tax rate is 42% for both periods.
Net Income. Net income decreased 10.1% from $11.9 million in fiscal year 1996
to $10.7 million in fiscal year 1997. This reduction reflected the higher
interest expense incurred during fiscal 1997. Fiscal 1996 performance was
adversely affected by the write-off of unamortized balance of deferred financing
costs of existing debt in connection with the recapitalization of Holdings in
January 1996.
Year Ended March 2, 1996 (53 weeks) Compared to the Year Ended February 25, 1995
(52 weeks)
Net sales. Net sales increased 8.0% from $172.5 million for the year ended
February 25, 1995, to $186.3 million for the year ended March 2, 1996. Indoor
heating product sales increased by 2.4% from $67.7 million to $69.3 million due
to sales increases in mini-hearth and vent-free fireplace products partially
offset by lower gas log sales resulting from higher than anticipated customer
inventories of gas logs at the beginning of fiscal 1996 in the specialty gas
channel of distribution. Outdoor heating product sales increased 14.0% from
$66.0 million to $75.2 million due to increased promotion and expansion in the
hardware/home center channel. Specialty tool sales increased 7.5% from $38.9
million to $41.8 million due primarily to continued growth in sales of powder
actuated tools and related accessories.
Cost of Sales. Cost of sales increased 8.1% from $107.5 million in fiscal
1995 to $116.2 million in fiscal 1996 due to sales growth of 8.0% for the same
period. Gross profit margin of 37.6% was comparable to prior year's gross profit
margin of 37.7%.
Selling and Administrative Expenses. Selling and administrative expenses
increased 4.7% from $33.9 million in fiscal 1995 to $35.5 million in fiscal year
1996. However, these costs decreased as a percentage of sales from 19.6% in
fiscal year 1995 to 19.1% in fiscal 1996 resulting from a reduction in sales
commissions and increased operating leverage due to the increase in sales during
the period.
Operating Profit. Due to the factors discussed above, operating profit
increased 10.9% from $31.2 million in fiscal 1995 to $34.6 million in fiscal
1996.
45
Interest Expense. Interest expense increased 22.4% from $5.8 million in
fiscal 1995 to $7.1 million in fiscal 1996 due to higher debt levels resulting
from higher working capital requirements and the recapitalization of Holdings in
January 1996.
Income Taxes. Income taxes increased 5.9% from $10.1 million in fiscal 1995
to $10.7 million in fiscal 1996 as the overall tax rate decreased from 43% in
fiscal 1995 to 42% in fiscal 1996 due to adoption of LIFO inventory accounting
which favorably affected income taxes.
Net Income. Net income declined 9.8% from $13.2 million in fiscal 1995 to
$11.9 million in fiscal 1996.
Liquidity and Capital Resources
Historical
The Company's primary cash needs have been for working capital, capital
expenditures and debt service requirements. The Company's sources of liquidity
have been cash flows from operations and borrowings under its revolving credit
facilities. The Company's business is subject to a pattern of seasonal
fluctuation. The Company's needs for working capital and the corresponding debt
levels tend to peak in the second and third fiscal quarters. The amount of sales
generated during the second and third fiscal quarters generally depends upon a
number of factors, including the level of retail sales for heating products
during the fall and winter, weather conditions affecting the level of sales of
heating products, general economic conditions, and other factors beyond the
Company's control.
Cash used in operating activities for the thirty-nine weeks ended November
29, 1997 was $33.6 million compared to $13.3 million for the thirty-nine weeks
ended November 30, 1996, an increase of $20.3 million. Inventories as of
November 29, 1997 were $8 million higher than the amount at November 30, 1996,
to support higher sales and production activities. Net cash provided by
operating activities was $18.4 million, $19.4 million and $18.3 million for
fiscal years 1997, 1996 and 1995, respectively.
Net cash used in investing activities increased from $1.6 million for the
thirty-nine weeks ended November 30, 1996 to $3.5 million for the thirty-nine
weeks ended November 29, 1997 due to capital expenditures for a new powder paint
system and fabrication equipment at the Company's Shelbyville, Tennessee plant
to support growth of hearth products. Net cash used in investing activities was
$2.9 million, $2.1 million and $2.2 million in fiscal 1997, 1996 and 1995,
respectively, consisting primarily of capital expenditures for new products,
capacity increases and cost reduction programs. Fiscal 1995 also included a $0.9
million acquisition of an outdoor heater products line. Net cash provided by
financing activities increased 114% from $15.2 million in the thirty-nine weeks
ended November 30, 1996 to $32.6 million in the thirty-nine weeks ended November
29, 1997 due to an increase in the use of the Company's revolving credit
facility to fund operations, primarily for the increase in inventories. Net cash
used in financing activities totaled $10.6 million, $18.0 million and $1.7
million in fiscal years 1997, 1996 and 1995.
The Existing Credit Facility provided for commitments in an aggregate amount
of up to $220.0 million. Borrowings outstanding under the Existing Credit
Facility were $135.5 million on November 29, 1997. Outstanding letters of credit
and foreign currency contracts established to facilitate merchandise purchases
were $0.9 million and $1.8 million, respectively, on November 29, 1997.
After the Recapitalization
Following the Recapitalization, the Company's primary sources of liquidity
will be cash flow from operations and borrowings under the Revolving Credit
Facility. The Company's primary uses of cash will be debt service requirements,
working capital and capital expenditures.
Concurrently with the Recapitalization, the Company issued the Old Notes for
$130.0 million in gross proceeds, and expects to enter into the Term Loan
Facility and the Revolving Credit Facility. The Term Loan Facility is comprised
of two tranches, each in the aggregate principal amount of $50.0 million. The
Revolving Credit Facility will provide
46
revolving loans in an aggregate amount of up to $75.0 million. Upon closing of
the Recapitalization, the Company borrowed the full amount available under the
Term Loan Facility and $35.5 million under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility were used partially to refinance
seasonal borrowings outstanding under the Existing Credit Facility. The amount
remaining available under the Revolving Credit Facility is available to fund the
working capital requirements of the Company. Proceeds to the Company from the
issuance of the Old Notes and from initial borrowings under the New Credit
Facility, less the repayment of the Existing Credit Facility and other
indebtedness, and transaction expenses, were remitted to Holdings to partially
finance the Recapitalization and the fees and expenses of Holdings incurred in
connection therewith. To provide additional financing to fund the
Recapitalization, Holdings raised (i) $73.8 million through the sale to Childs
and the other Equity Investors of Holdings Common Stock (representing 89.6% of
the outstanding shares upon completion of the Recapitalization), and (ii) $17.6
million through the issuance to Childs and the other Equity Investors of the
Holdings Preferred Stock.
The proceeds of the Old Notes, the Holdings Preferred Stock, the Holdings
Common Stock and the initial borrowings under the New Credit Facility were used
to finance the purchase of all previously outstanding shares of Holdings'
capital stock (other than shares of Holdings Common Stock having an implied
value of $8.6 million which continue to be held by certain Existing Shareholders
and which represent 10.4% of the shares of Holdings Common Stock immediately
following the transaction), to refinance outstanding indebtedness of the Company
and to pay fees and expenses incurred in connection with the Recapitalization.
Borrowings under the New Credit Facility bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR.
The Revolving Credit Facility will mature six years after the closing date. The
two tranches of the Term Loan Facility will be amortized over a six-year and a
seven-year period, respectively. The Company's obligations under the New Credit
Facility are guaranteed by Holdings and each of the Company's direct and
indirect domestic subsidiaries. The New Credit Facility and the guarantees
thereof are secured by substantially all assets of Holdings (including the
capital stock of the Company) and its direct and indirect domestic subsidiaries
and a pledge of the capital stock of all the Company's direct and indirect
subsidiaries, subject to certain limitations with respect to foreign
subsidiaries. The New Credit Facility contains customary covenants and events of
default, including substantial restrictions on the Company's ability to make
dividends or distributions to Holdings. See "Description of New Credit
Facility." Based on the Company's capital and loan structure upon completion of
the Recapitalization, the Company's average monthly revolver balance will be
approximately $15 million, with peak borrowings of approximately $40.0 to $45.0
million from August through October. In addition, the Company will have
approximately $3.0 to $4.0 million of letters of credit outstanding under the
Revolving Credit Facility.
The Holdings Preferred Stock bears cumulative dividends at the rate of 12%
per annum (payable semi-annually). Dividends will compound to the extent not
paid. Subject to restrictions imposed by the Indenture, the New Credit Facility
and other documents relating to Holdings' or the Company's indebtedness,
Holdings may exchange the Holdings Preferred Stock for Exchange Notes having
substantially the same terms as the Holdings Preferred Stock. The Indenture
permits Holdings, under certain circumstances, to exchange all outstanding
Holdings Preferred Stock for Exchange Notes in an aggregate principal amount
equal to the aggregate liquidation preference of the Holdings Preferred Stock so
exchanged. The Exchange Notes will require Holdings to make semi-annual interest
payments thereon at a rate of 12% per annum. Subject to compliance with the debt
agreements of Holdings and the Company, such payments must be in cash. The
Indenture restricts, but does not prohibit, the Company from making such cash
interest payments. Under the Exchange Notes, Holdings may defer the payment of
interest payable on or before November 30, 2001, with any such deferred interest
bearing interest at 12% per annum, compounded semi-annually. Holdings will be
required to make a catch-up payment immediately prior to the first interest
payment date after the fifth anniversary of the date of issuance to the extent
the aggregate amount of such deferred interest exceeds an amount equal to one
year's interest on the originally issued Exchange Notes. The Indenture
restricts, but does not prohibit, the ability of Holdings to make such catch-up
payment. See "Description of the Notes -- Certain Covenants -- Restricted
Payments" and "Description of Holdings Preferred Stock -- Exchange Notes". See
"Description of Holdings Preferred Stock."
The Company expects that capital expenditures, during fiscal 1998 will be
approximately $5.3 million, including $1.7 million for a new paint system and
fabrication equipment at the Company's Shelbyville, Tennessee plant to support
growth of hearth products and $1.3 million to expand the engineering lab and
offices at the Company's main facilities
47
in Bowling Green, Kentucky. Capital expenditures are expected to be funded from
internally generated cash flows and by borrowings under the New Credit Facility.
Management believes that cash flow from operations and availability under the
Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control. See "Risk Factors."
48
BUSINESS
DESA is a leading manufacturer and marketer of zone heating/home comfort
products and specialty tools in the United States. Through its ability to
consistently offer consumers quality products with innovative features at
attractive price points, the Company has developed leading market positions in
(i) vent-free indoor heaters, (ii) vent-free hearth products, (iii) outdoor
heaters, (iv) consumer powder-actuated fastening systems and (v) electric chain
saws. In fiscal 1997, approximately 90% of the Company's sales were generated in
the United States and 10% were generated in international markets. Over 85% of
the domestic sales were in product categories where DESA is the market leader.
The Company has grown rapidly with sales increasing from $83.0 million in fiscal
1992 to $209.1 million in fiscal 1997, representing a CAGR of 20%. The Company's
EBITDA increased from $10.6 million, or 12.8% of sales, in fiscal 1992, to $37.8
million, or 18.1% of sales, in fiscal 1997, representing a CAGR of 29%. For the
twelve months ended October 4, 1997, the Company had sales of $222.1 million and
pro forma EBITDA of $39.8 million.
The Company sells its products through multiple consumer and commercial
channels of distribution including the leading home centers, mass merchants,
warehouse clubs, hardware cooperatives, specialty heating distributors,
construction and industrial equipment dealers, farm supply outlets and natural
gas utilities under brand names well recognized by its customers. The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each channel and service these customers through a multi-brand approach to
capture the largest possible share of a given product market. In addition, the
Company has an established record of success in new product development and
product line extensions. Over the last five years, DESA has introduced over 100
new products and line extensions which generated approximately 56% of the
Company's sales growth over that time period.
Zone Heating Products (80% of Fiscal 1997 Domestic Gross Sales)
The zone heating market is comprised of indoor gas heaters, hearth products
(gas logs, fireplaces and stoves) and outdoor heaters. DESA is a leading
manufacturer of vent-free indoor and outdoor zone heating products in the United
States. DESA's domestic zone heating business has experienced a CAGR of over 27%
with gross revenues increasing from $46.2 million in fiscal 1992 to $155.1
million in fiscal 1997. DESA markets its zone heating products under well-known
brand names such as Reddy(R), Vanguard(R) and Comfort Glow(R). The Company's
zone heating business is organized into two primary product categories:
o Indoor vent-free heating appliances and hearth products (40% of Fiscal 1997
Domestic Gross Sales): Indoor heating appliances include vent-free liquid
propane and natural gas space heaters which provide economical supplemental
heat to a specific area as distinguished from central heating systems which
are used to heat entire buildings. Vent-free hearth products such as gas
logs, fireplaces and stoves are utilized for both decorative and economic
heating. Vent-free products utilize a more efficient burner system which
avoids the need for outside venting, whereas vented products require a
discharging of emissions outside of the building.
o Outdoor heating appliances (40% of Fiscal 1997 Domestic Gross Sales):
Outdoor heating products consist of portable units which generate heat by
either using a fan to discharge heated air to a specific area (forced air
heaters) or emitting heat throughout the surrounding area without the
assistance of a fan (convection heaters). Forced air heaters are fueled by
kerosene, propane or natural gas, while convection heaters are fueled only
with propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating
otherwise unheated garages and workshops. Commercial applications include
heating factories, warehouses, construction sites and agricultural areas.
Specialty Tools (20% of Fiscal 1997 Domestic Gross Sales)
DESA's domestic specialty tools business has experienced a CAGR of 11% with
gross revenues increasing from $23.0 million in fiscal 1992 to $38.8 million in
fiscal 1997. Specialty tools products include powder actuated fastening systems
(tools and accessories) used to fasten wood to concrete or steel, stapling/rivet
tools and electrical products such
49
as chain saws and portable generators. These products are marketed under
well-known brand names such as Remington(R), Master(R) and Powerfast(R).
Competitive Strengths
Leading Market Positions in High Growth Segments. DESA is the domestic
market leader in outdoor heating appliances (70% market share), vent-free indoor
gas heating (59% market share), vent-free hearth products (31% market share),
powder actuated fastening systems (86% share of the consumer market, which
constitutes 26% of the total domestic market) and electric chain saws (36%
market share). By leveraging its strong market positions and customer
relationships in established product lines, DESA has increased sales by
introducing related products or line extensions of existing products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995) and fireboxes (introduced in fiscal 1997).
DESA's targeted market segments in the zone heating market have exhibited
strong historical growth. Vent-free indoor gas heater and hearth products, the
most rapidly growing segments in the $1.1 billion zone heating market, have
grown at a CAGR of approximately 44% over the last four years driven primarily
by the increasing consumer trend towards heating with natural gas and liquid
propane. The outdoor heater market has achieved a CAGR of 22% over the same
period.
Strong Relationships with a Diversified Distribution and Customer Base.
DESA has organized its sales and marketing organizations by channels of
distribution. The Company has built strong, long-term relationships with some of
the most rapidly growing retailers, including Home Depot, Lowe's, Sears,
Wal-Mart, W.W. Grainger, Ace Hardware and TruServ. The Company's products are
designed to appeal to a variety of end-users, ranging from DIY consumers to
professional home builders. By building strong relationships with the leading
retailers and distributors within each of the Company's channels, DESA is
well-positioned to participate in the continued growth of these key customers.
Broad Portfolio of Products with Well-Recognized Brand Names. DESA provides
a broad offering of quality products under numerous brand names which are
well-recognized by its customers. The Company's key brands include: Reddy(R),
Remington(R), Vanguard(R) and Comfort Glow(R) for zone heating products and
Remington(R) for powder actuated fastening systems and electric chain saws. The
Company also manufactures products on a private label basis for W.W. Grainger,
Sears, John Deere and Homelite. DESA leverages its brand equity with its DIY
consumers, professionals and specialty dealers by continually providing its
customers new product offerings and product line extensions under its
established brand names.
Proven New Product Development Process. DESA has a proven ability to
consistently offer consumers products with innovative features at attractive
price points. The quality and breadth of DESA's customer relationships provide
the Company with valuable market data that serves as the foundation for the
Company's new product development and product line extension process. For
example, the Company's line of hearth products was initially introduced as the
result of shifting consumer preferences away from (i) wood-burning hearth
products to gas technology and (ii) vented gas products to vent-free units. Over
the last five years, new product introductions and product line extensions have
accounted for approximately 56% of the Company's sales growth.
Effective Cost Reduction Program and Strong Cash Flow. A core component of
the Company's strong financial performance over the last five years has been a
focused program to enhance margins through cost reduction. The Company has
exceeded its annual cost reduction goal of 3% of cost of sales in each of the
last three years. This cost reduction program has contributed to an increase in
gross profit margin from 33.6% in fiscal 1992 to 37.4% in fiscal 1997.
The Company has been able to achieve its sales growth with efficient use of
working capital and low capital expenditures generating $128.4 million in free
cash flow (EBITDA less capital expenditures) for the last five years.
Strong Management Team. DESA was founded in 1969 by a group including
Robert H. Elman, DESA's current Chairman and CEO. The top three executives of
the Company have worked together as a team for the last 13 years.
50
These individuals have served as the catalyst for instilling a spirit of
"continuous improvements" and achievement as a cultural standard within the
Company. Senior management is well-complemented by a broad team of experienced
managers who have been with DESA since 1985.
Business Strategy
DESA's objective is to continue to leverage its competitive strengths to
increase revenues and EBITDA. In addition, the Company believes there are
significant additional opportunities to enhance its overall market and
competitive position as follows:
Continue Aggressive Growth through DESA's Primary Channels and Customers.
DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its
products through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply stores, building supply chains and fireplace
specialty stores. These newer channels represent attractive markets across the
United States.
Capitalize on Favorable Trends for Vent-Free Gas Products. Recent housing
construction data reveals that over two-thirds of new homes today use gas as the
primary heating source compared to one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the number of homes utilizing gas will grow to 80 million by the
year 2010. This growing preference for gas represents a significant growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally, by focusing on vent-free gas products, which have
lower installation costs and provide increased fuel efficiency compared to
vented products, the Company is well positioned to benefit from the fastest
growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in the
United States, the global DIY markets are experiencing attractive growth rates.
Five of the ten largest home improvement retailers in the world are based
outside of the United States. However, international sales comprised only 10% of
DESA's total sales in fiscal 1997.
Make Selected Acquisitions. The Company intends to seek selective
acquisitions where it can expand its existing product portfolio, utilize its
diversified distribution channels and achieve operational synergies. Over the
last five years, only 9% of the Company's sales growth has come through
acquisitions. Management believes that the markets in which it operates are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.
Products and Markets
DESA is the leader in a number of markets where its quality manufacturing
and innovative product design have resulted in a strong competitive position.
The Company's products are sold for both consumer and commercial use utilizing
multiple distribution channels and a variety of brand names. The Company
currently serves markets for zone heating products and specialty tools.
Approximately 90% of the Company's 1997 sales were domestic and 10% of sales
were international.
Zone Heating Market
Market Overview. The zone heating market includes a broad range of products
that are used to heat limited areas as distinguished from central heating
systems which are used to heat entire buildings. The zone heating market is
51
currently estimated to be approximately $1.1 billion in size, with hearth
products (i.e., vented gas hearth, vent-free gas hearth, wood fireplaces, wood
stoves/inserts, pellet stoves/inserts) accounting for $628 million or over 55%
of the total market; indoor gas heaters comprising $145 million; outdoor heaters
accounting for $110 million and accessories comprising $250 million.
Calendar Year 1996 Zone Heating Products Market
Market Size = $1.1 Billion
[PIE CHART SHOWING THE FOLLOWING SEGMENTS:
Gas Heaters $145.0
Gas Hearth $430.8
Non-Gas Hearth $196.7
Outdoor Heaters (a) $110.0
Accessories (b) $250.0]
- - - - ----------
Source: Hearth Products Association and GAMA Statistical Release.
(a) Does not include electrical products and installed units.
(b) Midpoint management estimate of $200 to $300 million includes vent pipes,
connectors, glass fireplace doors, screens, mantles and decorative trim.
52
Zone Heating Market Size and Growth
Calendar Year DESA's
------------- % of CAGR Market
1992 1996 Market '92-'96 Share
---- ---- ------ ------- -----
($ in Millions)
Indoor Heaters and Hearth Products
Vent-Free Gas Heaters $ 35.3 $ 71.9 6.4% 19.5% 59%
Vented Gas Heaters 61.8 73.1 6.4 4.3 NM
-------- ------- ----- -----
Total Gas Heaters 97.1 145.0 12.8 10.5
Vent-Free Gas Hearth 9.0 116.1 10.3 89.5 31%
Vented Gas Hearth 137.4 314.7 27.8 23.0 NA
-------- ------- ----- -----
Total Gas Hearth 146.4 430.8 38.1 31.0
Wood Fireplaces 67.3 83.0 7.3 5.4 NA
Wood Stoves/Inserts 91.0 74.9 6.6 (4.7) NA
-------- ------- ----- -----
Pellet Stoves/Inserts 36.8 38.8 3.4 1.3 NA
Total Non-gas Hearth 195.1 196.7 17.3 0.2
Total Indoor Heaters and Hearth
Products 438.6 772.5 68.2 15.2
Outdoor Heaters $ 50.0 110.0 9.7 21.8 70%(b)
Accessories NA 250.0(a) 22.1 NA NM
-------- ------- -----
Total Zone Heating Market NA $ 1,132.5 100.0% NA
- - - - ----------
<FN>
Source: Hearth Products Association and GAMA Statistical Release
(a) Midpoint of management's estimate of $200 to $300 million. Includes vent pipes, connectors, glass
fireplace doors, screens, mantels and decorative trim.
(b) Management estimate.
</FN>
Market Outlook. DESA's strong market position in the vent-free segment
provides a solid foundation for further growth of the Company's business and
expansion into other categories (e.g. vented gas hearth) as a result of the
following factors:
Benefits of low-cost zone heating. Over the past decade, zone heating
products have become increasingly popular because: (i) propane and natural gas
are 50% to 70% cheaper on a BTU basis than electricity, (ii) consumers have
become aware of the cost advantage of zone heating versus central heating and
(iii) fireplaces are being used as both heating sources and decorative
furnishing.
This growing preference for gas represents a growth opportunity for DESA as
all of its indoor heating products are fueled by natural or propane gas. The
market is still under-penetrated with only 4 million vent-free indoor heating
units having been sold over the last 10 years in North America compared to over
60 million homes using gas in 1996. Gas hearth shipments have been growing at a
rate in excess of 30% per year for the past five years. Over 27 million homes
have been plumbed for gas and have a fireplace, providing an opportunity for gas
log sales. In addition, 36 million homes are plumbed for gas but do not have a
fireplace, representing a significant opportunity for the installation of
vent-free fireplaces and logs.
Increased home center/hardware channel participation. Consumer awareness of
gas logs and gas fireplaces is currently only 67% and 20%, respectively.
Awareness of zone heating and hearth products is expected to increase as these
products gain wider distribution in home centers and hardware stores. The
potential for home improvement sales, through retrofitting or adding a new
fireplace, represents a meaningful market opportunity for hearth products. DESA,
with its strong home center and hardware co-op channel relationships and
portfolio of zone heating products, is well-positioned to capitalize on this
trend.
53
Favorable Regulatory Development. A positive development for vent-free
indoor heating products (heaters, gas logs, fireplaces, stoves) involves the
easing of state restrictions regarding the sale and use of these products. As of
last year, 42 of the 50 states in the United States permitted the sale and use
of vent-free indoor heating products. In the past year, California and New York
enacted legislation to allow the sale and use of vent-free indoor heating
products, subject to rules and guidelines being established by agencies in each
state. These two large population states along with the six remaining states
(including Massachusetts) represent approximately one-third of the homes that
use natural gas in the United States. DESA's Vice President -- Sales and Vice
President -- Engineering, who represent the industry trade association (Gas
Appliance Manufacturer's Association, GAMA-Vent-Free Alliance), are actively
working with state agencies in California and New York which could provide for
sale of vent-free products as early as 1998.
Indoor Heating Products (Domestic)
DESA's indoor zone heating products consist primarily of two product
categories: (i) vent-free natural gas and propane-fueled residential space
heaters; and (ii) a line of hearth products, including vent-free gas fireplaces
and logs. Indoor heating products comprised 40% of the Company's fiscal 1997
gross sales. Sales of these products have increased at a CAGR of 30% from fiscal
1992 to fiscal 1997.
Indoor Vent-Free Heaters
The Company's space heaters are generally wall-mounted and provide heat to
the surrounding area. Residential space heaters come in either vented or
vent-free versions. Vented heaters require a discharging of emissions outside of
the dwelling, while vent-free heaters utilize a more efficient burner system
which avoids the need for outside venting. Vent-free heaters are generally
smaller and more physically attractive than their vented counterparts. DESA has
been the market leader in vent-free gas heaters since 1983. Historically, DESA
has focused on vent-free models. Only 2.9% of the Company's indoor heating sales
in fiscal 1997 are vented units.
The Company offers seven sizes and forty-six models of vent-free gas
heaters ranging in output from 5,000 to 30,000 BTU/hour for use with natural gas
or liquified propane. Key applications of these products include use in family
rooms, dens, kitchens and commercial offices. DESA's indoor vent-free heaters
are sold at retail prices, ranging from $149 to $349, which are significantly
lower than vented gas heaters.
Heaters are classified into two different types: infrared and blue flame.
Infrared models employ ceramic plaque burners which glow red-orange while in use
and they produce radiant heat that warms people or objects in the room. Blue
flame models have a stainless steel burner hidden behind a darkened glass front.
When burning, a line of blue flame is visible across the width of the heater.
These models produce convection heat that warms the air and distributes the heat
throughout the room. Both infrared and blue flame models are available with
either manual or thermostatic control and with piezo ignition.
The Company has developed patented technology for its line of thermostatic
infrared models, known as Infra-Stat, which provides superior features versus
competitors' offerings. DESA's heaters incorporate a proprietary feature of two
separate controls to regulate both the heat output and the thermostatic
operation. Enhanced blue-flame models are available for heavy-duty garage and
workshop applications. Optional accessories such as floor bases and fan
accessories are also available.
Vent-Free Hearth Products
In 1993, DESA pioneered the introduction of vent-free gas technology to
hearth products with the introduction of a heat efficient vent-free decorative
gas log. Vent-free gas logs have provided DESA with a new product growth
opportunity. Vent-free represents an advancement in decorative gas log
technology and, more importantly, has allowed the Company to establish a
presence in the fast-growing hearth products market.
Vent-free gas logs, which retail for $200 to $300, are aesthetically
attractive and an economical source of heat since none of the heat generated is
lost through an open vent. Historically, decorative gas logs have required
venting (i.e., an
54
open chimney damper) and were used primarily by individuals who enjoyed the
ambiance of a fireplace but wanted to avoid the trouble and inconvenience
associated with burning wood. DESA's vent-free logs utilize an efficient burner
system similar to vent-free heaters, and are thus less expensive to install and
operate than their vented counterparts.
In 1994, DESA combined the technology of blue flame heaters and gas logs to
create an aesthetically pleasing Mini- Hearth gas heater which retails for $499.
The Mini-Hearth utilizes a blue flame heater cabinet and burner to which a
decorative fibrous ceramic log has been added. A wooden mantle is placed around
the heater to create a fireplace effect. While the Mini-Hearth was designed to
be used as a zone heater rather than as a replacement for a formal fireplace,
the improved appearance has generated sales to customers who might not have
otherwise purchased a gas zone heater.
In 1995, DESA introduced a vent-free free-standing gas fireplace with logs
and a full sized mantle which is marketed as a traditional fireplace at a retail
price of approximately $1,000. DESA's vent-free fireplace does not require
venting and may be placed against any wall without structural renovations.
Traditional fireplace boxes must be mounted into an outside wall to facilitate
venting, requiring significant structural modifications to an existing home.
Furthermore, vent-free fireplace installation costs are highly attractive
relative to wood fireplaces (masonry and manufactured), which cost an average of
two to three times the cost of a vent-free fireplace, including installation.
The Company's vent-free gas logs are offered in three sizes and thirty-six
models while vent-free gas fireplaces are offered in ten models and mini-hearth
products in six models.
Outdoor Heating Products (Domestic)
Outdoor heating products represent approximately 40% of the Company's
fiscal 1997 gross sales. Sales of these products have increased at a CAGR of 25%
from fiscal 1992 to fiscal 1997.
DESA's line of outdoor heating products consists of portable units which
generate heat by either using a fan to discharge heated air to a specific area
(forced air heaters) or emitting heat throughout the surrounding area without
the assistance of a fan (convection heaters). Forced air heaters are fueled by
either kerosene, propane or natural gas, while convection heaters are fueled
only with propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating otherwise
unheated garages and workshops. Commercial applications include heating
factories, warehouses, construction sites and agricultural areas.
Annual sales increased from $25.4 million to $77.4 million from 1992
through 1997, reflecting the introduction of new outdoor heater products and
expanded sales of these products through the home center and mass merchant
channels. The Company also acquired an outdoor oil heater product line in April
1994, which added approximately $3.5 million in net sales in fiscal 1997. DESA
sells kerosene heaters in eight sizes with retail prices ranging from $139 to
approximately $2,000.
Specialty Tools (Domestic)
DESA's specialty tools category consists of (i) specialty fastening systems
(i.e., powder actuated tools and staple guns) and (ii) electrical products
(i.e., chain saws and electric generators) which are sold to both DIY and
commercial customers. The specialty tool category represents 20% of the
Company's gross sales which have grown at an 11% CAGR from fiscal 1992 to fiscal
1997.
Specialty Fastening Systems Products
Powder actuated tools utilize a powder load to drive nails for fastening
wood to concrete or steel. The charge is activated using either a trigger on the
tool or by striking the tool with a hammer. The energy discharged propels a
piston inside the tool which in turn drives the nail. DESA sells two powder
actuated tools targeted at the DIY market and six tools targeted at the
commercial market. The two consumer models retail for $19 to $79 and the six
commercial models retail for $129 to $199. Sales of powder loads and nail
accessories account for over 50% of this product category's revenues.
55
Market Overview. The total domestic powder actuated tool market in which
DESA competes is approximately $80 million, consisting of $60 million in the
commercial market and $20 million in the DIY market. In fiscal 1997, DESA had a
market share of 86% in the DIY segment. The staple gun and related accessories
market size is approximately $110 million of which DESA has a modest market
share.
Electrical Products
DESA assembles and markets a line of electric chain saws and electric
generators. Electric chain saws are used primarily by homeowners for light-duty
pruning and trimming. The Company offers models retailing from $39 to $69. DESA
also maintains a modest presence in the portable electric generator market.
Nearly 75% of the Company's generator sales are made to W.W. Grainger who offers
this product line to end-users through its equipment catalog and industrial
supply outlets.
Market Overview. The domestic electric chain saw market is approximately
$20 million in size, and DESA is the market leader with a 36% share. In the
important home center segment of the market, DESA maintains a 52% share. The
electric chain saw market is mature and industry volume has been reasonably
stable over the past five years.
International
In fiscal 1997, $19.6 million or 9.4% of DESA's net sales were generated in
international markets such as Canada, Europe and the Far East. This segment has
grown at a CAGR of 9.4% from fiscal 1992 through fiscal 1997. Although the
global markets have not traditionally been an area of DESA's focus, the Company
believes that the international category represents a significant opportunity
for increased sales in the future. International markets have the potential to
far surpass the home improvement market in the United States.
DESA's strategy for the international markets has been to export customized
versions of its products to accommodate local electrical requirements,
government regulation and user preferences for its exported products. DESA
utilizes local distributors in each country to sell its products, typically
relying on more than one distributor in each country.
In 1990, DESA increased its presence in the foreign markets with the
purchase of Jennen B.V., its Dutch distributor of outdoor forced air heaters.
Located in Rotterdam, it was subsequently renamed as DESA Europe B.V. and
currently serves as the Company's European headquarters.
Sales, Marketing and Distribution
Sales. DESA has organized its domestic sales force by channels of
distribution and product categories in order to optimize the effectiveness of
its selling efforts. DESA management believes that such a structure enhances the
Company's relationships with key channel participants by: (i) enabling the sales
force to develop specific customer insights regarding specialized needs and (ii)
creating a sense of partnership through customized attention and focus.
56
Approximate Number
DESA Sales Channel of of Sales
Organization Distribution Products Marketed Representatives
------------ ------------ ----------------- ---------------
General Consumer Mass Merchants Indoor Heating 120
Hardware Co-ops Hearth Products
Home Centers Outdoor Heating
Warehouse Stores
Catalog Showrooms
Agricultural Supply
Specialty Heating Utilities Indoor Heating 40-50
Propane Marketers Hearth Products
Specialty Distributors
Appliance Distributors
Construction Equipment Distributors Outdoor Heating 40-50
Equipment Renters Generators
Specialty Tools Mass Merchants Specialty Fastening Systems 100
Hardware Co-ops Electrical Products
Home Centers
Warehouse Stores
Catalog Showrooms
Agricultural Supply
The sales representative organizations report to DESA's regional managers
who, in turn, report to that channel's Sales Director who report to the
Executive Vice President -- Sales & Marketing.
Marketing. The Company's marketing staff utilizes a variety of traditional
and innovative programs to increase consumer awareness and augment sales. DESA
uses limited national advertising and relies instead on local customer
advertising through newspapers and circular flyers. DESA has also created a
broad national network of independent, factory-trained service centers to
provide local support to customers and end-users.
Distribution. The Company's significant customers include all of the major
home center accounts. The Company's consumer channels, which include home
centers, mass merchants, warehouse clubs and hardware co-ops, are the most
important channel for DESA's products and were responsible for 62% of its fiscal
1997 domestic sales. Other channels, including specialty heating, farm,
construction and industrial, contributed 38% of domestic sales in fiscal 1997.
Key customers include Home Depot and Lowe's, two of the major home centers
in the country; Ace and TruServ, leaders in the hardware co-op market; Sears and
Wal-Mart/Sam's, major mass merchandisers, and W.W. Grainger, a major industrial
supply company. Consistent with industry practices, the Company does not operate
under a long-term written supply contract with any of its customers. See "Risk
Factors -- Risk of Loss of Material Customers."
Competition
Each of the industries in which the Company manufactures and sells products
is highly competitive. Although competitive factors vary by product line,
competition in all product lines is based primarily on product quality, product
innovation, customer service and price. The Company also believes that a
manufacturer's relationship with its distributors and principal customers is a
key factor in the industries in which the Company competes.
The Company competes with a number of manufacturers in the heating products
industry. Within this industry, there are several manufacturers of gas heaters
and numerous producers of gas logs, pre-engineered fireplaces and solid fuel
57
heaters. The Company also competes with a number of manufacturers in the
specialty tool industry. The Company believes that it is a market leader in the
outdoor heating appliance, vent-free indoor gas heating and hearth and DIY
powder actuated fastener and electric chain saw markets and believes that its
experience, well-recognized brand names, comprehensive product offerings and
strong customer relationships give it a competitive advantage with respect to
these products.
The Company's competitors offer a number of products which directly compete
with or can be utilized as substitutes for the products manufactured by the
Company. No assurance can be given that the future sales of such competitive
products will not adversely affect the market for the Company's products. In
addition, certain of the Company's competitors, particularly in the specialty
tool industry, are larger and better capitalized than the Company.
Management Information Systems
DESA maintains an advanced MIS utilizing customized software for its
manufacturing and engineering design. The Company also has established Customer
Electronic Data Interchange for order entry by major accounts. These systems
provide "real-time" information in regards to work-in-process inventory and
provides detailed labor reporting to enable the Company to identify potential
labor cost savings. For product development and engineering, employees utilize a
state-of-the-art three dimensional CAD/CAM system.
Manufacturing
Indoor and Outdoor Heating Products. DESA's manufacturing processes include
metal fabrication, painting, assembly and product testing. In general, DESA
cuts, forms and coats the product housing, assembles the various components such
as motors, fans, electrical parts and burners, packages the final product and
ships it to customers. Punch presses, welding, powder coated painting and
assembly systems are mechanized with state-of-the-art equipment utilizing
robotics to permit high volume output with minimum labor content.
Specialty Fastening Systems. DESA manufactures and packages the nails
(pins) for sale with its powder actuated tool product line. Powder actuated
tools are sourced from a manufacturing joint venture with Continental/Midland,
Inc. and loads are purchased from a third party. Powerfast(R) stapling products
are sourced from Asian manufacturers.
Electrical Tools. DESA assembles electric chain saws from components made
to its specifications by third-party suppliers. Electric generators are
assembled on a chassis by connecting gasoline engines purchased from Honda and
Briggs & Stratton with an alternator purchased from a European supplier.
Trademarks, Patents and Licenses
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary designs, trademarks and brand
names on an exclusive basis in reliance upon the protections afforded by
applicable copyright, patent and trademark laws and regulations. The loss of
certain of the Company's rights to such designs, trademarks and brand names or
the inability of the Company to protect effectively or enforce such rights could
adversely affect the Company. See "Risk Factors -- Dependence On Brand Names."
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer end-product
demand, marketing strategies, overall economic and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with the
backlog at the same date in a prior year is not necessarily indicative of sales
trends. Moreover, the Company does not believe that backlog is necessarily
indicative of the Company's future results of operations or prospects.
58
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer good will. During fiscal 1997, warranty
costs amounted to approximately 1.4% of sales.
Environmental Liability
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases could require the Company to remediate a site to
meet applicable legal requirements. A Phase I environmental audit of the
Company's manufacturing facilities was completed on August 9, 1997 and did not
identify any material matters. The Company believes, although there can be no
assurance, that liabilities relating to environmental matters will not have a
material adverse effect on its future financial position or results of
operations.
Employees
DESA's zone heating products operation is seasonal. As a result, the number
of workers employed by the Company at any particular point in time varies. The
work force is accustomed to seasonal layoffs of two to four months. In 1997,
total employment averaged 772 with a low of 404 employees in March and a peak of
997 employees in October.
The hourly labor force in Bowling Green is represented by the Sheet Metal
Workers International Association (AFL- CIO) under a three-year contract
expiring in June 1998. The Manchester and Shelbyville, Tennessee facilities are
non-union plants.
The hourly labor force in Bowling Green is covered by a defined benefit
pension plan. All other employees are covered by a defined contribution plan
(401K). All workers are covered by self-insured medical plans.
Legal Proceedings
DESA is a party to various litigation in the normal course of its business
activities, none of which is expected to have a material adverse effect on the
Company. Although the Company has not experienced significant products liability
to date, the Company carries occurrence-based product liability insurance
coverage with a $101 million limit, $250,000 self insured retention ("SIR") and
an aggregate annual capped SIR exposure to DESA of $1 million.
Properties
The Company's Bowling Green, Kentucky facility serves as the corporate
headquarters as well as the manufacturing site for DESA's zone heating products,
both indoor and outdoor. The Company also leases warehouse space in Bowling
Green as needed. The facility in Shelbyville, Tennessee is the manufacturing
headquarters for the production of hearth products and outdoor heaters. The
manufacturing facility in Manchester, Tennessee produces the specialty tools
sold by DESA. In addition to these manufacturing facilities, the Company leases
sales offices and warehouse locations in Toronto, Canada and Rotterdam, Holland.
59
Location Square Footage Ownership Function
-------- -------------- --------- --------
Bowling Green, Kentucky 225,000 Owned Corporate Headquarters
28 acres Manufacturing, Engineering, Distribution
Shelbyville, Tennessee 70,000 Leased Manufacturing
7 acres
Manchester, Tennessee 57,400 Leased Manufacturing, Distribution
11 acres
Toronto, Canada 9,400 Leased Sales offices, Distribution
Rotterdam, Holland 5,200 Leased Sales offices, Distribution
Management believes its facilities are in good condition and that the
facilities are adequate for its operating needs for the foreseeable future
without significant modifications or capital investment.
Recent Developments
As of January 12, 1998, the Company entered into an agreement for the
acquisition of the Heath/Zenith business of Heath Holding Corp. However, no
assurances can be given that the acquisition will be ultimately consummated.
Heath/Zenith, headquartered in Benton Harbor, Michigan is the leading North
American manufacturer and marketer of residential motion sensor "security"
lighting products sold primarily to DIY retail home centers. Heath/Zenith is
also a leading manufacturer and marketer of residential motion sensor
"decorative" lighting products and wireless home control devices, including
wireless doorbells and light switches. Since its inception in 1987, Heath/Zenith
has consistently expanded its market positions and today commands either the
number one or number two market position in each of its primary product
categories.
Demand for Heath/Zenith's products has increased in recent years due to
consumers' heightened interest in products that provide effective home security
and innovative, reliable convenience features. Heath/Zenith has also benefited
from the rapid growth and consolidation in its primary DIY retail home centers
distribution channel. Due to its products and capabilities, Heath/Zenith has
been selected as the core supplier to the leading participants in the DIY retail
industry including, Home Depot. In addition, Heath/Zenith has secured core
supplier status with many of the nation's top mass merchandisers, warehouse
clubs, and hardware buying groups.
Similar to Desa, Heath/Zenith has achieved leading market positions and
strong operating performance as a result of (i) the strength of the
Heath/Zenith's relationships with its rapidly-expanding customer base, (ii)
innovative product design and development, (iii) broad and differentiated
product lines supported by strong brand names, (iv) consistent new product
introductions, (v) implementing effective sales and marketing programs designed
to increase customer awareness and expand distribution channels, and (iv)
achieving low-cost manufacturing and distribution expertise.
In the Motion Sensor Security and Decorative Lighting segments,
Heath/Zenith competes against Intelectron Incorporated, a privately held company
headquartered in Hayward, California, and Regent Lighting Corporation, a
privately held company headquartered in Burlington, North Carolina. Within the
Wireless Doorbell segment, Heath- Zenith competes against Dimango Products, Co.,
based in Brighton, Michigan, and Trine Products, Co., a privately held company
based in Bronx, New York.
On a pro forma basis, Heath/Zenith will account for approximately 17.5% and
7.3% of sales and EBITDA, respectively, of the combined company. Heath/Zenith's
business is comprised of three primary segments: Motion Sensor Security
Lighting, Motion Sensor Decorative Lighting, and Wireless Doorbells.
Motion Sensor Security Lighting
Within its motion sensor security lighting product line, which accounted
for 61% of 1996 revenues, Heath/Zenith offers 58 stock keeping units ("SKUs")
representing a variety of security lighting products which appeal to various
segments of the DIY market. The Heath/Zenith's standard motion sensor security
lighting products retail from $9.95
60
for promotional items up to $34.95 for a full-feature security light. The
Heath/Zenith's primary focus is to de-emphasize promotional products and to
emphasize its high quality, high margin products that are made with metal
fixtures and hoods, and which contain such value-added features as Pulse Count,
Dual BriteTM, and 270(degree) activation capability.
Market Overview. The $200 million North American residential outdoor
security lighting industry market is segmented into three categories: (i) motion
sensor security lighting, (ii) photocell (darkness activated) security lighting,
and (iii) standard (switch activated) security lighting. The motion sensor
security lighting segment has been the primary growth segment in the industry,
growing at a compounded annual growth rate of almost 6% over the last five
years. Since the introduction of motion sensor security lighting, the product
has established itself as an easy to install, reliable, low-cost security
product. As a result, motion sensor products have steadily captured market share
from standard and photocell lighting as those traditional products are less
effective crime deterrents and more expensive and less convenient to operate.
Motion Sensor Decorative Lighting
With 38 SKUs, motion sensor decorative lighting products represent
approximately 15% of the Heath/Zenith's 1996 total revenue. The Heath/Zenith's
motion sensor decorative lighting products, which sell for retail prices ranging
from $24.95 to $79.95, were introduced in 1992 as part of management's strategy
to move consumer to higher price point products. Included in this product line
are coach lanterns, cast aluminum lanterns, brass lanterns and post lanterns.
Market Overview. The $400 million North American residential outdoor
decorative lighting industry is driven primarily by the home improvement and
remodeling industry. As a result, the overall retail outdoor decorative lighting
industry has benefited from the expansion in the home improvement industry and
DIY retail channel. Historically, the decorative lighting market was dominated
by standard (switch activated) lighting products. However, as customers become
more aware of the benefits of motion sensor lighting products such as energy
efficiency, crime deterrence, and convenience, they are requiring motion sensor
capabilities in all of their outdoor lighting products.
Wireless Doorbells
Wireless doorbell products, introduced in 1991, represent approximately 15%
of 1996 total revenue. This product line, which retails for between $9.95 and
$49.95, represents the Heath/Zenith's successful entry into a new market by
leveraging a high-quality product with the Heath/Zenith brand name. The
Heath/Zenith's wireless doorbell products are positioned to take advantage of an
underserved market with relatively few solutions. Wireless doorbells present the
most viable and cost effective solution to the problem. Heath/Zenith has become
the market leader in the wireless doorbell industry by offering a diverse line
of products and, most importantly, by differentiating its product with a
proprietary sound chip.
Market Overview. Approximately 17% of Heath/Zenith's 1996 revenues were
generated by sales in the wireless controls systems industry, primarily in the
wireless doorbell segment. The wireless control systems industry is a diverse
industry that includes products ranging from home automation systems to garage
door openers to wireless doorbells. Heath/Zenith currently competes primarily in
the wireless doorbell segment of the residential wireless control systems
industry.
Customers
Heath/Zenith targets the rapidly-expanding DIY home center retail market
and, to a lesser extent, mass merchandisers, warehouse clubs, and cooperative.
In 1996, sales to home improvement retailers and hardware cooperatives accounted
for 90% of revenues and sales to mass merchandisers, warehouse clubs and other
retailers accounted for 10% of sales.
61
Manufacturing and Assembly
Heath/Zenith designs and manufactures its products through its Hong Kong
based subsidiary, Heath Ltd., which provides purchasing, engineering, contract
manufacturing, administration and assembly. Heath/Zenith uses three
subcontractors in China who assemble products according to predetermined
specifications and ship assembled products to Heath Ltd. Heath/Zenith owns all
the tooling utilized in the production of its products. Finished products are
shipped to a public warehouse in Reno, Nevada and distributed throughout North
America directly to customers.
Employees
Heath/Zenith has approximately 78 employees, 42 at its Benton Harbor
headquarters and 36 at Heath Ltd.
62
MANAGEMENT
Directors and Officers
The following table sets forth the name, age and position of each of the
Company's directors who will continue in office following the Recapitalization,
directors designate, executive officers and other significant employees. All of
the Company's officers are elected annually and serve at the discretion of the
Board of Directors.
Name Age Positions
---- --- ---------
Robert H Elman 59 Chairman, Chief Executive Officer, Director
John W Childs 55 Director
Raymond B Rudy 65 Director
Adam L Suttin 30 Director
Michael Greene 35 Director
Terry G Scariot 49 President, Director
John M Kelly 48 Executive Vice President
Edward G Patrick 51 Vice President of Finance, Treasurer
Scott M Nehm 48 Vice President, Controller
Robert H. Elman joined DESA Industries, at its inception, in 1969 as Vice
President and member of the Board of the Directors and as President of its Power
Products Division. He planned and directed the division's growth from sales of
$11 million in 1969 to $35 million in 1975, with operating income increasing
significantly during the same period. Mr. Elman remained with AMCA International
when it acquired DESA Industries in 1975 and became Senior Group Vice President
responsible for the Consumer, Automotive Products, Aerospace, and Food Packaging
Divisions until March 1985. Since March 1985, when Mr. Elman and his fellow
managers formed DESA International and participated in the leveraged buyout of
AMCA's Consumer Products Division, Mr. Elman has been Chairman and Chief
Executive Officer of the Company. Prior to DESA, he worked with ITT and Singer
in various management positions in the United States and Europe. Mr. Elman
serves as the non-employee Chairman of the Board of Directors of Hedstrom
Holdings, Inc. He received his Bachelor's Degree in Mechanical Engineering from
Rensselaer Polytechnic Institute and his MBA from Harvard Business School.
John W. Childs has been President of JWCA since July 1995. Prior to that
time, he was an executive at Thomas H. Lee Company from May 1987, most recently
holding the position of Senior Managing Director. Prior to that, Mr. Childs was
with the Prudential Insurance Company of America where he held various executive
positions in the investment area ultimately serving as Senior Managing Director
in charge of the Capital Markets Group. He is a director of Big V Supermarkets,
Inc., Central Tractor Farm & Country, Inc., Chevys Holdings, Inc., Cinnabon,
Inc., The Edison Project, Inc., Personal Care Group, Inc., and Select Beverages,
Inc.
Raymond B. Rudy has been a Managing Director of JWCA since July 1995. Prior
to that time, he was Deputy Chairman and Director of Snapple Beverage
Corporation from 1992 until the company was sold in 1994. From 1987 to 1989, Mr.
Rudy was President of Best Foods Subsidiaries of CPC International. From 1984 to
1986, Mr. Rudy was Chairman, President and CEO of Arnold Foods Company, Inc. He
is chairman of Empire Kosher Poultry, Inc. and Personal Care Group, Inc.
Adam L. Suttin has been a Vice President of JWCA since July 1995. Prior to
that time, he was an executive at Thomas H. Lee Company from August 1989, most
recently holding the position of Associate. He is a director of Central Tractor
Farm & Country, Inc., Empire Kosher Poultry, Inc., and Personal Care Group, Inc.
Michael Greene is a Managing Director of UBS Capital, which is the private
equity subsidiary of the Union Bank of Switzerland. Mr. Greene has worked in
Union Bank of Switzerland's private equity and leveraged finance business
63
since he joined Union Bank of Switzerland in 1990. Mr. Greene serves on the
board of directors of CBP Resources, Inc. and Metrocall, Inc.
Terry G. Scariot joined AMCA's Consumer and Automotive Products Division as
Vice President -- Finance in early 1984 and became Chief Financial Officer of
DESA International in March 1985. He was appointed President of DESA
International in March 1996 and joined the Board of Directors in December 1996.
Prior to joining AMCA International, Mr. Scariot held positions of increasing
responsibility in financial and manufacturing management at Monsanto Industrial
Chemicals Company, Rockwell International's Automotive Products Group, and Gulf
and Western's Bonney Forge Division. In October 1979, Mr. Scariot served as a
member of the Board of Directors and Chief Financial Officer for The Massillon
Steel Casting Company. Mr. Scariot received his Bachelor of Science degree in
finance and MBA from the University of Missouri.
John M. Kelly joined DESA Industries in Canada in 1972. After successful
management assignments in sales, manufacturing services, and administration, he
was appointed General Sales Manager in 1976 and General Manager in 1977. In
1983, Mr. Kelly was promoted to Vice President -- North American Sales for
AMCA's Consumer Products Division. In 1984, his responsibilities were expanded
to include the entire marketing function. He became DESA's senior sales and
marketing Executive Vice President in North America in March 1985. Mr. Kelly
assumed the role of Executive Vice President in March 1996, responsible for
worldwide sales and marketing and engineering. He majored in Economics at the
University of Toronto.
Edward G. Patrick has been associated with DESA International, Inc. and its
predecessor company since January 1985, joining the company as Director of
Credit and Accounts Receivable. In May of 1991, he was appointed Treasurer and
in January 1995 appointed Vice President of Finance. Prior to joining DESA, Mr.
Patrick held financial positions with Benchmark Tool Company, a Subsidiary of
Shopsmith Inc. (1981-1985), McGraw Edison Company (1975-1981), and General
Motors Corp. (1972-1975). Mr. Patrick received his Bachelor's Degree from
Northeast Missouri State University.
Scott M. Nehm has been with DESA and the predecessor operation since 1982.
In January 1995, he was appointed Vice President, Controller. Prior to DESA, Mr.
Nehm has held positions of increasing responsibility in financial management at
Modine Manufacturing Company (1971-1973), Koehring Company (1974-1979), and
Allied Products Inc. (1980-1981). Mr. Nehm has a CPA Certificate, BBA and MBA
degrees from the University of Wisconsin in Accounting, Finance and Marketing.
Executive Compensation
The following table sets forth compensation earned for all services
rendered to the Company during fiscal 1995, fiscal 1996 and fiscal 1997, as
applicable, by the Company's chief executive officer and the four most highly
compensated executive officers other than the Company's chief executive officer
(collectively, the "Named Executives").
64
Long-Term
Compensation
Awards
------------
Annual Compensation Number of
---------------------------------------- Securities All Other
Name and Principal Fiscal Salary(1) Bonus Underlying Compensation
Position at March 1, 1997 Year ($) ($)(1) Options(2) ($)
- - - - -------------------------------------- ------ -------------------- -------- ------------- ------------
Robert H Elman............................... 1997 565,385 820,000 -- 112,233
Chairman, Chief 1996 516,162 535,000 -- 100,255
Executive Officer 1995 385,546 512,000 -- 108,091
Terry G Scariot.............................. 1997 249,400 120,000 -- 16,203
President 1996 195,769 102,000 -- 28,829
1995 146,461 96,000 -- 24,373
John M Kelly................................. 1997 249,400 120,000 -- 29,203
Executive Vice 1996 195,769 102,000 -- 33,039
President 1995 146,461 96,000 -- 27,000
Edward G Patrick............................. 1997 74,822 17,500 4,000 8,111
Vice President of 1996 68,631 15,000 -- 5,697
Finance, Treasurer 1995 65,086 12,000 -- 1,277
Scott M Nehm................................. 1997 74,822 17,500 4,000 10,766
Vice President 1996 71,383 15,000 -- 8,044
Controller 1995 67,987 12,000 -- 2,066
- - - - ----------
<FN>
(1) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are
generally paid in the following fiscal year.
(2) All of the options are to be redeemed in connection with the Recapitalization.
</FN>
Employment Arrangements with Executive Officers
Mr. Elman is currently employed as Chairman and Chief Executive Officer
pursuant to an employment agreement which carries a three-year term. Under this
agreement, Mr. Elman currently receives a salary of $650,000. Mr. Scariot is
currently employed as President pursuant to an employment agreement which
carries a three-year term. Under this agreement, Mr. Scariot currently receives
a salary of $292,000. Mr. Kelly is currently employed as Executive Vice
President pursuant to an employment agreement which carries a three-year term.
Under this agreement, Mr. Kelly currently receives a salary of $292,000.
Pursuant to these employment agreements, the salary of each of Messrs. Elman,
Scariot and Kelly will be subject to annual increases at the discretion of the
Board of Directors of the Company. Messrs. Elman, Scariot and Kelly will be
eligible to participate in an executive bonus plan which will be instituted for
fiscal 1999, 2000, 2001, 2002 and 2003. Messrs. Elman, Scariot and Kelly will
also participate in an option plan which will allow management to earn up to
12.5% of the fully diluted equity of Holdings upon achievement of pre-determined
performance targets. In the event of a Change of Control of the Company after
which the employment of Messrs. Elman, Scariot and Kelly with the Company is not
continued, Messrs. Elman, Scariot and Kelly will be entitled to Change of
Control benefits unless the equity investment of each of Messrs. Elman, Scariot
and Kelly in Holdings of each shall have tripled in value.
65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock of Holdings by each person known to the Company to
be the beneficial owner of more than five percent of the common stock of
Holdings, each director of the Company, each Named Executive and all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. The business address for each executive officer of the Company is
in care of the Company.
Shares
Beneficially
Name and Address Owned Percent
---------------- ----- -------
J.W. Childs Equity Partners, L.P.(1)
One Federal Street
Boston, Massachusetts 8,813,024 67.5%
UBS Capital LLC(1)
299 Park Avenue
New York, New York 2,410,569 18.8
Robert H. Elman(2) 348,916 2.7
John W. Childs(1)(3)
One Federal Street
Boston, Massachusetts 9,160,151 70.1
Raymond B. Rudy(1)(3)
One Federal Street
Boston, Massachusetts 8,835,916 67.7
Adam L. Suttin(1)(3)
One Federal Street
Boston, Massachusetts 8,844,623 67.7
Michael Greene(4)
299 Park Avenue
New York, New York 2,410,569 18.8
Terry G. Scariot 92,452 *
John M. Kelly 92,452 *
Edward G. Patrick 26,965 *
Scott M. Nehm 26,965 *
All Directors and executive officers as a group (9
persons)(1)(2)(3)(4) 12,175,377 92.5
- - - - ----------
* Less than 1.0%
(1) Includes 363,968 shares beneficially owned by Childs and 99,264 shares
beneficially owned by UBS Capital pursuant to warrants to be issued in
connection with their respective purchases of Holdings Preferred Stock.
(2) Includes 164,011 shares owned by Mr. Elman's family.
(3) Includes shares beneficially owned by Childs, as to which Messrs. Childs,
Rudy and Suttin may be deemed also to be beneficial owners.
(4) Includes shares beneficially owned by UBS Capital, as to which Mr. Greene
may also be deemed to be a beneficial owner.
66
CERTAIN TRANSACTIONS
At the closing of the Recapitalization, it is contemplated that the Company
and Holdings will enter into a management agreement with JWCA providing for
payment by the Company to JWCA of (i) a $2.55 million advisory and financing fee
in consideration of JWCA's services regarding the planning, structuring and
negotiation of the Recapitalization and related financing and (ii) an annual
management fee of $240,000 in consideration of JWCA's ongoing provision of
certain consulting and management advisory services. Payments under this
management agreement may be made only to the extent permitted by the New Credit
Facility and the Indenture. The management agreement is expected to be for a
five-year term, automatically renewable for successive extension terms of one
year, unless JWCA or Holdings shall give notice of termination. In addition, UBS
Capital will be entitled to receive a $0.7 million advisory and financing fee in
consideration of UBS Capital's services regarding the planning, structuring and
negotiation of the Recapitalization and related financing.
Pursuant to the Recapitalization Agreement, concurrently with the closing
of the Recapitalization, Holdings, the Equity Investors and the Existing
Stockholders (the "Stockholders") will enter into a Stockholders Agreement (the
"Stockholders Agreement"). Subject to certain exceptions, the Stockholders
Agreement will restrict the right of the Stockholders to transfer any Holdings
Common Stock or Warrants or other vested rights to acquire Holdings Common Stock
(collectively, the "Subject Securities") without the consent of the holders of a
majority of the Subject Securities at the time held by Childs and its affiliates
and associates (the "JWC Holders"). Holdings and the JWC Holders will have
certain rights of first refusal with respect to Subject Securities. In addition,
the Stockholder Agreement will provide for certain so-called "tag-along",
"drag-along" and "piggyback registration" rights. In addition, the Stockholder
Agreement will provide each Stockholder with certain preemptive rights. The
Stockholder Agreement will also obligate Holdings and the Stockholders to take
all necessary actions to include certain nominees of the JWC Holders (who could
constitute all or a majority of the board of directors) on Holdings' board of
directors and to ensure that certain representatives of the other Stockholders
may attend meetings. The Stockholders Agreement will also restrict Holdings'
right to enter into agreements with JWC Holders without the consent of the other
Stockholders.
Holdings and its subsidiaries expect to enter into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns separately from Holdings.
67
DESCRIPTION OF NOTES
General
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company, Holdings (as guarantor) and Marine Midland Bank, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the proposed form of Indenture and Registration Rights
Agreement is available as set forth under "Available Information". The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
The Notes will be general unsecured obligations of the Company, will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including the New Credit Facility, and will rank pari passu in
right of payment with any existing and future senior subordinated indebtedness
of the Company. The Company's payment obligations under the Notes will be fully
and unconditionally guaranteed (the "Holdings Guarantee") on a senior
subordinated basis by Holdings. In addition, all borrowings under the New Credit
Facility will be secured by a Lien on substantially all of the assets of the
Company, Holdings and their domestic Subsidiaries.
In addition, the Company conducts certain operations through its foreign
subsidiaries and the Notes will be effectively subordinated to all indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of such foreign subsidiaries. Any right of the Company to receive
assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. As of the date of the Indenture, all of the Company's Subsidiaries will
be Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
Principal, Maturity and Interest
The Notes will be limited in aggregate principal amount to $130.0 million
and will mature on December 15, 2007. The Indenture provides for the issuance of
up to $75.0 million aggregate principal amount of additional Notes having
identical terms and conditions to the Notes offered hereby (the "Additional
Notes"), subject to compliance with the covenants contained in the Indenture.
Any Additional Notes will be part of the same issue as the Notes offered hereby
and will vote on all matters with the Notes offered hereby. For purposes of this
"Description of Notes," references to the Notes do not include Additional Notes.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal, premium, if any, and interest and Liquidated
Damages, if any, on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest and Liquidated Damages, if any,
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments with respect to Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. The Notes
will be issued in denominations of $1,000 and integral multiples thereof.
68
Subordination
The payment of all Obligations on the Notes will be subordinated in right
of payment, as set forth in the Indenture, to the prior payment in full in cash
of all Senior Indebtedness, whether outstanding on the date of the Indenture or
thereafter incurred.
Upon any distribution to creditors of the Company or Holdings in a
liquidation or dissolution of the Company or Holdings, as the case may be, or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or Holdings or their respective property, an assignment
for the benefit of creditors or any marshalling of the Company's or Holdings'
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes or
the Holdings Guarantee, and until all Obligations with respect to Senior
Indebtedness are paid in full, any distribution to which the Holders of Notes
would be entitled shall be made to the holders of Senior Indebtedness (except
that Holders of Notes may receive securities that are subordinated at least to
the same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness and payments made from the trust described
under "-- Legal Defeasance and Covenant Defeasance"). Senior Indebtedness shall
not be deemed to have been paid in full until the termination of all commitments
or other Obligations under the New Credit Facility, and the payment in full in
cash thereof.
The Company and Holdings also may not make any payment or distribution upon
or in respect of the Notes or the Holdings Guarantee (except in such
subordinated securities or from the trust described under "-- Legal Defeasance
and Covenant Defeasance") if (i) a default in the payment of any Obligation on
Designated Senior Indebtedness occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with respect
to Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company, Holdings, the agent under the New Credit Facility or the holders of any
other Designated Senior Indebtedness. Payments on the Notes or the Holdings
Guarantee may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage pursuant to
a Payment Blockage Notice may be commenced unless and until (i) 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage Notice
and (ii) all scheduled payments of principal, premium, if any, and interest on
the Notes that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company or Holdings who are holders of Senior Indebtedness. At
November 29, 1997, the aggregate principal amount of Senior Indebtedness of the
Company was approximately $135.5 million. The Indenture will limit, subject to
certain financial tests, the amount of additional Indebtedness, including Senior
Indebtedness, that the Company, Holdings and their respective subsidiaries can
incur. See "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
Holdings Guarantee
The payment of principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes will be fully and unconditionally guaranteed on an
unsecured basis by Holdings. The Holdings Guarantee will be subordinated to the
amounts for which Holdings will be liable under the guarantees issued from time
to time with respect to Senior Indebtedness to the same extent as the Notes are
subordinated to such Senior Indebtedness. The obligation of Holdings
69
under the Holdings Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law. See, however, "Risk Factors --
Fraudulent Conveyance and Preference Considerations."
The Indenture will provide that Holdings may not consolidate with or merge
with or into (whether or not Holdings is the surviving Person), another
corporation, Person or entity whether or not affiliated with Holdings unless (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than Holdings) assumes all
the obligations of Holdings pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; (iii) Holdings, or any Person formed by or surviving
any such consolidation or merger, would have Consolidated Net Worth (immediately
after giving effect to such transaction), equal to or greater than the
Consolidated Net Worth of Holdings immediately preceding the transaction; and
(iv) Holdings would be permitted, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Optional Redemption
The Notes will not be redeemable at the Company's option prior to December
15, 2002. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on December 15 of the years indicated below:
Year Percentage
2002................................................ 104.9375%
2003................................................ 103.2917%
2004................................................ 101.6458%
2005 and thereafter................................. 100.0000%
Notwithstanding the foregoing, at any time on or before December 15, 2000,
the Company may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount of Notes (including any Additional Notes) at
a redemption price of 109.875% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon to the redemption date, with the
net cash proceeds of one or more Public Equity Offerings; provided that at least
65% of the aggregate principal amount of Notes (including any Additional Notes)
remain outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of such Public Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
Optional Redemption Upon Change Of Control
Upon the occurrence of a Change of Control prior to December 15, 2002, the
Notes will be redeemable, in whole or in part, at the option of the Company,
upon not less than 30 nor more than 60 days prior notice to each Holder of Notes
to be redeemed, at a redemption price equal to the sum of (i) the then
outstanding principal amount thereof plus
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(ii) accrued and unpaid interest thereon and Liquidated Damages, if any, to the
redemption date plus (iii) the Applicable Premium. The following definitions are
used to determine the Applicable Premium:
"Applicable Premium" will be defined, with respect to a Note, as the
greater of (i) 4.9375% of the then outstanding principal amount of such Note or
(ii) the excess of (A) the present value of the remaining required interest and
principal payments due on such Note (exclusive of accrued and unpaid interest
and Liquidated Damages, if any), computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the then outstanding principal
amount of such Note.
"Treasury Rate" will be defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15 (519) which has become publicly available at least two Business Days prior
to the date fixed for prepayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to Stated Maturity of the Notes;
provided, however, that if the Average Life to Stated Maturity of the Notes is
not equal to the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Average Life to Stated Maturity of the Notes is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of repurchase (the
"Change of Control Payment"). Within fifteen days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 75 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding
71
Senior Indebtedness to permit the repurchase of Notes required by this covenant.
The Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will take precedence over
other provisions of the Indenture which may be applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Facility currently prohibits the Company from purchasing any
Notes, and also provides that certain events constituting a change of control
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture, applicable to a Change of Control Offer made by the Company
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture will provide that the Company and Holdings will not, and will
not permit any of their respective Restricted Subsidiaries to, consummate an
Asset Sale unless (i) the Company, Holdings or the Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value (evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 75% of the consideration therefor received by the Company, Holdings or
such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided
that the amount of (x) any liabilities (as shown on the Company's, Holdings' or
such Restricted Subsidiary's most recent balance sheet) of the Company, Holdings
or any Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Notes, the Holdings Guarantee or any
Subsidiary Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company, Holdings
or such Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company, Holdings or any such Restricted Subsidiary
from such transferee that are immediately converted by the Company, Holdings or
such Restricted Subsidiary into cash (to the extent of the cash received), shall
be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or Holdings, as the case may be, may apply such Net Proceeds, at its
option, (a) to permanently reduce outstanding Senior Indebtedness (and
correspondingly reduce commitments thereunder) or (b) to acquire a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in the same or a similar
line of business as the Company was engaged in on the date of the Indenture.
Pending the final application of any such Net Proceeds,
72
the Company or Holdings, as the case may be, may temporarily reduce revolving
credit Indebtedness or otherwise invest such Net Proceeds in any manner that is
not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company and Holdings will be required to make
an offer to all Holders of Notes and Additional Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes and Additional Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of purchase, in accordance
with the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes and Additional Notes tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company or Holdings, as the case may be, may
use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes and Additional Notes surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and Additional Notes to be purchased on a pro rata basis. Upon completion
of such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture will provide that the Company and Holdings will not, and will
not permit any of the Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on account
of the Company's, Holdings' or any of the Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or Holdings) or to the direct or
indirect holders of the Company's, Holdings' or any Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
Holdings); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company or Holdings) any Equity Interests of the Company,
Holdings, any Restricted Subsidiary of the Company or Holdings, or any Affiliate
of the Company or Holdings (other than any such Equity Interests owned by the
Company or any Wholly Owned Restricted Subsidiary of the Company); (iii) make
any payment on, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes (other than Notes),
except a payment of interest or principal of Indebtedness (other than interest
payments on any Exchange Notes or Qualified Subordinated Indebtedness) at Stated
Maturity or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) the Company (in the case of a Restricted Payment by the Company or any
of its Restricted Subsidiaries) or Holdings (in all other cases) would, at the
time of such Restricted Payment and after giving pro forma effect thereto as if
such Restricted Payment had been made at the beginning of the applicable
four-quarter period, have a Fixed Charge Coverage Ratio of at least 2.0 to 1
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(c) in the case of a Restricted Payment of the Company or a Restricted
Subsidiary of the Company, such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the second succeeding paragraph), is less than the
sum of (i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit), plus (ii) 100%
of the aggregate net cash proceeds received by the Company from the issue or
sale since the date
73
of the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment
plus (iv) the amount resulting from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (in each case, such amount to be valued as provided
in the second succeeding paragraph) not to exceed the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary and which was treated as a Restricted Payment under the Indenture;
and
(d) in the case of a Restricted Payment by Holdings or a Restricted
Subsidiary of Holdings (other than the Company or a Restricted Subsidiary of the
Company), such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Holdings, the Company and their Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the next succeeding paragraph), is less than the sum
of (i) 50% of the Consolidated Net Income of Holdings for the period (taken as
one accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of Holdings' most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by Holdings from the issue or sale since the date of the
Indenture of Equity Interests of Holdings (other than Disqualified Stock) or of
Disqualified Stock or debt securities of Holdings that have been converted into
such Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of Holdings and other than
Disqualified Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if any) and
(B) the initial amount of such Restricted Investment plus (iv) the amount
resulting from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (in each case, such amount to be valued as provided in the second
succeeding paragraph) not to exceed the amount of Investments previously made by
Holdings in such Unrestricted Subsidiary and which was treated as a Restricted
Payment under the Indenture.
The foregoing provisions will not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of other
Equity Interests of the Company (other than any Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c)(ii) of paragraph (c) above; (iii) the redemption,
repurchase, retirement, defeasance or other acquisition of any subordinated
Indebtedness or Equity Interests of Holdings in exchange for, or out of the net
cash proceeds of, the substantially concurrent sale (other than to the Company
or a Restricted Subsidiary of Holdings) of other Equity Interests of Holdings
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (d)(ii) of
paragraph (d) above; (iv) the defeasance, redemption, repurchase or other
acquisition of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (v) the making of any
Restricted Payment by Holdings utilizing the proceeds of a Restricted Payment
made by the Company to Holdings in accordance with the Indenture; (vi) the
payment of any dividend by a Restricted Subsidiary of the Company or Holdings
(other than the Company) to the holders of its common Equity Interests on a pro
rata basis; (vii) so long as no Default or Event of Default shall have occurred
and is continuing, the repurchase, redemption or other retirement for value of
any Equity Interests of the Company, Holdings or a Restricted Subsidiary, or
dividends or other distributions by the Company to Holdings the proceeds of
which are utilized by Holdings to repurchase, redeem or otherwise acquire or
retire for value any Equity Interests of Holdings, in each case, held by any
member of the management, employees or consultants of the Company, a Restricted
Subsidiary or Holdings pursuant to any management, employee or consultant equity
subscription agreement or stock option agreement; provided
74
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed the sum of (x) $500,000 in any
twelve-month period and (y) the aggregate cash proceeds received by the Company
or Holdings from any reissuance of Equity Interests by Holdings or the Company
to members of management of the Company or Holdings (provided that the cash
proceeds referred to in this clause (y) shall be excluded from clause (c)(ii) of
paragraph (c) above); (viii) dividends or other payments to Holdings sufficient
to enable Holdings to pay (x) accounting, legal, corporate reporting and
administrative expenses of Holdings incurred in the ordinary course of business,
(y) required fees and expenses, and any adjustments to the purchase price under
the Stock Purchase Agreement, in each case in connection with the
Recapitalization, and (z) the registration fees and expenses under applicable
laws and regulations of its debt or equity securities; and (ix) payments to
Holdings pursuant to the Tax Sharing Agreement. In addition, the Indenture will
provide that the Company may make a distribution to Holdings to consummate the
Recapitalization.
The Board of Directors of the Company or Holdings, as the case may be, may
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation would not cause a Default. For purposes of making such
determination, all outstanding Investments by the Company, Holdings and the
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greater of (x) the
net book value of such Investments at the time of such designation and (y) the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company, Holdings or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors of the Company or Holdings, as the case may be, whose resolution
with respect thereto shall be delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture, which calculations may be based upon Holdings' latest available
financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company and Holdings will not, and will
not permit any of their respective Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt), will not issue any
Disqualified Stock and will not permit any of their respective Subsidiaries to
issue any shares of preferred stock; provided, however, that (i) the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio of the Company for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 1.75 to 1, if such incurrence or issuance is on or prior to December 15,
1999, or 2.0 to 1, if such incurrence or issuance is after December 15, 1999, in
each case, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period and (ii) Holdings may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if the Fixed
Charge Coverage Ratio of Holdings for Holdings' most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 1.75 to 1, if such
incurrence or issuance is on or prior to December 15, 1999, or 2.0 to 1, if such
incurrence or issuance is after December 15, 1999, in each case, determined on a
pro forma basis (including a pro forma application of the net proceeds
75
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following (collectively, "Permitted Debt"), each of
which shall be given independent effect:
(i) the incurrence by the Company, Holdings and their respective
Subsidiaries of Indebtedness (including letters of credit), or guarantees of
such Indebtedness, pursuant to the term loan portion of the New Credit Facility;
provided that, after giving pro forma effect to any such incurrence and the
application of the proceeds therefrom, the aggregate principal amount of all
Indebtedness of the Company, Holdings and their Subsidiaries outstanding under
the term loan portion of the New Credit Facility does not exceed $100.0 million
less the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently repay any such Indebtedness pursuant to the covenant described above
under the caption "Repurchase at the Option of Holders -- Asset Sales;"
(ii) the incurrence by the Company, Holdings and their respective
Subsidiaries of Indebtedness (including letters of credit), or guarantees of
such Indebtedness, pursuant to the revolving loan portion of the New Credit
Facility (with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of the Company, Holdings and their
Subsidiaries thereunder); provided that, after giving pro forma effect to any
such incurrence and the application of the proceeds therefrom, the aggregate
principal amount of all Indebtedness (including letters of credit) of the
Company, Holdings and their Subsidiaries outstanding under the revolving loan
portion of the New Credit Facility does not exceed the greater of (x) $75.0
million less the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently repay any such Indebtedness pursuant to the covenant described above
under the caption "Repurchase at the Option of Holders -- Asset Sales" or (y)
the amount of the Borrowing Base as of any date of incurrence;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes (other than any Additional Notes), the incurrence by Holdings of the
Holdings Guarantee or the incurrence by any Restricted Subsidiary of Subsidiary
Guarantees;
(iv) the incurrence by the Company, Holdings or any of their Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company, Holdings or
such Subsidiary, in an aggregate principal amount not to exceed $5.0 million at
any time outstanding;
(v) the incurrence by any corporation that becomes a Subsidiary of the
Company after the Issue Date of Acquired Debt, which Indebtedness is existing at
the time such corporation becomes a Subsidiary; provided, however, that (A)
either (x) the principal amount (or accreted value, as applicable) of such
Acquired Debt, together with any other outstanding Indebtedness incurred
pursuant to this clause (iv), does not exceed $5.0 million since the Issue Date
or (y) immediately after giving effect to such corporation becoming a
Subsidiary, Holdings could incur at least $1.00 of additional Indebtedness
(other than Permitted Debt) in accordance with the Indenture, (B) such
Indebtedness is without recourse to the Company, Holdings or to any of their
respective Subsidiaries or to any of their respective properties or assets other
than Person becoming a Subsidiary or its properties and assets and (C) such
Indebtedness was not incurred as a result of or in connection with or in
contemplation of such entity becoming a Subsidiary;
(vi) the incurrence by the Company, Holdings or any of their Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
76
(vii) the incurrence of intercompany Indebtedness between or among the
Company, Holdings and any of their respective Wholly Owned Restricted
Subsidiaries; provided, however, that (i) if the Company or Holdings is the
obligor on such Indebtedness, such Indebtedness is expressly subordinate to the
prior payment in full in cash of all Obligations with respect to the Notes and
(ii)(A) any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than the Company, Holdings or
a Wholly Owned Restricted Subsidiary and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company, Holdings or a
Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by the Company, Holdings or such Subsidiary,
as the case may be;
(viii) Indebtedness of an Unrestricted Subsidiary owed to and held by the
Company, Holdings or a Restricted Subsidiary, provided that the Company,
Holdings or such Restricted Subsidiary is permitted to make an investment in
such Unrestricted Subsidiary under the Indenture at the time such Indebtedness
is incurred in an amount equal to the principal amount of such Indebtedness;
(ix) the incurrence by the Company or Holdings of Hedging Obligations that
are incurred for the purpose of fixing or hedging currency risk or interest rate
risk with respect to any floating rate Indebtedness that is permitted by the
terms of this Indenture to be outstanding;
(x) the incurrence by Unrestricted Subsidiaries of Non-Recourse Debt,
provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt
of an Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary;
(xi) Indebtedness incurred in respect of performance, surety and similar
bonds provided by the Company, Holdings and the Restricted Subsidiaries in the
ordinary course of business, and refinancings thereof;
(xii) Indebtedness for letters of credit relating to workers' compensation
claims and self-insurance or similar requirements in the ordinary course of
business;
(xiii) Indebtedness arising from guarantees of Indebtedness of the Company,
Holdings or any Subsidiary or other agreements of the Company, Holdings or a
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or Subsidiary, other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition,
provided that the maximum aggregate liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually received by the
Company, Holdings and their Subsidiaries in connection with such disposition;
(xiv) the issuance by Holdings, on the Issue Date, of shares of Holdings
Preferred Stock, with an aggregate liquidation value of up to $17.6 million and
the issuance of additional shares of Holdings Preferred Stock as dividends on
outstanding shares of Holdings Preferred Stock subsequent to the Issue Date in
accordance with the terms of the Holdings Preferred Stock;
(xv) the incurrence of Exchange Notes issued (a) in exchange for all, but
not less than all, of the outstanding Holdings Preferred Stock in accordance
with the terms of the Holdings Preferred Stock as in effect on the Issue Date,
if immediately prior to giving effect to the incurrence of such Exchange Notes,
the Fixed Charge Coverage Ratio of
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Holdings would have been at least 2.0 to 1 pursuant to the Fixed Charge Ratio
test set forth in clause (ii) of the proviso of the first paragraph of this
covenant; provided that in calculating such Fixed Charge Coverage Ratio of
Holdings, no effect shall be given to clause (ii) of the definition of
"Consolidated Net Income" set forth under "-- Certain Definitions" below) and
(b) as interest on Exchange Notes in accordance with the terms thereof;
(xvi) the incurrence by Holdings of Qualified Subordinated Indebtedness in
an aggregate principal amount not to exceed $5.0 million at any time
outstanding; and
(xvii) the incurrence by the Company, Holdings or any of their Subsidiaries
of additional Indebtedness (in addition to Indebtedness permitted by any other
clause of this paragraph) in an aggregate principal amount (or accreted value,
as applicable) at any time outstanding not to exceed $20.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture will provide that the Company and Holdings will not, and will
not permit any of their respective Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that the Company and Holdings will not, and will
not permit any Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company, Holdings or any of the
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
Indebtedness owed to the Company, Holdings or any of the Restricted
Subsidiaries, (ii) make loans or advances to the Company, Holdings or any of the
Restricted Subsidiaries or (iii) transfer any of its properties or assets to the
Company, Holdings or any of the Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) applicable law,
(b) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company, Holdings or any of the Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (c) by
reason of customary non-assignment provisions in leases, licenses, encumbrances,
contracts or similar assets entered into or acquired in the ordinary course of
business and consistent with past practices, (d) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired, (e)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company, Holdings or
any Restricted Subsidiary not otherwise prohibited by the Indenture, (f) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary, (g)
Indebtedness of the Company and its Restricted Subsidiaries containing
restrictions on dividends, distributions and other payments to Holdings and its
Restricted Subsidiaries (other than the Company and its Restricted
Subsidiaries), (h) the New Credit Facility, provided that such restrictions are
no more restrictive than those contained
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in the New Credit Facility as in effect on the Issue Date or such Permitted
Refinancing Indebtedness is no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) either (a) the Company is the surviving
corporation or (b) the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture, pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) except in the case of a
merger of the Company with or into a Wholly Owned Restricted Subsidiary, the
Company or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock;" and (v) the
Company has delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and such supplemental indenture
complies with the Indenture and that all conditions precedent provided for in
the Indenture relating to such transaction have been complied with.
Transactions with Affiliates
The Indenture will provide that the Company and Holdings will not, and will
not permit any Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of their respective properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company, Holdings or the relevant Restricted Subsidiary,
as the case may be, than those that would have been obtained in a comparable
transaction by the Company, Holdings or such Restricted Subsidiary, as the case
may be, with an unrelated Person and (ii) the Company or Holdings delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1,000,000, a resolution of the Board of Directors approving such Affiliate
Transaction and an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (t) any employment
agreement entered into by the Company, Holdings or any of their Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company, Holdings or such Subsidiary, (u) transactions between or among (A) the
Company and/or its Restricted Subsidiaries and (B) Holdings and its Restricted
Subsidiaries (other than the Company and its Restricted Subsidiaries), (v)
Restricted Payments (other than Restricted Investments) that are permitted by
the provisions of the Indenture described above under the caption "-- Restricted
Payments," (w) investment banking and management fees in an aggregate amount no
greater than $240,000 in the aggregate in any calendar year (plus reimbursement
of expenses) to be paid by the Company and/or Holdings to the Principals or any
Related Party, (x) an aggregate cash fee of $3.25 million payable by the Company
and/or Holdings to the Principals or any Related Party or UBS Capital LLC
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on or about the Issue Date and (y) any loans made to the Company under the New
Credit Facility by any Affiliate of the Union Bank of Switzerland and fees and
reimbursement of expenses in respect thereof and (z) discounts and commissions
payable to UBS Securities LLC in the Offering of the Notes, in each case, shall
not be deemed Affiliate Transactions.
Sale and Leaseback Transactions
The Indenture will provide that the Company and Holdings will not, and will
not permit any Restricted Subsidiaries to, enter into any sale and leaseback
transaction (other than, (x) among the Company and Wholly Owned Restricted
Subsidiaries of the Company or (y) among Wholly Owned Restricted Subsidiaries of
the Company); provided that the Company or Holdings may enter into a sale and
leaseback transaction if (i) the Company or Holdings, as the case may be, could
have (a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction pursuant to the covenant
described above under the caption "-- Incurrence of Additional Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "-- Liens," (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal to
the fair market value (as determined in good faith by the Board of Directors of
the Company or Holdings, as applicable, and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and the Company or Holdings, as
the case may be, applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Subsidiaries
The Indenture will provide that the Company (i) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any such Wholly
Owned Restricted Subsidiary to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of such
Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "-- Asset Sales," and (ii)
will not permit any Wholly Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company.
The Indenture will provide that Holdings (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of Holdings to, transfer, convey, sell,
lease or otherwise dispose of any Capital Stock of any such Wholly Owned
Restricted Subsidiary to any Person (other than Holdings or a Wholly Owned
Restricted Subsidiary of Holdings), unless (a) such transfer, conveyance, sale,
lease or other disposition is of all the Capital Stock of such Wholly Owned
Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "-- Asset Sales," and (ii) will not
permit any Wholly Owned Restricted Subsidiary of Holdings to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to Holdings
or a Wholly Owned Restricted Subsidiary of Holdings.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture will provide that the Company and Holdings will not permit
any Restricted Subsidiary to guarantee the payment of any Indebtedness of the
Company, Holdings or any other Restricted Subsidiary, (in each case, the
"Guaranteed Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor,
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Subsidiary Guarantee of payment of
the Notes by such Restricted Subsidiary, (ii) if the Notes or the Subsidiary
Guarantee (if any) of such Restricted Subsidiary are subordinated in right of
payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to the Guaranteed Debt substantially to the same extent as the Notes or
the Subsidiary Guarantee are subordinated to the Guaranteed Debt
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under the Indenture, (iii) if the Guaranteed Debt is by its express terms
subordinated in right of payment to the Notes or the Subsidiary Guarantee (if
any) of such Restricted Subsidiary, any such guarantee of such Restricted
Subsidiary with respect to the Guaranteed Debt shall be subordinated in right of
payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to the
Notes substantially to the same extent as the Guaranteed Debt is subordinated to
the Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary,
(iv) such Restricted Subsidiary subordinates rights of reimbursement, indemnity
or subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee to its obligation under its Subsidiary Guarantee, and (v)
such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to
the effect that (A) such Subsidiary Guarantee has been duly authorized, executed
and delivered, and (B) such Subsidiary Guarantee constitutes a valid, binding
and enforceable obligation of such Restricted Subsidiary, except insofar as
enforcement thereof may be limited by bankruptcy, insolvency or similar laws
(including, without limitation, all laws relating to fraudulent transfers) and
except insofar as enforcement thereof is subject to general principles of
equity.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and Subsidiary Guarantee and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided that
the Net Proceeds of such sale or other disposition are applied in accordance
with the applicable provisions of the Indenture. See "Repurchase at Option of
Holders -- Asset Sales." The Indenture will also provide that in the event that
a Guarantor is designated by the Company to be an Unrestricted Subsidiary in
accordance with the terms of the Indenture, such Guarantor will be released and
of any obligations under its Subsidiary Guarantee. See "Certain Covenants --
Restricted Payments."
No Senior Subordinated Debt
The Indenture will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness of such Guarantor, and senior in any respect in right of payment to
such Guarantor's guarantees of the Notes.
Payments for Consent
The Indenture will provide that neither the Company, nor Holdings nor any
of their respective Subsidiaries will, directly or indirectly, pay or cause to
be paid any consideration, whether by way of interest, fee or otherwise, to any
Holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company and Holdings will furnish to the
Holders of Notes (i) all quarterly and annual financial information that would
be required to be contained in a filing with
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the Commission on Forms 10-Q and 10-K if Holdings were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of Holdings and its consolidated Subsidiaries (showing in reasonable
detail, either on the face of the financial statements or in the footnotes
thereto and in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the financial condition and results of operations of the
Company and the Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries), but excluding
exhibits, and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if Holdings
were required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, Holdings will file a copy of all such
information and reports with the Commission for public availability (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and Holdings have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in the payment when due
of principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
Holdings to comply with the provisions described under the captions "Repurchase
at the Option of the Holders -- Change of Control" or "-- Asset Sales" "Certain
Covenants -- Restricted Payments" or "-- Incurrence of Indebtedness and Issuance
of Preferred Stock;" (iv) failure by the Company or Holdings for 60 days after
notice from the Trustee or holders of at least 25% in aggregate principal amount
of the outstanding Notes to comply with any of its other agreements in the
Indenture, the Notes or any Guarantee; (v) default under any mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company, Holdings or any
of the Restricted Subsidiaries (or the payment of which is guaranteed by the
Company, Holdings or any of the Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on the final maturity date of such Indebtedness (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company,
Holdings or any of the Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (vii) except as permitted by the Indenture or
any Guarantee that is given by a Guarantor, any Guarantee of a Significant
Restricted Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect; and (viii) certain events of bankruptcy or insolvency with respect to
the Company, Holdings or any of their Significant Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however, that
such declaration will not become effective until the earlier to occur of (i) the
acceleration of the maturity of any Indebtedness under the New Credit Facility
or (ii) five business days following notice of such declaration to the agent
under the New Credit Facility. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company, Holdings, any Significant Restricted Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in aggregate principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
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In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable, to the extent permitted by law,
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 2002, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to December 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or Holdings, as such, shall have any liability for
any obligations of the Company, Holdings or any Subsidiary under the Notes, the
Indenture, the Guarantees or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result
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of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company, Holdings or any of their Subsidiaries
is a party or by which the Company, Holdings or any of their Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture,
the Guarantees or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture, the Guarantees or the
Notes may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (viii) release any Guarantor
from any of its obligations under its Guarantee or the Indenture, except in
accordance with the terms of the Indenture or (ix) make
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any change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 10 of the Indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Notes or any Guarantee to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's or any
Guarantor's obligations to Holders of Notes in the case of a merger or
consolidation, to provide for the issuance of a Subsidiary Guarantee by a
Subsidiary of the Company or Holdings, to provide for the issuance of Additional
Notes in accordance with the limitations set forth in the Indenture on the Issue
Date, to make any change that would provide any additional rights or benefits to
the Holders of Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Desa International,
Inc., 2701 Industrial Drive, P.O. Box 90004, Bowling Green, Kentucky, 42102,
Attention: Ed Patrick.
Book-Entry, Delivery and Form
Except as set forth in the next paragraph, the Notes to be resold as set
forth herein will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the date of the closing of
the sale of the Notes offered hereby (the "Closing Date") with, or on behalf of,
the Depositary and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
Notes that were (i) originally issued to or transferred to "institutional
accredited investors" who are not "qualified institutional buyers" (as such
terms are defined under "Notice to Investors" elsewhere herein) (the "Non-Global
Purchasers") or (ii) issued as described below under "Certificated Securities,"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer to a qualified institutional buyer
of Certificated Securities initially issued to a Non-Global Purchaser, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
85
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names the Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes (including principal, premium, if any, interest and Liquidated Damages,
if any). The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to the
legend requirements described herein under "Notice to Investors." In addition,
if (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note Holder of its Global Note, Notes in such form will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
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Same-Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made in immediately available funds. With
respect to Certificated Securities, however, the Company will make all payments
of principal, premium, if any, interest and Liquidated Damages, if any, by
mailing a check to each Holder's registered address. Secondary trading in
long-term notes and debentures of corporate issuers is generally settled in
clearing-house or nextday funds. In contrast, the Notes represented by the
Global Note are expected to be eligible to trade in the PORTAL Market and to
trade in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Notes will, therefore, be required by
the Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or other current assets in the ordinary
course of business or obsolete equipment (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of (x)
the Company and its Restricted Subsidiaries taken as a whole or (y) Holdings and
its Restricted Subsidiaries as a whole, will be governed by the provisions of
the Indenture described above under the caption "Repurchase at the Option of
Holders -- Change of Control" and/or the provisions described above under the
caption "Certain Covenants -- Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company, Holdings or any of their respective Subsidiaries of Equity Interests of
any of the Company's or Holdings' Subsidiaries, in the case of either clause (i)
or (ii), whether in a single transaction or a series of related transactions
that have a fair market value (as determined in good faith by the Board of
Directors of the Company) in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary of the Company or by a Subsidiary to the Company or to a Wholly Owned
Restricted Subsidiary of the Company, (ii) a transfer of assets by Holdings to a
Wholly Owned Restricted Subsidiary of Holdings or by a Subsidiary (other than
the Company or a Subsidiary of the Company) to Holdings or to a Wholly Owned
Restricted Subsidiary of Holdings, (iii) an issuance of Equity Interests by a
Wholly Owned Restricted Subsidiary of the Company to the Company or to another
Wholly Owned Restricted Subsidiary of the Company, (iv) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary of Holdings (other than the
Company or any of its Subsidiaries) to Holdings or to another Wholly Owned
Restricted Subsidiary of Holdings, and (v) a Restricted Payment that is
permitted by the covenant described above under the caption "Certain Covenants
- - - - -- Restricted Payments" will not be deemed to be Asset Sales.
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"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Average Life to Stated Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one- twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Borrowing Base" means, as of any date, an amount equal to the sum of 85%
of accounts receivable of the Company, Holdings and the Restricted Subsidiaries
as of such date that are not more than 90 days past due, plus 65% of the book
value of all inventory owned by the Company, Holdings and the Restricted
Subsidiaries as of such date, in each case calculated on a consolidated basis
and in accordance with GAAP. To the extent that information is not available as
to the amount of accounts receivable or inventory as of a specific date, the
Company and Holdings may utilize the most recent available information for
purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any lender party to the New Credit Facility or with
any domestic commercial bank having capital and surplus in excess of $500.0
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper of a domestic issuer having a rating of at least A-1
by Standard and Poor's Ratings Services or P-1 by Moody's Investors Service,
Inc. maturing within twelve months after the date of acquisition and (vi) any
mutual fund which invests solely in investments of the types described in
clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of either (x) Holdings and its Restricted
Subsidiaries taken as a whole or (y) the Company and its Restricted Subsidiaries
taken as a whole, in each case, to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties, (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company or Holdings, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) (a) prior to the
initial underwritten public offering by the Company or Holdings of its Common
Stock pursuant to an effective registration statement under the Securities Act
(the "IPO") the result of which is that either (A) the Principals and their
Related Parties become the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that for purposes of
calculating the beneficial ownership of any person, such person shall be deemed
to have "beneficial ownership" of all securities that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition) of less than 40%
88
of the Voting Stock of the Company or Holdings (measured by voting power rather
than number of shares) or (B) any person (as defined above), other than the
Principals and their Related Parties, becomes the beneficial owner (as defined
above), directly or indirectly, of 40% or more of the Voting Stock of the
Company or Holdings and such person is or becomes, directly or indirectly, the
beneficial owner of a greater percentage of the voting power of the Voting Stock
of the Company or Holdings, calculated on a fully diluted basis, than the
percentage beneficially owned by the Principals and their Related Parties, or
(b) after the IPO, any person (as defined above), other than the Principals and
their Related Parties, becomes the beneficial owner (as defined above), directly
or indirectly, of 35% or more of the Voting Stock of the Company or Holdings and
such person is or becomes, directly or indirectly, the beneficial owner of a
greater percentage of the voting power of the Voting Stock of the Company or
Holdings, calculated on a fully diluted basis, than the percentage beneficially
owned by the Principals and their Related Parties, (iv) the first day on which a
majority of the members of the Board of Directors of the Company or Holdings are
not Continuing Directors, (v) the first day on which Holdings ceases to own 100%
of the outstanding Equity Interests of the Company, or (vi) the Company or
Holdings consolidates with, or merges with or into, any Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Company or Holdings, in any such event pursuant to a
transaction in which any of the outstanding Voting Stock of the Company or
Holdings is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company or
Holdings outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance). For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring Voting
Stock of the Company or Holdings will be deemed to be a transfer of such portion
of such Voting Stock as corresponds to the portion of the equity of such entity
that has been so transferred.
"Consolidated Cash Flow" means, with respect to the Company or Holdings for
any period, the Consolidated Net Income of such Person for such period plus,
without duplication, (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Subsidiaries for such period, whether paid or accrued and whether
or not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, noncash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company or Holdings, as the case may be,
by such Subsidiary without prior approval (that has not been obtained), pursuant
to the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to the Company or Holdings
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary
89
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of
any Restricted Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and (v)
the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company, Holdings or one of their Subsidiaries.
"Consolidated Net Worth" means, with respect to the Company or Holdings as
of any date, the sum of (i) the consolidated equity of the common stockholders
of such Person and its consolidated Subsidiaries as of such date, plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company or Holdings who (i) was a member of
such Board of Directors on the date of the Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) so long as any Senior
Indebtedness under the New Credit Facility is outstanding, such Senior
Indebtedness and (ii) thereafter, any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $50 million or more and that has
been designated by the Company as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, at the option of the holder thereof) or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption "--
Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Notes" means the 12% Junior Subordinated Notes due December 31,
2009 of Holdings, issuable pursuant to the terms of the Holdings Preferred Stock
as in effect on the Issue Date.
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"Existing Indebtedness" means Indebtedness of the Company, Holdings and
their Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to the Company or Holdings for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations but excluding amortization of debt issuance costs), (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, (iii) any interest expense on
Indebtedness of another Person that is guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such guarantee or Lien is called
upon), and (iv) the product of (a) all cash dividend payments on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests (other
than Disqualified Stock) of the Company or Holdings, as the case may be, times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax rate
of such Person and its Restricted Subsidiaries, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to the Company or Holdings
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company,
Holdings or any of the Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company, Holdings or any
of the Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantee" means a guarantee of the Notes (including the Holdings
Guarantee and each Subsidiary Guarantee).
"Guarantor" means (i) Holdings, (ii) each Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
(iii) their respective successors and assigns.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or the value of foreign currencies purchased or received by the Company in
the ordinary course of business.
"Holdings" means Desa Holdings Corporation, a Delaware corporation and
parent of the Company.
"Holdings Preferred Stock" means Holdings' Series C 12% Senior Redeemable
Exchangeable Pay-In-Kind Preferred Stock, par value $.01 per share, as in effect
on the Issue Date.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company, Holdings or any of their respective Subsidiaries sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company or Holdings such that, after giving effect to any such
sale or disposition, such Person is no longer a Restricted Subsidiary of the
Company or Holdings, the Company and/or Holdings, as the case may be, shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "-- Restricted
Payments."
"Issue Date" means the first date of issuance of Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
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"Net Proceeds" means the aggregate cash proceeds received by the Company,
Holdings or any of the Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness (other than Indebtedness under the New Credit
Facility) secured by a Lien on the asset or assets that were the subject of such
Asset Sale and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain credit facility, dated as of the
Issue Date, by and among the Company, Holdings and NationsBank, N.A., as
administrative agent, issuing bank and swing line bank and the other parties
party thereto, together with all "Loan Documents" as defined therein and all
other documents, instruments and agreements executed in connection therewith
(including, without limitation, any guarantees, security documents and Hedging
Obligations), and in each case as amended, supplemented or modified from time to
time, including any renewal, refunding, replacement, restructuring or
refinancing of all or a portion thereof from time to time whether by the same or
any other agent, lender or other party thereto.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company,
nor Holdings nor any of the Restricted Subsidiaries (a) provides credit support
of any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise), or (c) constitutes the lender; and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company, Holdings or any of the Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Company, Holdings or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investment by
Holdings or any of its Subsidiaries (other than the Company or a Subsidiary of
the Company) in Holdings or in a Wholly Owned Restricted Subsidiary of Holdings;
(c) any Investment in Cash Equivalents; (d) any Investment by the Company or any
of its Restricted Subsidiaries in a Person, if as a result of such Investment
(i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys all or substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Restricted Subsidiary of the Company; (e)
any Investment by Holdings or any of its Restricted Subsidiaries in a Person, if
as a result of such Investment (i) such Person becomes a Wholly Owned Restricted
Subsidiary of Holdings or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys all or substantially all of
its assets to, or is liquidated into, Holdings or a Wholly Owned Restricted
Subsidiary of Holdings; (f) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption
"Repurchase at the Option of Holders -- Asset Sales;" (g) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company or Holdings; and (h) other Investments in any
Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (h)
that are at the time outstanding, not to exceed $5.0 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility; (ii) Liens on assets of Subsidiaries of the Company in favor of
the Company; (iii) Liens on assets of Subsidiaries of Holdings (other than the
Company or any of its Subsidiaries) in favor of Holdings; (iv) Liens on property
of a Person existing at the time such Person is merged into or consolidated with
the Company, Holdings or any of their respective Restricted Subsidiaries;
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provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or Holdings or such
Restricted Subsidiary, as the case may be; (v) Liens on property existing at the
time of acquisition thereof by the Company, Holdings or any of their respective
Subsidiaries, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory or regulatory obligations, leases, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (vii) Liens existing on the
date of the Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (ix) statutory
and common law Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens arising in the ordinary
course of business with respect to amounts not yet more than ninety days overdue
or being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made; (x) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (xi) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the Company,
Holdings or any of the Restricted Subsidiaries; (xii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company, Holdings or its Restricted Subsidiaries relating to
such property or assets; (xiii) any interest or title of a lessor in the
property subject to any Capitalized Lease or operating lease; (xiv) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xv) Liens in favor of the Company, Holdings or any Restricted
Subsidiary; (xvi) Liens arising from the rendering of a final judgment or order
against the Company, Holdings or any Restricted Subsidiary that does not give
rise to an Event of Default; (xvii) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xviii) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case securing Hedging Obligations; (xix) Liens arising out
of conditional sale, title retention, consignment or similar arrangements for
the sale of goods entered into by the Company, Holdings or any of the Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company, Holdings and the Restricted Subsidiaries prior to the
Issue Date; (xx) Liens incurred in the ordinary course of business of the
Company, Holdings or any of their respective Subsidiaries with respect to
obligations that do not exceed $5.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company, Holdings or such Subsidiary; (xxi) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries; and (xxii) Liens on assets of the Company securing Obligations
under any Senior Indebtedness of the Company and Liens on assets of a Guarantor
securing Obligations under any Senior Indebtedness of such Guarantor.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company,
Holdings or any of their respective Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund Existing Indebtedness or other Indebtedness of the Company, Holdings or
any of the Restricted Subsidiaries incurred in accordance with the Indenture
(other than Indebtedness incurred in accordance with clauses (i), (ii), (iv),
(vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi) and (xvii) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;") provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date at or later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or
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refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date at or later than the final
maturity date of, and is subordinated in right of payment to, the Notes on terms
at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is Indebtedness of the
Company or its Restricted Subsidiaries, such Indebtedness is incurred by the
Company, Holdings or the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
and (v) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is Indebtedness of Holdings or its Restricted Subsidiaries
(other than the Company and its Restricted Subsidiaries), such Indebtedness is
incurred by Holdings or the Restricted Subsidiary who is the obligor of the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Principals" means (i) J.W. Childs Equity Partners, L.P., (ii) each
Affiliate of J.W. Childs Equity Partners, L.P. as of the Issue Date, and (iii)
each officer or employee (including their respective immediate family members)
of J.W. Childs Associates, L.P. as of the Issue Date.
"Public Equity Offering" means an underwritten public offering of common
stock (other than Disqualified Stock) of the Company or Holdings, pursuant to an
effective registration statement filed with the Commission in accordance with
the Securities Act; provided, however, that, in the case of a Public Equity
Offering by Holdings, Holdings contributes to the capital of the Company net
cash proceeds thereof in an amount sufficient to redeem the Notes called for
redemption in accordance with the terms of the Indenture.
"Qualified Subordinated Indebtedness" means Indebtedness of Holdings which
(i) does not require payments (other than payments made with additional
Qualified Subordinated Indebtedness) in respect of principal, premium, interest
or otherwise (pursuant to mandatory redemption, sinking fund obligation or
otherwise) prior to the date that is 91 days after the date on which the Notes
mature, (ii) does not directly or indirectly provide for any restrictive
covenants or events of default other than the covenants and events of default
which are substantially the same as those provided for in the Exchange Notes (as
in effect on the Issue Date) and (iii) is subordinated in right of payment to
the Notes at least to the same extent as the Holdings Preferred Stock is
subordinated to the Notes on the Issue Date (including with respect to the
standstill provisions provided therein).
"Related Party" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means (i) all "Obligations" in respect of and as
defined in the New Credit Facility (including, without limitation, interest that
accrues after the filing of a petition initiating any action or proceeding under
Bankruptcy Law or any other bankruptcy, insolvency or similar law or statute
protecting creditors in effect in any jurisdiction, whether or not such interest
accrues after the filing of such petition for purposes of Bankruptcy Law or such
other law or statute or is an allowed claim in any such action or proceeding),
whether existing on the date hereof or hereafter incurred, and (ii) any other
Indebtedness permitted to be incurred by the Company or any Guarantor under the
terms of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in right
of payment to the Notes. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness will not include (w) any liability for federal,
state, local or other taxes owed or owing by the Company or any Guarantor, (x)
any Indebtedness of the Company or any Guarantor to any of their respective
Subsidiaries or other Affiliates, except to the extent any such Indebtedness is
pledged as security under the New Credit Facility, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture.
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"Significant Restricted Subsidiary" means a Restricted Subsidiary, that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date of the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stock Purchase Agreement" means that Stock Purchase Agreement, dated
October 8, 1997, among J.W. Childs Equity Partners, L.P., Holdings, and the
stockholders of Holdings named therein, as in effect on the Issue Date.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) or (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means each guarantee of the Notes issued by a
Subsidiary of Holdings or the Company pursuant to the Indenture.
"Tax Sharing Agreement" means the tax sharing agreement among Holdings, the
Company and any one or more of Holdings' subsidiaries, as amended from time to
time, so long as the method of calculating the amount of the Company's payments,
if any, to be made thereunder is not less favorable to the Company than as
provided in such agreement as in effect on the Issue Date (except to the extent
required to reflect changes in applicable federal or state tax laws), as
determined in good faith by the Board of Directors of the Company.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company or Holdings, as the case may be, as an
Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent
that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b)
is not party to any agreement, contract, arrangement or understanding with the
Company, Holdings or any Restricted Subsidiary unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company, Holdings or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company or
Holdings (as determined in good faith by the Board of Directors of the Company
or Holdings, as the case may be); (c) is a Person with respect to which neither
the Company, nor Holdings nor any of the Restricted Subsidiaries has any direct
or indirect obligation (x) to subscribe for additional Equity Interests or (y)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; and (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company, Holdings or any of the Restricted Subsidiaries. Any
such designation by such Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company and
Holdings shall be in default of such covenant). The Board of Directors of the
Company or Holdings may at any time designate any Unrestricted Subsidiary to be
a Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro
96
forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would be
in existence following such designation.
"Voting Stock" means, with respect to any Person, the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF NEW CREDIT FACILITY
General
Concurrently with the consummation of the Recapitalization, the Company
entered into the New Credit Facility with the lenders from time to time party
thereto, NationsBank, as Administrative Agent, Union Bank of Switzerland, New
York Branch, as Documentation Agent, NationsBank Montgomery Securities, Inc.
("NMSI"), as Syndication Agent for the lenders referred to therein, and NMSI and
UBS Securities LLC, as Co-Arrangers, providing for borrowings in an aggregate
principal amount of up to $195 million. The New Credit Facility is comprised of
a six-year term facility (the "New Term Loan A") in the principal amount of $50
million, a seven-year term facility (the "New Term Loan B") in the principal
amount of $50 million, a revolving credit facility (the "Revolving Credit
Facility") in the principal amount of $75.0 million, and a 6-year acquisition
facility (the "Acquisition Facility") in the principal amount of $20 million.
Indebtedness under the New Credit Facility is guaranteed by Holdings and each
existing and hereafter acquired domestic subsidiary of the Company. This
information relating to the New Credit Facility is qualified in its entirety by
reference to the complete text of the documents entered into or to be entered
into in connection therewith. The following is a description of the general
terms of the New Credit Facility.
Security
Indebtedness under the New Credit Facility is secured by (i) substantially
all of the assets of Holdings, the Company and their domestic subsidiaries, (ii)
100% of the outstanding capital stock of each of the Company and the domestic
subsidiaries of Holdings and the Company and (iii) 65% of the outstanding
capital stock of any foreign subsidiary of the Company or Holdings.
Interest
Amounts outstanding under the New Term Loan A and the New Revolving Credit
Facility bear interest at a rate equal to LIBOR plus 225 basis points. Amounts
outstanding under the New Term Loan B and the Acquisition Facility bear interest
at a rate equal to LIBOR plus 262.5 basis points.
Borrowing Base
Pursuant to the terms of the New Credit Facility, advances under the
Revolving Credit Facility are limited to a borrowing base comprised of specified
percentages of eligible accounts receivable and eligible inventory. The Company
will be required to reduce outstanding borrowings under the Revolving Credit
Facility to a maximum of $15.0 million for a period of at least thirty (30) days
during each year.
Maturity
Loans made pursuant to the Revolving Credit Facility may be borrowed,
repaid and reborrowed from time to time until the sixth anniversary of the
Closing Date or the earlier repayment in full of the New Term Loan A, subject to
the satisfaction of certain conditions on the date of any such borrowing.
Fees
The Company is required to pay to the Banks in the aggregate a commitment
fee equal to 50 basis points per annum, payable in arrears on a quarterly basis,
on the committed undrawn amount of the New Credit Facility. The Agent and the
Banks shall receive such other fees as have been separately agreed upon with the
Agent, including, without limitation, in respect of letters of credit issued
under the letter of credit subfacility.
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Letters of Credit Subfacility
The New Credit Facility includes a subfacility for the issuance of letters
of credit up to a maximum aggregate amount at any one time outstanding not to
exceed $10.0 million. If any letter of credit is outstanding after the
termination of the New Credit Facility, the Company would be required to post a
standby letter of credit or deposit cash collateral in an amount sufficient to
reimburse the Banks for amounts drawn under any such outstanding letter of
credit.
Covenants
The New Credit Facility contains a number of financial, affirmative and
negative covenants that regulate the operations of Holdings and its
subsidiaries, including the Company. Financial covenants require Holdings to
maintain: (i) a minimum fixed charge coverage ratio, (ii) a minimum interest
coverage ratio; and (iii) a maximum leverage ratio. Negative covenants restrict,
among other things, the incurrence of debt, the existence of liens, transactions
with affiliates, loans, advances and investments, payment of dividends and other
distributions to shareholders, dispositions of assets, mergers, consolidations
and dissolutions, contingent liabilities and changes in business.
Events of Default; Remedies
The New Credit Agreement contains customary events of default under the New
Credit Facility, including (i) the non-payment of principal, interest or other
amounts, (ii) violation of covenants, (iii) inaccuracy of representations and
warranties, (iv) cross-defaults to certain other indebtedness and material
agreements (including the Notes), (iv) certain events of bankruptcy and
insolvency, (v) ERISA, (vi) actual or asserted invalidity of any loan documents
or security interests, (vii) changes in control of the ownership of the Company,
(viii) bankruptcy and (ix) Holdings engaging in any business or activity other
than holding 100% of the stock of the Company. If any such event of default
occurs, the Administrative Agent will be entitled, on behalf of the Banks, to
take all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the New Credit Facility
and may require all such amounts outstanding thereunder to be immediately paid
in full.
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DESCRIPTION OF HOLDINGS PREFERRED STOCK
The following statements are brief summaries of certain provisions relating
to the shares of the Holdings Preferred Stock. The following statements are
qualified in their entirety by the provisions of Holdings' Certificate of
Incorporation and the Restated Certificate of Designation relating to the
Holdings Preferred Stock (the "Certificate of Designation") filed with the
secretary of state of Delaware, which includes the resolutions of the Board of
Directors of Holdings creating the Holdings Preferred Stock.
Dividend Rights
Holders of Holdings Preferred Stock are entitled to receive, but only when
and as declared by the Board of Directors of Holdings out of funds legally
available therefor, cumulative dividends at the annual rate of $120.00 per
share, payable semiannually on the last day of June 30 and December 31 in each
year, commencing June 30, 1998 (a "Dividend Reference Date"). Dividends are
cumulative, accrue on a daily basis, are calculated from the date of issue of
the Holdings Preferred Stock and are payable to holders of record on such record
dates as are fixed by the Board of Directors of Holdings. Dividends payable for
any period less than a full semiannual period will be computed on the basis of a
365-day year and the actual number of days elapsed.
Dividends are payable in cash, except if any dividend payable on any
Dividend Reference Date occurring before December 31, 2009 is not declared and
paid in full in cash on such Dividend Reference Date, the amount payable as a
dividend on such Dividend Reference Date that is not paid in cash shall, subject
to the terms of any Parity Securities or Senior Securities (each defined below),
be declared and paid in additional shares of Holdings Preferred Stock, with such
additional shares of Holdings Preferred Stock being valued at $1,000 per share
for such purpose.
For purposes of the Certificate of Designation:
"Equity Interests" means capital stock and all warrants, options or other
rights to acquire capital stock (but excluding any debt security that is
convertible into, or exchangeable for, capital stock).
"Junior Security" means any shares of the voting common and the non-voting
common stock of Holdings and any other class or series of stock of Holdings
which, by the terms of Holdings' Certificate of Incorporation or of the
instrument by which its Board of Directors, acting pursuant to authority granted
in Holdings' Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be junior to the Holdings Preferred
Stock in respect of the right to receive dividends or to participate in any
distribution of assets (including but not limited to any distribution of assets
in connection with the liquidation of Holdings) other than by way of dividends.
"Parity Security" means any shares of any class or series of stock of
Holdings which, by the terms of Holdings' Certificate of Incorporation or of the
instrument by which its Board of Directors, acting pursuant to authority granted
in Holdings' certificate of incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be on a parity with the Holdings
Preferred Stock in respect of the right to receive dividends and to participate
in any distribution of assets (including but not limited to any distribution of
assets in connection with the liquidation of Holdings) other than by way of
dividends.
"Senior Security" means shares of any class or series of stock of Holdings
which, by the terms of Holdings' certificate of incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in Holdings' certificate of incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be senior to the Holdings Preferred
Stock in respect of the right to receive dividends or to participate in any
distribution of assets (including but not limited to any distribution of assets
in connection with the liquidation of Holdings) other than by way of dividends.
No dividend (payable other than in shares of Junior Securities) whatsoever
shall be paid upon, or moneys or other property of Holdings set apart for
payment of any dividend upon, any Junior Security nor shall any Junior Security
be redeemed or purchased by Holdings or any subsidiary thereof (except by
conversion into or exchange for Junior
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Securities) nor shall any moneys or other property be paid to or made available
for a sinking fund for any such redemption or purchase of any Junior Security,
unless, in each such instance, all of the following conditions are met: (i) all
dividends on all outstanding shares of Holdings Preferred Stock accrued through
the most recent Dividend Reference Date shall have been paid or declared and
sufficient moneys (or, to the extent permitted by the Certificate of
Designation, shares of Holdings Preferred Stock) set aside for payment thereof;
(ii) all dividends on all outstanding shares of Holdings Preferred Stock accrued
through the most recent Dividend Reference Date from the Dividend Reference Date
immediately preceding such most recent Dividend Reference Date shall have been
paid in cash or declared and sufficient moneys set aside for payment thereof;
(iii) all shares of Holdings Preferred Stock issued by Holdings after December
31, 2002 as payment-in-kind dividends shall have been redeemed; (iv), Holdings
shall have redeemed all shares of Holdings Preferred Stock (A) for which it has
received a notice of redemption from the holders thereof pursuant to the right
of holders to demand redemption described below under the heading "Redemption on
Demand by Holder" and in respect of which Holdings' obligation to redeem such
shares shall not have terminated or (B) which are required to be redeemed
pursuant to the mandatory redemption obligation of Holdings described below
under the heading "Mandatory Redemption;" and (v) certain other limitations on
the maximum amount of such dividends on or redemptions or purchases of Junior
Securities are met. The foregoing provisions shall not prohibit (i) the payment
of any dividend within sixty (60) days after the date of declaration thereof, if
at the date of such declaration such payment would have complied with the
provisions of the Certificate of Designation, or (ii) the repurchase, redemption
or other retirement for value of any Equity Interests of Holdings held by any
member of the management or employees of Holdings or any subsidiary of Holdings
pursuant to the Stockholders Agreement to be entered into concurrently with the
closing of the Recapitalization, among Holdings and its stockholders named
therein; provided that (A) the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall be subject to certain
limitations on the maximum amount thereof, (B) no Voting Rights Triggering Event
(defined below) shall have occurred and be continuing immediately after such
transaction, and (C) Holdings shall have redeemed all shares of Holdings
Preferred Stock (I) for which it has received a notice of redemption from the
holders thereof pursuant to the right of holders to demand redemption described
below under the heading "Redemption on Demand by Holder" and in respect of which
Holdings' obligation to redeem such shares shall not have terminated or (II)
which are required to be redeemed pursuant to the mandatory redemption
obligation of Holdings described below under the heading "Mandatory Redemption."
So long as any share of Holdings Preferred Stock remains outstanding, no
full dividend (payable other than in shares of Junior Securities) shall be paid
upon, or moneys or other property of Holdings set apart for payment of any full
dividend upon, any Parity Securities, unless all dividends on all outstanding
shares of Holdings Preferred Stock accrued through the most recent Dividend
Reference Date shall have been paid or declared and sufficient moneys (or, to
the extent required by the Certificate of Designation, shares of Holdings
Preferred Stock) set aside for payment thereof. If all such dividends are not so
paid, the Holdings Preferred Stock shall share dividends pro rata with such
Parity Securities.
Substantially all of Holdings' operations are conducted through the
Company. The ability of Holdings to pay cash dividends on the Holdings Preferred
Stock will be dependent upon the payment to it of dividends, interest or other
charges by the Company. The Company's right to make such payments is restricted
by the New Credit Facility and the Indenture.
Liquidation Preference
Upon any liquidation, dissolution or winding up of Holdings, whether
voluntary or involuntary, the holders of Holdings Preferred Stock will be
entitled to be paid out of the assets of Holdings available for distribution to
stockholders, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the sum of $1,000 per share of Holdings
Preferred Stock plus all accrued and unpaid dividends thereon (the "Liquidation
Value"). After such payment, the holders of Holdings Preferred Stock will not be
entitled to any further payment or claim to any of the remaining assets of
Holdings. If, upon any liquidation, dissolution or winding up of Holdings, the
assets of Holdings to be distributed among holders of Holdings Preferred Stock
are insufficient to permit payment to holders of the aggregate Liquidation Value
to which they are entitled, then the assets of Holdings to be distributed to
such holders will be distributed ratably among such holders. Neither the
consolidation or merger of Holdings into or with any other person or entity, nor
the sale or transfer by Holdings of all or any part of its assets, nor the
reduction of the capital stock of Holdings, will be deemed to be a liquidation,
dissolution or winding up of Holdings.
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Redemption
Holdings has the following redemption rights and obligations with respect
to the Preferred Stock:
Optional Redemptions by Holdings. At any time within six (6) months after a
Change of Control or a Qualified Public Offering (each as defined below),
Holdings may, at its election, redeem all or any part of the outstanding shares
of Holdings Preferred Stock, out of funds legally available therefor, at the
Liquidation Value. For purposes of the Certificate of Designation:
"Change of Control" shall mean the occurrence of any of the following:
(i) The sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of Holdings or the Company to any
"person" (as such term is used in Section 13(d)(3) of the Exchange Act), except
to the extent such transaction would not constitute a Change of Control under
clause (vi) of this definition;
(ii) The adoption of a plan relating to the liquidation or dissolution of
Holdings or the Company;
(iii) The consummation of any transaction (including but not limited to any
merger or consolidation, (A) prior to the initial underwritten public offering
of the common stock of Holdings pursuant to an effective registration statement
under the Securities Act (the "IPO") the result of which is that the JWC Holders
and their Related Parties become the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall
be deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition) of less than 40%
of the Voting Stock of Holdings (measured by voting power rather than number of
shares) or (B) after the IPO, any person (as defined above), other than the JWC
Holders and their Related Parties, becomes the beneficial owner (as defined
above), directly or indirectly, of 35% or more of the Voting Stock of Holdings
and such person is or becomes, directly or indirectly, the beneficial owner of a
greater percentage of the voting power of the Voting Stock of Holdings,
calculated on a fully diluted basis, than the percentage beneficially owned by
the JWC Holders and their Related Parties;
(iv) The first day on which a majority of the members of the Board of
Directors of Holdings are not Continuing Directors;
(v) The first day on which Holdings shall own, directly or indirectly, less
than all of the issued and outstanding capital stock of the Company or of the
surviving or transferee Person of the Company in a transaction not constituting
a Change of Control under clause (vi) of this definition; or
(vi) Holdings or the Company consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, Holdings or the Company, as the case may be, in
any such event pursuant to a transaction in which (A) any of the outstanding
Voting Stock of Holdings is converted into or exchanged for cash, securities or
other property, other than any such transaction where the Voting Stock of
Holdings outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance) or (B) any
of the outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property (other than payments of or the right to
receive cash in respect of fractional shares of such Voting Stock), other than
any such transaction where the Voting Stock of the Company outstanding
immediately prior
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to such transaction is converted into or exchanged for Voting Stock of the
surviving or transferee Person all of which is owned, directly or indirectly, by
Holdings (immediately after giving effect to such issuance).
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Holdings who (i) was a member of such Board of
Directors on the date of adoption of the Certificate of Designation by the Board
of Directors of Holdings or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election.
"JWC Holders" means the JWC Holders as defined in the Stockholders
Agreement to be entered into concurrently with the closing of the
Recapitalization among Holdings and the stockholders of Holdings named therein.
The Principals are included among the JWC Holders.
"Person" means any individual, partnership, corporation, limited liability
corporation, trust, estate, joint venture, association, unincorporated
organization, government or any department or agency thereof, or other entity.
"Qualified Public Offering" means one or more public sales of any capital
stock of Holdings pursuant to one or more registration statements (other than on
Form S-4 or S-8 or any other similar limited purpose form), that have become
effective under the Securities Act, yielding at least $10.0 million in aggregate
gross proceeds.
"Related Party" with respect to any JWC Holder means (i) any controlling
stockholder or 80% (or more) owned subsidiary of such JWC Holder or (ii) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partner, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of JWC Holders and/or such other Persons referred to
in the immediately preceding clause (i).
"Voting Stock" means, with respect to any Person, the capital stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
At any time and from time to time Holdings may, at its election, redeem all
or any part of the outstanding shares of Holdings Preferred Stock issued by the
Holdings as payment-in-kind dividends out of funds legally available therefor,
at the Liquidation Value.
Redemption on Demand by Holder. Within ten business days after a Change of
Control, Holdings shall, unless Holdings shall have theretofore given notice of
the optional redemption by Holdings of all of the outstanding shares of Holdings
Preferred Stock, give written notice to the holders of the Holdings Preferred
Stock of the demand redemption rights described in this paragraph. In addition,
within ten business days after each Dividend Reference Date occurring at least
six months after such Change of Control, Holdings shall give written notice to
the holders of Preferred Stock of such demand redemption rights. Upon receipt of
any such notice, each holder of shares of Holdings Preferred Stock may require
Holdings to redeem, at the Liquidation Value plus an amount equal to one percent
(1%) of such Liquidation Value at the time of redemption, up to the lesser of
(i) all of the shares of Holdings Preferred Stock held by such holder and (ii)
such number of shares of Holdings Preferred Stock held of record by such holder
as shall equal the product of (x) all of the shares of Holdings Preferred Stock
in respect of which such holder shall have exercised his demand redemption right
multiplied by (y) a ratio, the numerator of which shall be equal to the Cash
Available for Redemption and the denominator of which shall be equal to the
aggregate of the Liquidation Value plus an amount equal to one percent (1%) of
the Liquidation Value at the time of redemption for all of the shares of
Holdings Preferred Stock in respect of which holders of Holdings Preferred Stock
shall have exercised their demand redemption rights. Holdings will not be
required to pay the redemption price due in connection with the redemption of
any Holdings Preferred Stock as described in this paragraph until ninety-one
business days after the redemption of all of the Notes required to be redeemed
by the Company in connection with such Change of Control. The right of a holder
of shares of Holdings Preferred Stock to require Holdings to redeem, out of Cash
Available for Redemption, any or all of such shares (and any shares of Holdings
Preferred Stock thereafter issued as payment-in-kind dividends thereon)
following a Change of Control or any Dividend Reference Date occurring at least
six months after such Change of Control will terminate to the extent that such
holder fails to exercise his demand redemption right in respect of such shares
within the applicable exercise period following any date on which Holdings gives
notice of such demand redemption rights.
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For purposes of the Certificate of Designation, "Cash Available for
Redemption" means, as of any date, the sum of
(i) the lesser of
(A) the sum of (I) the aggregate amount of cash and cash equivalents
held by Holdings as of such date, plus (II) the maximum undrawn amount
available to Holdings (without duplication of any amount available to any
subsidiary of Holdings under any credit or loan agreements, as amended and
in effect from time to time, including but not limited to any such credit
or loan agreement in connection with which Holdings acts as a guarantor or
co- obligor of the obligations of any such subsidiary) as of such date
under any credit or loan agreements, as amended and in effect from time to
time, to which the Holdings is party, as borrower, plus
(B) the maximum amount that Holdings could, if it declared and paid a
cash dividend on its common stock on such date, declare and pay without
being in violation of or default under (with or without the lapse of time
or the giving of notice, or both) any applicable law or any note,
debenture, indenture or other agreement or instrument governing
indebtedness for borrowed money of Holdings, plus
(ii) the lesser of
(A) the sum of (I) the aggregate amount of cash and cash equivalents
held by the Company as of such date plus (II) the maximum undrawn amount
available as of such date under (x) the New Credit Facility, as amended and
in effect from time to time, or (y) any credit or loan agreements, as
amended and in effect from time to time, hereafter executed in connection
with any refinancing or replacement of the New Credit Facility, and
(B) the maximum amount that the Company could, if it declared and paid
a cash dividend on its common stock on such date, declare and pay without
being in violation of or default under (with or without the lapse of time
or the giving of notice, or both) any applicable law or any note,
debenture, indenture or other agreement or instrument governing
indebtedness for borrowed money of the Company, minus
(iii) a reasonable reserve determined by the Board of Directors of Holdings
in the good faith exercise of its business judgment.
Mandatory Redemption. On December 31, 2009, Holdings shall redeem, at the
Liquidation Value, all of the outstanding shares of Holdings Preferred Stock.
If the funds of Holdings legally available for redemption of Preferred
Stock on any redemption date are insufficient to redeem the total number of
shares of Holdings Preferred Stock to be redeemed on such date, those funds
which are legally available shall be used to redeem the maximum possible number
of shares of Holdings Preferred Stock ratably among the holders of the Holdings
Preferred Stock to be redeemed. At any time thereafter, when additional funds of
the Holdings are legally available for the redemption of Holdings Preferred
Stock, such funds shall immediately be used to redeem, without interest, the
balance of the Holdings Preferred Stock which Holdings has become obligated to
redeem on any redemption date but which it has not redeemed.
Substantially all of Holdings' operations are conducted through the
Company. The ability of Holdings to pay the redemption price due on the
redemption of any of the Holdings Preferred Stock will be dependent upon the
payment to it of dividends, interest or other charges by the Company. The
Company's right to make such payments is restricted by the New Credit Facility
and the Indenture.
Voting Rights
The outstanding shares of Holdings Preferred Stock have no voting rights
except as required by law and as follows:
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(a) The affirmative vote of the holders of record of at least two thirds (
2/3) of the outstanding shares of Holdings Preferred Stock, voting together as a
separate class, is required (i) to change (A) the rate or time of payment of any
dividends on, or (B) the time or amount of any redemption of, or (C) the amount
of any payments upon liquidation of Holdings with respect to, or (D) the
priorities afforded by the provisions of the Certificate of Designation for the
benefit of shares of Holdings Preferred Stock or (ii) to amend the redemption
rights of the holders of the Holdings Preferred Stock described above under the
heading "Mandatory Redemption" or (iii) to amend the voting rights of the
holders of the Holdings Preferred Stock.
(b) The affirmative vote of the holders of at least a majority of the
outstanding shares of Holdings Preferred Stock, voting together as a separate
class, is required to: (i) increase the number of authorized shares of Holdings
Preferred Stock or (ii) authorize or issue any additional shares of Holdings
Preferred Stock (other than as dividends on outstanding shares of Holdings
Preferred Stock to the extent permitted under the Certificate of Designation) or
(iii) issue any shares of capital stock of Holdings of any class, or any
security or obligations convertible into any capital stock of Holdings of any
class, in each case ranking on a parity with or prior to the Holdings Preferred
Stock as to distribution of assets in liquidation or in right of payment of
dividends (other than shares of Holdings Preferred Stock issued as dividends on
outstanding shares of Holdings Preferred Stock to the extent permitted under the
Certificate of Designation or in connection with the exchange, for shares of
Holdings Preferred Stock, of any Exchange Notes (as defined below) issued by
Holdings).
(c) In the event that (I) (A) dividends (either in cash or through the
issuance of additional shares of Holdings Preferred Stock to the extent
permitted under the Certificate of Designation) on the Holdings Preferred Stock
are in arrears and unpaid with respect to any Dividend Reference Date or (B)
December 31, 2002, Holdings fails on three (3) or more Dividend Reference Dates
(whether or not consecutive) to declare and pay in full in cash dividends, in
the amount of all accrued and unpaid dividends on the shares of Holdings
Preferred Stock outstanding as of each such Dividend Reference Date, on the then
outstanding shares of Holdings Preferred Stock (each, a "Dividend Voting Rights
Triggering Event") or (II) Holdings fails to redeem all of the then outstanding
shares of Holdings Preferred Stock on December 31, 2009 or otherwise fails to
discharge any redemption obligation with respect to the Holdings Preferred
Stock, then the maximum authorized number of directors of Holdings will be
increased by one (1) and holders of Holdings Preferred Stock shall be entitled
to vote their shares of Holdings Preferred Stock, together with the holders of
any Parity Securities upon which like voting rights have been conferred and are
exercisable, to elect, as a class, an additional one (1) director. Each such
event described in clauses (I) and (II) is herein referred to as a "Voting
Rights Triggering Event." So long as shares of Holdings Preferred Stock shall be
outstanding, the holders of Holdings Preferred Stock shall retain the right to
vote and elect, with the holders of any such Parity Securities, voting together
as a single class, such director until such time as (A) in the event such right
arises due to a Dividend Voting Rights Trigger Event, all accumulated dividends
that are in arrears on the Holdings Preferred Stock are paid in full in cash or,
with respect to any Dividend Reference Date occurring on or before December 31,
2002, through the issuance of additional shares of Holdings Preferred Stock; and
(B) in all other cases, the failure, breach or default giving rise to such
Voting Rights Triggering Event is remedied or waived by the holders of at least
a majority of the shares of Holdings Preferred Stock then outstanding and
entitled to vote thereon. Such period is herein referred to as a "Default
Period." Immediately upon the expiration of a Default Period, the right of the
holders of Holdings Preferred Stock to elect one director shall cease, the term
of office of the director elected by the holders of Holdings Preferred Stock and
such Parity Securities as a class shall terminate, and the number of directors
shall be such number as may be provided for in the Certificate of Incorporation,
as amended, or By-Laws of Holdings.
Exchange Notes
Exchange Provisions. Holdings may, at its election, exchange all but not
less than all of the outstanding shares of Holdings Preferred Stock for 12%
Junior Subordinated Notes due December 31, 2009 of Holdings (the "Exchange
Notes") having the general terms described below. Upon the exchange of the
Holdings Preferred Stock for the Exchange Notes, each holder of Holdings
Preferred Stock will be entitled to receive, per share of Holdings Preferred
Stock so
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exchanged, a principal amount of Exchange Notes equal to the Liquidation Value
of such share as of the date of such exchange. Upon such exchange, dividends on
the shares of Holdings Preferred Stock so exchanged shall cease to accrue, such
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of Holdings with respect to shares so exchanged
(except the right to receive from Holdings the Exchange Notes in the aggregate
original principal amount to which such holder is entitled upon such exchange)
shall cease. The Indenture and the New Credit Facility restrict the ability of
Holdings to elect to issue Exchange Notes in exchange for Holdings Preferred
Stock.
General. The Exchange Notes will be issued only if and when Holdings elects
to require the exchange of the Holdings Preferred Stock for the Exchange Notes.
The Exchange Notes will be unsecured obligations of Holdings and will be
subordinated to Holdings' obligations under the New Credit Facility and the
Holdings Guarantee of the Notes. The Exchange Notes will not be obligations of
the Company and, accordingly, the rights of the holders of the Exchange Notes
will be effectively subordinated to rights of the holders of the Notes, except
to the extent that Holdings may itself be a creditor with claims against the
Company. The maximum aggregate original principal amount of the Exchange Notes
will be limited to the aggregate original principal amount of the Exchange Notes
originally issued in exchange for shares of the Holdings Preferred Stock.
Interest. (a) The Exchange Notes will bear interest from their date of
issuance at the rate of 12% per annum, which will be due and payable on the last
day of each June 30 and December 31 after the Exchange Notes are issued.
Interest on the Exchange Notes will accrue from the most recent date on which
interest has been paid, or if no interest has been paid, from the original
issuance of the Exchange Notes. Interest is payable in cash, except that
Holdings may elect to defer the payment of any interest payable on any interest
payment date occurring on or before December 31, 2002 and prior to the Catch-up
Date (as hereinafter defined). To the extent that any interest accrued on the
Exchange Notes is not paid in cash on any interest payment date, such deferred
interest bears interest at 12% per annum, compounded on each interest payment
date thereafter until paid.
(b) On the last business day occurring on or before the first interest
payment date following the fifth anniversary of the date on which the Exchange
Notes were originally issued in exchange for shares of Holdings Preferred Stock
(the "Catch-up Date"), Holdings is required to pay in cash, in respect of
interest accrued and unpaid under the Exchange Notes, in addition to any
interest payment otherwise due on such date, such additional amount as is
necessary so that the aggregate amount includible for federal income tax
purposes in gross income with respect to the Exchange Notes by the holders
thereof for all periods ending on or before such first interest payment date
does not exceed the aggregate cumulative amount of interest paid in cash under
the Exchange Notes through such first interest payment date by more than the
product of the original principal amount of the Exchange Notes multiplied by
their yield to maturity.
(c) Each payment of interest due on an interest payment date occurring
after the Catch-up Date is required to be in an amount sufficient so that the
total amount of accrued and unpaid interest at the close of such interest
payment date shall in no event exceed the maximum amount which may be deferred
without causing a loss or deferral of Holdings' deduction of original issue
discount on the Exchange Notes under applicable provisions of the Internal
Revenue Code of 1986, as amended.
Holdings' operations are conducted through the Company. The rights of
Holdings and its creditors, including the holders of Exchange Notes, to
participate in the assets of the Company upon any liquidation or reorganization
of the Company or otherwise will be subject to the prior claims of creditors of
the Company (including, among others, holders of the Notes), except to the
extent that Holdings may itself be a creditor with claims against the Company.
The ability of Holdings to pay principal and cash interest payments on the
Exchange Notes will be dependent upon the payment to it of dividends, interest
or other charges by the Company. The Company's right to make such payments is
restricted by the New Credit Facility and the Indenture.
Redemption. Holdings has the following redemption rights and obligations
with respect to the Exchange Notes:
(a) At any time within six months after a Change of Control or a Qualified
Public Offering, Holdings may redeem all or any part of the outstanding
principal amount of the Exchange Notes, without premium, but together with
accrued and unpaid interest thereon.
106
(b) Within ten business days after a Change of Control, Holdings shall,
unless Holdings shall have theretofore given notice of the optional redemption
by Holdings of all of the Exchange Notes, give written notice to the holders of
the Exchange Notes of the demand redemption rights described in this paragraph.
In addition, within ten business days after each interest payment date occurring
at least six months after such Change of Control, Holdings shall give written
notice to the holders of the Exchange Notes of such redemption rights. Upon
receipt of any such notice, each holder of Exchange Notes may require Holdings
to redeem, at a redemption price equal to the outstanding principal amount of
and accrued and unpaid interest on such Exchange Notes, together with a premium
thereon in an amount equal to one percent (1%) of such principal amount and
accrued and unpaid interest to be redeemed, and all accrued and unpaid interest
on such principal amount, up to the lesser of (i) all of the Exchange Notes held
by such holder and (ii) such aggregate amount of the Exchange Notes held of
record by such holder as shall equal the product of (A) the Cash Available for
Redemption multiplied by (B) a ratio, the numerator of which shall be equal to
the redemption price of all of the Exchange Notes in respect of which such
holder shall have exercised his demand redemption right and the denominator of
which shall be equal to the aggregate redemption price for all of the Exchange
Notes in respect of which the holders thereof shall have exercised their demand
redemption right. Holdings will not be obligated to pay the redemption price due
in connection with the redemption of any Exchange Notes as described in this
paragraph (b) until ten business days after the redemption of all of the Notes
required to be redeemed by the Company in connection with such Change of
Control. The right of a holder of Exchange Notes to require Holdings to redeem,
out of Cash Available for Redemption, any or all of such Exchange Notes
following a Change of Control or any interest payment date occurring at least
six months after such Change of Control will terminate to the extent that such
holder fails to exercise his demand redemption right in respect of such Exchange
Notes within the applicable exercise period following any date on which Holdings
gives notice of such demand redemption rights.
Subordination and Standstill Provisions. The payment of the principal,
premium, if any, and interest on the Exchange Notes is subordinated in right of
payment to the prior payment in full of all Senior Debt (as defined below) of
Holdings, whether outstanding on the date of issuance of the Exchange Notes or
thereafter created, incurred, assumed or guaranteed. Upon any distribution to
creditors of Holdings in a liquidation, dissolution or winding up of Holdings or
in a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Holdings or its property, the holders of Senior Debt will be
entitled to receive payment in full in cash before the Exchange Noteholders are
entitled to receive any payment. If any such distribution is made to the
Exchange Noteholders before all Senior Debt has been paid in full or provision
has been made for such payment, such distribution must be paid over to the
holders of the Senior Debt. No such subordination will prevent the occurrence of
an Event of Default (as defined below).
During the continuance of (i) any default in the payment of the principal,
premium, if any, or interest on Senior Debt in an aggregate principal amount of
at least $10 million, including principal or interest which has become due by
reason of acceleration, or (ii) any other default, in respect of which Holdings
shall have been notified in writing by the holder of such Senior Debt or any
trustee therefor, with respect to Senior Debt in an aggregate principal amount
of at least $10 million permitting the holders thereof to accelerate the
maturity thereof, no payment may be made on the Exchange Notes, and payments may
thereafter be resumed only if both such default or any subsequent default shall
have been cured or waived or shall cease to exist; provided that, in the event
that a Senior Debt default (other than any such Senior Debt default of a nature
described in clause (i) of this paragraph) shall have occurred and be
continuing, the restrictions set forth in this paragraph shall, unless all of
the Senior Debt in respect of which such Senior Debt default shall have occurred
and be continuing shall have been declared due and payable under any
acceleration provision applicable thereto and such declaration shall not have
been waived, rescinded or annulled, cease to apply upon the earliest of (A) two
hundred seventy (270) days after the occurrence of such Senior Debt default or
(B) the date on which all Senior Debt defaults under such Senior Debt shall have
been cured or waived; provided, further, that the restrictions set forth in this
paragraph on payments with respect to the Exchange Notes in the event that a
Senior Debt default (other than any such Senior Debt default of a nature
described in clause (i) of this paragraph) may be invoked no more than one (1)
time in any three hundred sixty-five (365) day period, unless all of the Senior
Debt in respect of which such Senior Debt default shall have occurred and be
continuing shall have been declared due and payable under any acceleration
provision applicable thereto and such declaration shall not have been waived,
rescinded or annulled. If any such payment is made to the Exchange Noteholders
before all Senior Debt has been paid in full or provision has been made for such
payment, such payment must be paid over to the holders of the Senior Debt.
107
Holders of the Exchange Notes may not take any action to accelerate the
maturity of the indebtedness evidenced by the Exchange Notes unless all Senior
Debt shall have been paid in full in cash or all Senior Debt shall theretofore
have become due and payable.
Holders of the Exchange Notes may not commence any action or proceeding
against Holdings to recover all or any part of any indebtedness evidenced by the
Exchange Notes or bring or join with any creditor in bringing, unless the
holders of the Senior Debt then outstanding shall join therein, any proceeding
against Holdings under any bankruptcy, reorganization, insolvency or similar law
or statute unless and until all Senior Debt shall be paid in full in cash.
For purposes of the Exchange Notes, "Senior Debt" means
(a) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes), direct or indirect, as to principal,
interest (including post-petition interest whether or not an allowed claim),
premium or otherwise, initially incurred or issued to institutional investors,
whether outstanding on the date hereof or hereafter created or incurred, and
whether at any time assigned or otherwise transferred to any other institutional
investor or any other person, including but not limited to (i) all obligations
and liabilities in respect of money borrowed or purchase money indebtedness by
or of Holdings, (ii) all guarantees and endorsements (other than for collection
or deposit in the ordinary course of business) of any such obligations and
liabilities of others, such as but not limited to guarantees of any such
obligation or liability of a subsidiary of Holdings, (iii) all obligations and
liabilities secured by any mortgage, lien, pledge, security interest or other
encumbrance in respect of property, whether incurred in connection with money
borrowed or the acquisition of property, (iv) all obligations and liabilities in
respect of any lease of property, and (v) reimbursement obligations with respect
to letters of credit and interest rate protection agreements;
(b) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes), direct or indirect, as to principal,
interest, premium or otherwise with respect to any obligation, note, or
debenture offered by Holdings for sale to the public in an offer structured so
as to comply with applicable rules and regulations for a public offering in the
jurisdiction or jurisdictions in which such obligation, note or debenture is
offered, whether outstanding on the date hereof or hereafter created or
incurred, which are not expressly made pari passu or subordinate to the Exchange
Notes;
(c) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes) to which the Exchange Notes shall be
expressly subordinated in writing by the holders of not less than a majority in
aggregate principal amount of the Exchange Notes then outstanding;
(d) All other obligations and liabilities of Holdings (other than
indebtedness represented by the Exchange Notes); and
(e) All renewals, extensions, modifications and refundings of any such
obligation or liability;
unless in the case of either (a), (b), (c), (d) or (e), the terms of the
agreement or instrument creating the obligation or liability provide that it is
not senior to the Exchange Notes.
Events of Default and Remedies. Subject to the subordination and standstill
provisions described above under the heading "Subordination and Standstill
Provisions": (i) upon the occurrence and continuation of any Event of Default
(as defined below), then (a) in the case of any Event of Default specified in
clause (a) or (d)(i) of the definition of "Event of Default," each holder of
Exchange Note, and (b) in the case of any other Event of Default specified in
clause (b) or (c) of the definition of "Event of Default," the holder or holders
of record of at least twenty-five percent (25%) in aggregate principal amount of
the Exchange Notes then outstanding, may proceed to protect and enforce his or
their rights, as the case may be, by suit in equity, action at law and/or other
appropriate proceeding either for specific performance of any covenant or
condition, or in aid of the exercise of any power granted in the Exchange Notes,
and may by notice in writing to Holdings declare all or any part of the unpaid
balance of the Exchange Notes held by him to be forthwith due and payable, and
the holder may proceed to enforce payment of such balance or part thereof in
such manner as he may elect; and (ii) Holdings shall pay to the holder, upon
demand, the reasonable costs and expenses
108
(including reasonable attorneys fees and expenses) incurred by the holder in
connection with the enforcement of his rights and remedies arising upon the
occurrence and continuance of an Event of Default.
Anything in the Exchange Notes to the contrary notwithstanding, if any one
or more Events of Default specified in clause (d)(ii) or (iii) of the definition
of "Event of Default" shall occur and be continuing, then the holder or holders
of record of at least twenty-five percent (25%) in aggregate principal amount of
the Exchange Notes then outstanding may proceed to protect and enforce his or
their rights by suit in equity for specific performance and/or action at law for
damages; provided that the remedy, judgment, damages or other relief in equity
or at law of any such holder or holders shall be limited to the right to seek
specific performance of the obligation of Holdings to make payments in respect
of interest accrued on the Exchange Notes or damages, as the case may be, to,
and only to, the extent that Holdings shall have had cash available for interest
payments (defined in the Exchange Notes similarly to Cash Available for
Redemption) at the relevant date, determined in accordance with the Exchange
Notes. Such remedy (i) shall be the sole and exclusive remedy at law or in
equity of any such holder or holders of Exchange Notes in respect of any one or
more Events of Default specified in clause (d)(ii) or (iii) of the definition of
"Event of Default" and (ii) shall be subject to the subordination and standstill
provisions described above under the heading "Subordination and Standstill
Provisions."
For purposes of the Exchange Notes, "Event of Default" means the occurrence
and continuance of any of the following events:
(a) Except as otherwise provided in clause (d) below, Holdings shall have
failed, for a period of thirty days after written notice thereof, to make any
principal, interest, fee or other payment on any of the indebtedness evidenced
by the Exchange Notes (notwithstanding that such payment shall have been
suspended pursuant to the subordination provisions hereof); or
(b) Except as otherwise provided in clause (d) below, Holdings shall have
failed duly to observe or perform in any material respect any other covenant,
agreement or provision contained in the Exchange Notes other than those referred
to in subdivision (a) above, and such failure shall have continued for a period
of thirty days after written notice thereof; or
(c) Any customary bankruptcy-type event with respect to Holdings shall have
occurred and be continuing.
(d) notwithstanding the foregoing clauses (a), (b) and (c),
(i) the failure of Holdings to pay interest payable on any interest
payment date occurring after the earlier of (A) December 31, 2002 or (B)
the Catch-up Date shall constitute an Event of Default to, and only to, the
extent that Holdings shall fail to pay such interest in an amount at least
equal to the amount of cash available for interest payments, determined in
accordance with the Exchange Notes, as determined by Holdings as of a date
within ten business days prior to each such interest payment date;
(ii) the failure of Holdings to make the interest payment described in
paragraph (b) under the heading "-- Interest" shall not constitute an Event
of Default under the Exchange Notes to, and only to, the extent that
Holdings shall fail to make such payment in an amount at least equal to the
amount of cash available for interest payments, determined in accordance
with the Exchange Notes, as determined by Holdings as of a date within ten
business days prior to the Catch-up Date; and
(iii) the failure of Holdings to make any interest payment described in
paragraph (c) under the heading "-- Interest" shall constitute an Event of
Default under the Exchange Notes to, and only to, the extent that Holdings
shall fail to make such payment in an amount at least equal to the amount
of cash available for interest payments,
109
determined in accordance with the Exchange Notes, as determined by Holdings
as of a date within ten business days prior to the relevant interest
payment date.
110
LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being passed
upon for the Company by Sullivan & Worcester LLP, Boston, Massachusetts.
INDEPENDENT AUDITORS
The consolidated financial statements of Holdings at March 1, 1997 and
March 2, 1996, and for each of the three years in the period ended March 1,
1997, included in this Offering Memorandum, have been audited by Ernst & Young
LLP, independent auditors, as stated in their report appearing herein.
111
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESA HOLDINGS CORPORATION
Report of Ernst & Young LLP F-2
Consolidated Balance Sheets as of March 2, 1996, March 1, 1997 and November 29, 1997
(Unaudited) F-3
Consolidated Statements of Income for fiscal years ended February 25, 1995, March 2,
1996 and March 1, 1997 and the thirty-nine weeks ended November 30, 1996
and November
29, 1997 (Unaudited) F-4
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal years ended
February 25, 1995, March 2, 1996 and March 1, 1997 and the thirty-nine
weeks ended
November 29, 1997 (Unaudited) F-5
Consolidated Statements of Cash Flows for fiscal years ended February 25, 1995,
March 2, 1996 and March 1, 1997 and the thirty-nine weeks ended November
30, 1996
and November 29, 1997 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
INDEPENDENT AUDITORS' REPORT F-20
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996:
Balance Sheet F-21
Statement of Operations F-22
Statement of Shareholders' Equity F-23
Statement of Cash Flows F-24
Notes to Financial Statements F-25
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED OCTOBER 5, 1997:
Balance Sheet F-30
Statement of Operations F-31
Statement of Shareholders' Equity F-32
Statement of Cash Flows F-33
Notes to Financial Statements F-
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the accompanying consolidated balance sheets of DESA
Holdings Corporation (the "Company") as of March 2, 1996 and March 1, 1997, and
the related consolidated statements of income, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended March 1, 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 consolidated financial position of DESA Holdings
Corporation at March 2, 1996 and March 1, 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 1, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 3, the Company changed its method of determining the
cost of inventory in 1996.
New York, New York
April 4, 1997
F-2
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, excepts number of shares)
March 2, March 1, November 29,
1996 1997 1997
---- ---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 145 $ 5,058 $ 201
Accounts receivable, net 10,751 13,066 65,586
Inventories:
Raw materials 363 508 740
Work-in-process 4,519 4,386 7,831
Finished goods 10,054 10,853 18,562
--------- --------- ---------
14,936 15,747 27,133
Deferred tax assets 1,621 1,206 1,177
Other current assets 218 555 1,154
--------- --------- ---------
Total current assets 27,671 35,632 95,251
Property, plant and equipment:
Land 390 390 390
Buildings and improvements 4,297 4,297 4,297
Machinery and equipment 22,144 24,892 28,582
Furniture and fixtures 655 640 640
--------- --------- ---------
27,486 30,21 33,909
Less accumulated depreciation (17,742) (20,137) (22,500)
--------- --------- ---------
9,744 10,082 11,409
Goodwill 41,947 40,829 39,999
Other assets 6,183 5,441 11,121
Total assets $ 85,545 $ 91,984 $ 157,780
========= ========= =========
Liabilities and stockholders' equity (deficit) Current liabilities:
Accounts payable $ 10,890 $ 17,997 $ 25,114
Accrued liabilities 9,115 8,695 10,319
Income taxes payable 810 1,156 2,705
Current portion of long-term debt 8,050 16,350 22,355
--------- --------- ---------
Total current liabilities 28,865 44,198 60,493
Long-term debt 149,709 130,600 240,500
Deferred tax liabilities 2,079 1,664 1,663
Other liabilities 294 276 379
--------- --------- ---------
Total liabilities 180,947 176,738 303,035
Commitments
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized-- 2,000,000 shares;
issued and outstanding-- 17,600 shares at November 29, 1997 -- -- --
Capital in excess of par value--Preferred stock -- -- 17,600
Common stock, $.01 par value; authorized --50,000,000 shares; issued and
outstanding -- 23,363,876 shares at March 2, 1996, 23,573,876 at
March 1, 1997 and 12,606,162.9409 shares at November 29, 1997 234 236 126
Nonvoting common stock, $.01 par value; authorized-- 3,000,000
shares; issued and outstanding -- 1,781,557 shares at March 2, 1896
and March 1, 1997 and 90,603.6022 shares at November 29, 1997 18 18 1
Capital in excess of par value 26,514 26,722 82,273
Carryover predecessor basis adjustment (32,309) (32,309) (32,309)
Retained earnings (deficit) (89,829) (79,113) (212,484)
Cumulative translation adjustment (30) (308) (462)
--------- --------- ---------
Total stockholders' equity (deficit) (95,402) (84,754) (145,255)
--------- --------- ---------
Total liabilities and stockholders' equity (deficit) $ 85,545 $ 91,984 $ 157,780
========= ========= =========
See accompanying notes.
F-3
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Fiscal years ended Thirty-nine weeks ended
---------------------------------------- ----------------------------
February 25, March 2, March 1, November 30, November 29,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
Net sales $ 172,501 $ 186,324 $ 209,105 $ 173,587 $ 193,404
Operating costs and expenses:
Cost of sales 107,484 116,217 130,890 108,587 123,243
Selling and administrative expenses 33,851 35,503 42,656 32,083 35,477
--------- --------- --------- --------- ---------
Operating profit 31,166 34,604 35,559 32,917 34,684
Other expenses:
Interest 5,777 7,073 14,509 11,105 11,321
Other 2,124 2,325 2,601 1,830 2,082
--------- --------- --------- --------- ---------
Income before provision for income taxes 23,265 25,206 18,449 19,982 21,281
Provision for income taxes 10,064 10,703 7,733 8,378 8,769
--------- --------- --------- --------- ---------
Income before extraordinary item 13,201 14,503 10,716 11,604 12,512
Extraordinary item, net of income tax of $1,723
and $2,285 -- 2,638 -- -- 7,797
--------- --------- --------- --------- ---------
Net income 13,201 11,865 10,716 11,604 4,715
Less dividends on preferred stock 900 853 -- -- 17
--------- --------- --------- --------- ---------
Income available for common stockholders $ 12,301 $ 11,012 $ 10,716 $ 11,604 $ 4,698
========= ========= ========= ========= =========
See accompanying notes.
F-4
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997
and the thirty-nine weeks ended November 29, 1997 (Unaudited)
(In thousands)
Preferred Stock
---------------------- Carryover Total
Capital in Nonvoting Capital in Predecessor Retained Cumulative Stockholders'
excess of Common Common Excess of Basis Earnings Translation Equity
Series A par value Stock Stock Par Value Adjustment (Deficit) Adjustment (Deficit)
---------- ---------- --------- ---------- ----------- ---------- ---------- ----------- ----------
Balance at February 26, 1994 $ 5,150 $ 4,461 $ 225 -- $24,752 $(32,309) $ 12 $ (12) $ 2,279
Net income -- -- -- -- -- -- 13,201 -- 13,201
Dividends on preferred stock 646 254 -- -- -- -- (900) -- --
Exercise of stock options -- -- 7 -- 689 -- -- -- 696
Translation adjustment -- -- -- -- -- -- -- 18 18
Balance at February 25, 1995 5,796 4,715 232 -- 25,441 (32,309) 12,313 6 16,194
Net income -- -- -- -- -- -- 11,865 -- 11,865
Dividends on preferred stock 622 231 -- -- -- -- (853) -- --
Redemption of preferred stock (6,418) (4,946) -- -- -- -- -- -- (11,364)
Exercise of stock options -- -- 2 -- 200 -- -- -- 202
Exercise of BT warrant -- -- -- 18 873 -- -- -- 891
Dividends on common stock
and nonvoting common stock -- -- -- -- -- -- (113,154) -- (113,154)
Translation adjustment -- -- -- -- -- -- -- (36) (36)
Balance at March 2, 1996 -- -- 234 18 26,514 (32,309) (89,829) (30) (95,402)
Net income -- -- -- -- -- -- 10,716 -- 10,716
Exercise of stock options -- -- 2 -- 208 -- -- -- 210
Translation adjustment -- -- -- -- -- -- -- (278) (278)
Balance at March 1, 1997 -- -- 236 18 26,722 (32,309) (79,113) (308) (84,754)
Net income -- -- -- -- -- -- 4,715 -- 4,715
Issue preferred stock -- 17,600 -- -- -- -- -- -- 17,600
Repurchase of common stock -- -- (110) (17) 55,551 -- -- -- 55,424
Recapitalization -- -- -- -- -- -- (138,069) -- (138,069)
Dividends on preferred stock -- -- -- -- -- -- (17) -- (17)
Translation adjustment -- -- -- -- -- -- -- (154) (154)
Balance at November 29, 1997 $ -- $17,600 $ 126 $ 1 $82,273 $(32,309) $(212,484) $(462) $(145,255)
======= ======= ===== ==== ======= ======== ========= ===== =========
See accompanying notes.
F-5
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal years ended Thirty-nine weeks ended
------------------------------------- ---------------------------
February 25, March 2, March 1, November 30, November 29,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
Operating activities
Net income $ 13,201 $ 11,865 $ 10,716 $ 11,604 $ 4,698
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 2,148 2,332 2,432 2,127 2,363
Amortization 1,966 1,963 2,104 1,571 5,372
Deferred income taxes (1,260) 964 -- -- (78)
Equity in undistributed earnings of joint venture (109) (119) (132) (88) (124
Extraordinary item -- 2,638 -- -- 7,797
(Increase) decrease in operating assets:
Accounts receivable, net (2,656) 4,431 (2,315) (47,856) (52,520)
Inventories (6,474) (67) (811) (4,608) (11,386)
Other current assets (43) (64) (337) 102 (580)
Increase (decrease) in operating liabilities:
Accounts payable 6,867 (3,224) 7,107 15,837 7,117
Accrued liabilities 3,824 (2,516) (694) 4,183 1,641
Income taxes payable 833 1,380 346 4,743 1,548
Other liabilities 40 (208) (18) (7) 87
Net cash provided by (used in) operating activities 18,337 19,375 18,398 (13,378) (33,565)
--------- --------- --------- --------- ---------
Investing activities
Capital expenditures (1,499) (2,122) (2,770) (1,662) (3,690)
Dividends received from joint venture 196 112 132 111 124
Purchase of Toro assets (873) -- -- -- --
Other -- (50) (244) -- 27
Net cash used in investing activities (2,176) (2,060) (2,882) (1,551) (3,539)
--------- --------- --------- --------- ---------
Financing activities
Recapitalization transactions:
Proceeds from new Term Loans $ -- $ 155,000 $ -- $ -- $ 100,000
Proceeds from new revolver loan -- 9,900 -- -- 35,500
Proceeds from exercise of BT Warrant -- 891 -- -- 130,000
Redemption of Series A Preferred Stock -- (6,418) -- -- --
Redemption of Series B Preferred Stock -- (4,946) -- -- --
Repayment of old Term Loans -- (50,950) -- -- (183,095)
Dividends paid on common stock and nonvoting common stock -- (113,154) -- -- --
Payment of expenses -- (5,673) -- -- (17,490)
--------- --------- --------- --------- ---------
Net cash flow used in Recapitalization transactions -- (15,350) -- -- 64,915
Decrease in revolving loan -- (7,141) (2,759) 19,815 43,000
Principal payments of old Term Loans (2,250) (11,050) -- -- (6,855)
Principal payments of new Term Loans -- -- (8,050) (4,830) --
Decrease in promissory notes (97) -- -- -- (2,645)
Payments for repurchase of common stock -- -- -- -- (166,141)
Proceeds from issuance of preferred stock -- -- -- -- 17,600
Proceeds from issuance of common stock 696 202 210 201 82,400
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities (1,651) (17,989) (10,599) 15,186 32,641
--------- --------- --------- --------- ---------
Effect of exchange rates on cash 63 (1) (4) (9) (27)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents for the period 14,573 (16,025) 4,913 247 (4,857)
Cash and cash equivalents at beginning of period 1,597 16,170 145 145 5,058
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 16,170 $ 145 $ 5,058 $ 393 $ 201
========= ========= ========= ========= =========
See accompanying notes.
F-6
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997 and the
thirty-nine weeks ended November 30, 1996 and November 29, 1997
(information for the thirty-nine weeks ended
November 30, 1996 and November 29, 1997 is unaudited)
1. Organization and Basis of Presentation
DESA Holdings Corporation (the "Company") was formed in 1993 by (i) a
contribution of $13.5 million by a group of investors formed by Hicks, Muse,
Tate & Furst Incorporated ("Hicks Muse"), a privately held investment firm, for
13,500,000 shares of $.01 par value common stock which represents 60% of the
outstanding voting shares of the Company, with the remaining 9,000,000 shares
acquired by the management shareholders of DESA Holding Corp. ("Old Holdings")
in exchange for 140,831 shares of Old Holdings, (ii) 200,000 shares of Series A
variable rate cumulative Preferred Stock issued to BT Investment Partners, Inc.
("Bankers Trust") and (iii) 176,000 shares of Series B variable rate cumulative
Preferred Stock issued to CIGNA Investments and Mutual Benefit Life Insurance
Company ("CIGNA/Mutual"). Bankers Trust also received a warrant to purchase
1,781,557 shares of common stock of the Company (the "BT warrant") at a price of
$.50 per share and the management shareholders received options to purchase
695,876 shares of common stock of the Company (see Note 7). The fair market
values assigned to these warrants and options were $1,781,557 and $695,876,
respectively. In December 1993, the Company acquired all of the outstanding
common shares of DESA International, Inc. (the "Restructuring" transaction).
This Restructuring met the criteria under the Emerging Issues Task Force Issue
No. 88-16, "Basis in Leveraged Buyout Transactions". Consequently, management's
entire residual interest in the Company was valued at its predecessor basis and
is shown as a Carryover Basis Adjustment of $32,308,744, which reduces
stockholders' equity on the consolidated balance sheet whereas Hicks Muse's
residual interest was valued at fair value.
The Company was refinanced on January 12, 1996 through new borrowings ("new
Term Loans") via a new credit agreement with Bankers Trust. In conjunction with
this transaction, the Company paid a dividend of $113,154,449 to the holders of
common stock and nonvoting common stock, redeemed all outstanding shares of
Series A and Series B preferred stock including payment of the accrued preferred
stock dividends and repaid the outstanding balance of the old Term Loans.
In addition, as part of the refinancing in January 1996, the Company issued
1,781,557 shares of nonvoting common stock in conjunction with the exercise of
the BT warrant. Each share of nonvoting common stock, at the option of the
holder, is convertible into one share of common stock, subject to certain
restrictions.
Since the refinancing in January 1996 did not result in a change in the
controlling interest held by the management shareholders and Hicks Muse, a
change in the accounting basis under generally accepted accounting principles to
reflect the current market value was not applied. Therefore, the above described
transactions (the "Recapitalization") have been accounted for as a
recapitalization with all amounts paid to the management shareholders, Bankers
Trust, Hicks Muse and CIGNA/Mutual being recorded as reductions in stockholders'
equity.
2. Company Operations
The Company is engaged in the manufacturing and marketing of various
consumer product lines, including zone heating products and specialty tools. No
single customer accounted for more than 10% of net sales in fiscal year 1995.
Two customers, which operate in the hardware homecenter industry, accounted for
10% and 11% of net sales, respectively, in fiscal year 1996 and 13% and 11% of
net sales, respectively, in fiscal year 1997.
F-7
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28. The
fiscal years for the financial statements included herein ended on March 1, 1997
(52 weeks), March 2, 1996 (53 weeks), and February 25, 1995 (52 weeks).
Consolidation
The accompanying consolidated financial statements include the accounts of
DESA Holdings Corporation and its wholly-owned subsidiaries: DESA International,
Inc.; DESA Industries of Canada, Inc.; and DESA Europe B.V. All significant
intercompany accounts and transactions have been eliminated. The Company's 50%
interest in a joint venture is accounted for using the equity method.
Interim Financial Information
The interim consolidated financial statements as of November 29, 1997 and
for the thirty-nine weeks ended November 30, 1996 and November 29, 1997 and
related disclosures in these notes are unaudited. The interim financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the thirty-nine weeks ended November 29, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1998.
Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Effective February
26, 1995, the Company changed its method of determining the cost of all its
United States' inventories from the first-in, first-out (FIFO) method to the
last-in, first-out (LIFO) method. The Company believes the LIFO method results
in a better matching of current costs with current revenues.
At March 2, 1996 and March 1, 1997, approximately 95% and 88%,
respectively, of the total inventory balance is priced at LIFO. The effect of
the change in fiscal year 1996 and 1997 was to increase pre-tax income by
$95,000 and $278,000, respectively. The cumulative effect of this accounting
change and the pro forma effects on prior years' earnings have not been included
because such effects are not reasonably determinable.
If the LIFO method of valuing inventories was not used, total inventories
would have been $95,000 and $373,000 lower than reported at March 2, 1996 and
March 1, 1997, respectively.
F-8
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized whereas maintenance and repairs are expensed as
incurred. Upon disposition, the asset cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in
income. Depreciation of plant and equipment is determined on the straight-line
basis over the following estimated useful lives:
Buildings and improvements................................... 33 years
Machinery and equipment...................................... 5-12 years
Furniture and fixtures....................................... 5-10 years
Tooling and molds............................................ 3 years
Income Taxes
The Company accounts for income taxes using the liability method as required by
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the provisions of FAS 109, deferred tax assets and liabilities are
determined based on tax rates expected to be in effect when the taxes will
actually be paid or refunds received.
Financing Costs
Financing costs are amortized using the straight-line method over the
life of the related debt instrument. The amortization of these financing costs
is included in other expenses in the consolidated statements of income.
Goodwill
Goodwill is amortized on the straight-line basis over 40 years and is
recorded at cost less accumulated amortization. The Company systematically
reviews the recoverability of its goodwill by comparing the unamortized carrying
value to anticipated undiscounted future cash flows. Any impairment is charged
to expense when such determination is made. Accumulated amortization at March 2,
1996 and March 1, 1997 was $2,542,000 and $3,660,000, respectively.
Foreign Currency Translation
All assets, liabilities and results of operations are measured in the
primary currency ("functional currency") in which each entity conducts its
business. Assets and liabilities denominated in a currency other than the
functional currency are remeasured and stated in the functional currency based
on current exchange rates. Gains or losses arising therefrom are included in net
income. Adjustments resulting from translating foreign functional currency
assets and liabilities into U.S. dollars, based on current exchange rates, are
recorded as a separate component of stockholders' equity (deficit) called
"Cumulative Translation Adjustment." Revenues and expenses are translated into
U.S. dollars at average monthly exchange rates. The Canadian dollar has been
determined to be the functional currency for the Company's Canadian subsidiary
and the Netherlands Guilder as the functional currency for the European
subsidiary.
F-9
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," was issued in June 1997. The Company will be required to adopt the new
standard for the fiscal year ending February 27, 1999, although early adoption
is permitted. The primary objective of this statement is to report and disclose
a measure ("Comprehensive Income") of all changes in equity of a company that
result from transactions and other economic events of the period other than
transactions with owners. The Company will adopt this statement in fiscal year
1999 and does not anticipate that the statement will have a significant impact
on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information," was issued in June 1997. The Company
will be required to adopt the new standard for the fiscal year ending February
27, 1999, although early adoption is permitted. This statement requires use of
the "management approach" model for segment reporting. The management approach
model is based on the way a company's management organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. The Company will adopt this statement in fiscal year 1999 and does not
anticipate that the adoption of the statement will have a significant impact on
its financial statements.
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 reported
period. Actual results can differ from those estimates.
4. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of
$1,108,000 and $936,000 at March 2, 1996 and March 1, 1997, respectively.
F-10
5. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
March 2, March 1, November 29,
1996 1997 1997
---- ---- ----
(Unaudited)
Senior Subordinated Notes 97/8% $ -- $ -- $130,000
Bankers Trust Co. and Various Banks Tranche A Term
Loan (weighted average interest rate of 7.72% in
1996, 8.04% in 1997, and 8.24% for the
thirty-nine weeks ended November 29, 1997) 100,000 92,500 $ --
Bankers Trust Co. and Various Banks Tranche B Term
Loan (weighted average interest rate of 9.22% in
1996, 8.54% in 1997, and 8.73% for the
thirty-nine weeks ended November 29, 1997) 55,000 54,450 --
Bankers Trust Co. and Various Banks Revolving Loan
Commitment (weighted average interest rate of
7.40% in 1996 and 8.24% in 1997 and 8.32% for
the thirty-nine weeks ended November 29, 1997) 2,759 -- --
NationsBank and Various Banks Tranche A Term
Loan (interest rate of ___% at November 29, 1997) -- -- 50,000
NationsBank and Various Banks Tranche B Term
Loan (interest rate of ___% at November 29, 1997) -- -- 50,000
NationsBank and Various Banks Revolving Loan
Commitment (interest rate of ___% at November 29, 1997) -- -- 32,855
-------- -------- --------
Total outstanding borrowings 157,759 146,950 262,855
Less current portion:
Revolving loan -- -- 17,855
Tranche A Term Loan 7,500 13,700 3,500
Tranche B Term Loan 550 2,650 1,000
-------- -------- --------
$149,709 $130,600 $240,500
======== ======== ========
As part of the Recapitalization discussed in Note 1, the Company
entered into a new credit agreement on January 12, 1996 with Bankers Trust Co.
and various banks that consists of a Revolving Loan Commitment of up to
$65,000,000, a Tranche A Term Loan Commitment of $100,000,000 and a Tranche B
Term Loan Commitment of $55,000,000.
The Revolving Loan Commitment period extends to August 31, 2001. The
Company can utilize up to $10,000,000 in letters of credit under this
commitment. As of March 2, 1996 and March 1, 1997, the Company has approximately
$1,531,000 and $1,131,000, respectively, in standby letters of credit
outstanding. Currently, interest is payable at the prime rate plus 1.25% or
LIBOR plus 2.25% at the Company's option.
Borrowings are generally limited to specific percentages of eligible
trade receivables and inventory. The Company pays commitment fees of 1/2 of 1%
per annum on the daily unutilized Revolving Loan Commitment.
The Tranche A Term Loan Commitment period extends to August 31, 2001
with current interest payable at the prime rate plus 1.25% or LIBOR plus 2.25%
at the Company's option. Once repaid, Tranche A Term Loans may not be
reborrowed.
The Tranche B Term Loan Commitment period extends to February 28, 2003
with current interest payable at the prime rate plus 1.75% or LIBOR plus 2.625%
at the Company's option. Once repaid, Tranche B Term Loans may not be
reborrowed.
F-11
5. Financing Arrangements (continued)
As part of the Recapitalization discussed in Note 14, the Company
entered into a new credit agreement on November 26, 1997 with NationsBank, N.A.,
UBS Securities LLC and Nationsbanc Montgomery Securities, Inc. that consists of
a Working Capital Loan Commitment of up to $75,000,000, a Tranch A Term Loan
Commitment of $50,000,000, a Tranche B Term Loan Commitment of $50,000,000 and
an Acquisition Loan Commitment of $20,000,000.
The Working Capital Loan Commitment period extends to November 26,
2003. The Company can utilize up to $10,000,000 in letters of credit under this
commitment. Currently, interest is payable at the prime rate plus 1.25% or LIBOR
plus 2.25% at the Company's option.
Borrowings are generally limited to specific percentages of eligible
trade receivables and inventory. The Company pays commitment fees of 1/2 of 1%
per annum on the daily unutilized Working Capital Loan Commitment.
The Tranche A Term Loan commitment period extends to November 26, 1003
with current interest payable at the prime rate plus 1.25% or LIBOR plus 2.25%
at the Company's option. Once repaid, Tranche A Term Loans may not be
reborrowed.
The Tranche B Term Loan commitment period extends to November 26, 1003
with current interest payable at the prime rate plus 1.625% or LIBOR plus 2.625%
at the Company's option. Once repaid, Tranche B Term Loans may not be
reborrowed.
The Acquisition Loan commitment period extends to November 26, 2003
with current interest payable at the prime rate plus 1.625% or LIBOR plus 2.625%
at the Company's option. Once repaid, Acquisition Loans may not be reborrowed.
The following table shows the required future repayments under the
Tranche A and Tranche B Terms Loans as of March 1, 1997 (in thousands):
Tranche A Tranche B
Fiscal Year Term Loan Term Loan Total
----------- --------- --------- -----
1998............................ $13,700 $ 2,650 $ 16,350
1999............................ 12,500 550 13,050
2000............................ 15,000 550 15,550
2001............................ 20,000 550 20,550
2002............................ 31,300 19,250 50,550
2003............................ -- 30,900 30,900
- - - - ----- ------- ------- --------
$92,500 $54,450 $146,950
======= ======= ========
Commencing in fiscal 1997, the required annual repayments under the
Tranche A and Tranche B Term Loans are increased by 75% (50% if certain leverage
ratios are met) of any excess cash flows at the end of the fiscal year, as
defined. Under the terms of this provision, the Company is obligated to make
additional payments in fiscal 1998 of $5,800,000 (Tranche A -- $3,700,000 and
Tranche B -- $2,100,000).
F-12
5. Financing Arrangements (continued)
The Company's management believes the book values of its term loans
approximate market value. Market value is determined based on the effective
interest rate at which the Company could borrow funds with similar remaining
maturities.
The Company purchased an interest rate protection agreement in June
1996 which limits the maximum interest rate payable on the Term Loans to 8%. The
Company is required to purchase an interest rate protection agreement on an
annual basis for 50% of the aggregate outstanding principal amount of its Term
Loans until the aggregate outstanding principal amount is less than $75,000,000.
This credit agreement includes various restrictive covenants which,
among other things, prohibit payment of dividends to common stockholders, set
maximum limits on capitalized lease obligations and capital expenditures,
require minimum consolidated EBITDA (as defined) levels, and set consolidated
interest coverage and leverage ratios. Substantially all of the Company's assets
are pledged under these loan agreements.
Cash payments for interest for the years ended February 25, 1995, March
2, 1996, and March 1, 1997, were $5,425,000, $8,186,000, and $13,656,000,
respectively.
The following table shows the required future repayments under the Tranche
A and Tranche B Terms Loans as of November 29, 1997 (in thousands) and the
Acquisition Loan (percentage):
Tranche A Tranche B Acquisition
Fiscal Year Term Loan Term Loan Total Loan
----------- --------- --------- ----- ----
1998 $ 875 $ 250 $ 1,125 --
1999 4,250 1,000 5,250 --
2000 7,375 1,000 8,375 6.25%
2001 10,000 1,000 11,000 25.00%
2002 10,000 1,000 11,000 25.00%
2003 10,000 1,000 11,000 25.00%
2004 7,500 18,350 25,850 18.75%
2005 -- 26,400 26,400 --
-------- -------- -------- ------
$ 50,000 $ 50,000 $146,950 100.00%
======== ======== ======== ======
Commencing in fiscal 1999, the required annual repayments under the Tranche
A and Tranche B Term Loans are increased by 50% of any excess cash flows at the
end of the fiscal year, as defined.
The Company's management believes the book values of its term loans
approximate market value. Market value is determined based on the effective
interest rate at which the Company could borrow funds with similar remaining
maturities.
This credit agreement includes various restrictive covenants which, among
other things, prohibit payment of dividends to common stockholders, set maximum
limits on capitalized lease obligations and capital expenditures, and set
consolidated interest coverage, fixed charge coverage and leverage ratios.
Substantially all of the Company's assets are pledged under these loan
agreements.
F-13
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
February 25, March 2, March 1,
1995 1996 1997
---- ---- ----
Deferred tax liabilities:
Depreciation and amortization $ 1,861 $2,079 $1,792
Inventory reserves, including LIFO -- -- 146
Other-- net -- -- 35
-- -- --
Total gross deferred tax liabilities 1,861 2,079 1,973
======= ====== ======
Deferred tax assets:
Allowance for doubtful accounts 390 402 324
Inventory reserves, including LIFO 421 72 --
Accrued expenses 1,556 1,147 1,028
Other-- net -- -- 163
-- -- ---
Total gross deferred tax assets 2,367 1,621 1,515
------- ------ ------
Net deferred tax liabilities $ (506) $ 458 $ 458
======= ====== ======
No valuation allowance is necessary as management believes that all
deductible temporary differences will be utilized as charges against reversals
of future taxable temporary differences and future taxable income.
The provision for income taxes consists of the following (in
thousands):
Thirty-nine weeks ended
Fiscal year --------------------------
----------- November 30, November 29,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
Current:
Federal $ 9,356 $6,191 $5,821 $6,444 $4,207
State and local 1,758 1,389 1,110 832 1,003
Foreign 210 436 802 1,102 1,352
------- ------ ------ ------ ------
11,324 8,016 7,733 8,378 6,562
Deferred:
Federal (1,066) 855 -- -- (65)
State and local (194) 109 -- -- (13)
------- ------ ------ ------ ------
(1,260) 964 -- -- (78)
------- ------ ------ ------ ------
Total $10,064 $8,980 $7,733 $8,378 $6,484
------- ------ ------ ------ ------
F-14
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes (continued)
The income statement classification of the provision for income taxes
is as follows (in thousands):
Thirty-nine weeks ended
Fiscal year --------------------------
----------- November 30, November 29,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
Income tax expense attributable
to continuing operations $10,064 $10,703 $7,733 $8,378 $8,769
Extraordinary item -- (1,723) -- -- (2,285)
------- ------- ------ ------ ------
Total $10,064 $ 8,980 $7,733 $8,378 $6,484
======= ======= ====== ====== ======
Included in earnings before income tax expense and extraordinary item
for the years ended February 25, 1995, March 2, 1996, and March 2, 1997 are
foreign earnings of $323,000, $747,000, and $1,688,000, respectively.
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately $1,830,000 at March 1, 1997. Approximately $1,438,000 of those
earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been provided thereon.
Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (net of foreign tax credits)
and withholding taxes payable to the various foreign countries. In the event
that these indefinitely reinvested earnings were distributed, it is estimated
that U.S. federal and state income taxes, net of foreign tax credits of
approximately $564,000, would be due.
The effective income tax rate differs from the statutory rate as
follows (in thousands):
Thirty-nine weeks ended
Fiscal year --------------------------
----------- November 30, November 29,
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(Unaudited)
Federal income tax at statutory
rate $ 8,143 $ 8,822 $6,457 $6,996 $6,653
State income tax, net of Federal
benefit 1,017 974 722 541 645
Foreign income taxes 97 436 212 446 784
Other-- net 807 471 342 395 687
--- --- --- --- ---
Provision for income taxes $10,064 $10,703 $7,733 $8,378 $8,769
======= ======= ====== ====== ======
Cash payments for income taxes for the years ended February 25, 1995,
March 2, 1996, and March 1, 1997 were $10,344,000, $8,174,000, and $7,387,000,
respectively.
7. Stockholders' Equity
Preferred Stock
Prior to the Recapitalization (see Note 1), the Company was authorized
to issue 2,000,000 shares of Preferred Stock of which 465,000 shares were
designated Series A variable rate cumulative Preferred Stock and 265,000 shares
were designated Series B variable rate cumulative Preferred Stock. The issued
shares were nonvoting.
F-15
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stockholders' Equity (continued)
Series A and B Preferred Stock
The holders of Series A variable rate cumulative Preferred Stock
("Series A") and the holders of Series B variable cumulative Preferred Stock
("Series B") were entitled, until redemption, to receive quarterly dividends at
various rates, as defined, of the stated value per share.
Preferred dividends accrued for fiscal 1995 and 1996 were $899,925 and
$853,100 which were paid in 25,833 and 24,888 shares of Series A and 10,164 and
9,236 shares of Series B, respectively.
As part of the Recapitalization transactions discussed in Note 1, the
Company redeemed and canceled the outstanding shares of Series A and Series B,
in whole, at a price equal to the stated value per share plus the dividends
which were accrued and unpaid but not added to the stated value.
Stock Option Plan
In March 1994, the Company established the 1994 Stock Option Plan which
terminates in ten years and provides for the issuance of incentive stock options
or nonqualified stock options for 1,169,261 shares of common stock. The stock
options may be granted to key employees or eligible nonemployees, as defined, as
determined by the Option Committee of the Board of Directors, and the term of
the options cannot exceed ten years from the grant date. The exercise price of
the incentive options shall be equal to or greater than the fair market value of
the common stock on the date of grant, and the exercise price of the
nonqualified options is determined by the Option Committee.
The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock Based Compensation," during fiscal 1997.
SFAS 123 requires the Company to either adopt a fair value based method of
expense recognition for all stock based compensation awards, or provide pro
forma net income information as if the recognition and measurement provisions of
SFAS 123 had been adopted. The Company decided to account for its stock based
compensation awards following the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"). APB 25 requires compensation expense to be recognized
only if the market price of the underlying stock exceeds the exercise price on
the date of grant. The Company's stock based awards consist of stock options
with an exercise price equal to market price on the date of grant. As such, the
Company has not recorded compensation expense in connection with these awards.
The effect of applying the SFAS 123 fair value method to the Company's stock
based awards results in net income that is not materially different from the
amount reported.
In fiscal 1995, 1996 and 1997, the Company issued options to purchase
871,876 shares, 75,000 shares, and 215,000 shares, respectively, of common
stock, of which 176,000 incentive options, 51,000 incentive options, and 15,000
incentive options, respectively, vest in three equal annual installments
commencing on the first anniversary date. The remaining 200,000 incentive
options issued in fiscal 1997, 24,000 incentive options issued in fiscal 1996,
and 695,876 nonqualified options issued in fiscal 1995 vest immediately upon
grant.
F-16
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stockholders' Equity (continued)
The following is a summary of transactions:
Number
of Shares
---------
Non qualified options:
Outstanding at February 26, 1994 --
Granted in 1995 at $1.00 per share 695,876
Exercised in 1995 at $1.00 per share (695,876)
--------
Outstanding at February 25, 1995 --
========
Incentive options:
Outstanding at February 26, 1994 --
Granted on April 1, 1994 at $1.00 per share 176,000
Forfeited in 1995 at $1.00 per share (12,000)
--------
Outstanding at February 25, 1995 at $1.00 per share 164,000
Granted on June 1, 1995 at $2.99 per share 24,000
Exercised in 1996 at $1.00 per share (144,000)
Exercised in 1996 at $2.99 per share (24,000)
Forfeited in 1996 at $1.00 per share (20,000)
Granted on February 22, 1996 at $1.00 per share 51,000
--------
Outstanding at March 2, 1996 at $1.00 per share 51,000
Granted on March 11, 1996 at $1.00 per share 100,000
Granted on May 21, 1996 at $1.00 per share 100,000
Granted on August 1, 1996 at $1.00 per share 15,000
Exercised in 1997 at $1.00 per share (210,000)
--------
Outstanding at March 1, 1997 at $1.00 per share 56,000
Granted on April 1, 1997 at $2.00 per share (Unaudited) 21,000
Granted on August 25, 1997 at $2.00 per share (Unaudited) 28,385
Exercised in 1997 at $1.00 per share (Unaudited) (5,000)
Exercised on November 26, 1997, including 51,000 options at
$1.00 per share (Unaudited) (51,000)
Exercised on November 29, 1997, including 49,385 options at $2.00 per share
(Unaudited) (49,385)
--------
Outstanding at November 29, 1997 0
========
Shares Reserved for Issuance
At February 25, 1995, March 2, 1996, and March 1, 1997, 473,385 shares, 305,385
shares and 95,385 shares, respectively, of common stock were reserved for the
exercise and future grants of stock options. At February 25, 1995, March 2,
1996, and March 1, 1997, 1,781,557 shares of common stock were reserved for
issuance upon conversion of the nonvoting common stock.
F-17
8. Pension Plans
All eligible salaried employees are covered by a defined contribution
plan ("401K"). After an employee has been employed for six months, the Company
contributes 2% of their salary. The Company matches an additional 50% of
participant contributions up to a maximum contribution of 1%. The cost of this
plan was $213,000, $260,000, and $299,000 for the fiscal years ended February
25, 1995, March 2, 1996, and March 1, 1997, respectively.
The Company has a defined benefit pension plan covering substantially all of its
industrial employees. The defined benefits are based on a service multiplier
that is multiplied by years of credited service. The Company's funding policy is
consistent with the requirements of federal laws and regulations.
Assets of the 401K and deferred benefit pension plans are invested in
securities of governmental agencies, common stocks, and insurance contracts.
A summary of the Company's net periodic pension cost related to the
defined benefit plan for fiscal years 1995, 1996, and 1997 is as follows (in
thousands):
Fiscal Year
-----------
1995 1996 1997
---- ---- ----
Service cost -- benefits earned during the
period $ 54 $ 92 $ 85
Interest cost on projected benefit obligation 90 110 136
Actual gain on plan assets 22 (251) (257)
Net amortization (105) 168 141
----- ----- -----
Net pension cost $ 61 $ 119 $ 105
===== ===== =====
The following table sets forth the funded status of the Company's
defined benefit plan and the amount recognized in the Company's consolidated
balance sheets as of March 2, 1996 and March 1, 1997 (in thousands):
1996 1997
---- ----
Actuarial present value of accumulated benefit obligation:
Vested obligation $ 1,523 $ 1,764
Unvested obligation 42 60
------- -------
Accumulated benefit obligation 1,565 $ 1,824
Future benefit increases 94 54
Projected benefit obligation $ 1,659 $ 1,878
======= =======
Plan assets at fair market value $ 1,573 $ 2,081
Projected benefit obligation 1,659 1,878
------- -------
Excess (deficiency) of plan assets over projected benefit
obligation (86) 203
Unrecognized net loss 209 122
Unrecognized net obligation 214 188
------- -------
Prepaid asset $ 337 $ 513
======= =======
F-18
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Pension Plans (continued)
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.25% and 8.00%,
respectively, for fiscal years 1996 and 1997. The expected long-term rate of
return on plan assets for fiscal years 1996 and 1997 was 9%. The impact in
fiscal year 1997 of the change in the weighted average discount rate used was to
increase the projected benefit obligation by approximately $28,000. Such change
in the weighted average discount rate used will impact the determination of the
net periodic pension cost in fiscal 1998.
9. Foreign Exchange Contracts
At March 1, 1997, the Company had forward exchange foreign currency
contracts, with maturities ranging from April 1997 to December 1997, to purchase
approximately $6.8 million in foreign currencies to cover future payments to
component suppliers. The carrying values of forward exchange foreign currency
contracts approximate their estimated fair values.
10. Lease Commitments
The Company leases certain machinery, office and manufacturing
facilities for periods up to five years under operating lease agreements. Total
rent expense for fiscal 1995, and 1996 and 1997 was approximately $665,000,
$1,336,000, and $1,624,000, respectively. Future minimum lease payments under
all noncancellable operating leases at March 1, 1997 are as follows (in
thousands):
Fiscal years ending:
1998................................................... $ 1,316
1999................................................... 1,195
2000................................................... 701
2001................................................... 298
2002................................................... 231
Thereafter............................................. 430
-------
Total minimum lease payments............................. $ 4,171
=======
11. Other Assets
Other assets consist of the following (in thousands):
March 2, March 1,
1996 1997
---- ----
Investment in joint venture $ 550 $ 550
Deferred financing costs 5,511 4,535
Other 122 356
------ ------
$6,183 $5,441
====== ======
In connection with the Recapitalization in January 1996 (see Note 1),
the Company charged to income the unamortized balance of deferred financing
costs of the Old Term Loans and other related expenditures of $4,361,000 and
recorded a tax benefit of $1,723,000 (net amount of $2,638,000 is reflected as
an extraordinary item). The financing costs incurred in connection with the 1996
Recapitalization, which are shown above net of amortization, have been
capitalized and are being amortized over the term of the new debt.
F-19
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Foreign Operations
The accompanying consolidated financial statements include the
following amounts related to the Company's foreign operations in Canada and
Europe (in thousands):
Fiscal Year
1995 1996 1997
---- ---- ----
Total assets $ 3,484 $ 3,211 $ 4,121
Total liabilities 1,885 1,202 1,228
Net sales 8,601 11,160 17,188
Operating profit 435 953 1,695
13. Related Party Transactions
The Company entered into a monitoring and oversight agreement dated as
of December 1, 1993 pursuant to which Hicks Muse has provided financial advisory
services to the Company in connection with the negotiation and financing of the
Restructuring and will continue to provide financial advisory services to the
Company in the future. The term of this agreement is for three years and will
continue from year to year thereafter unless terminated by either party. As
compensation for such services, the Company will pay Hicks Muse a fee of $25,000
per quarter together with all reasonable expenses incurred in connection
therewith. This fee will be increased or decreased each fiscal year based on a
specified percentage of sales, as defined, but not less than $100,000 per annum.
Under this agreement, Hicks Muse was paid $114,000, $189,000 and $211,000 in
fiscal years 1995, 1996, and 1997, respectively.
14. Subsequent Events (Unaudited)
J.W. Childs Equity Partners, L.P. ("Childs") has entered into a Stock
Purchase Agreement dated as of October 8, 1997 with the Company and its
stockholders (the "Recapitalization Agreement"). Pursuant to the
Recapitalization Agreement, Childs and its affiliates are to acquire
approximately 90% of the equity interests in the Company. The Company will issue
new Common Stock and Redeemable Preferred Stock to Childs and its affiliates in
exchange for aggregate consideration of $91.4 million. The Company will use such
proceeds together with a portion of the proceeds borrowed under a new term loan,
acquisition, and revolving credit facility (the "New Credit Facility") with
NationsBank, N.A. ("NationsBank"), as administrative agent, to purchase a
portion of its outstanding common stock in a transaction intended to be
accounted for as a recapitalization (the "Recapitalization"). In connection with
the Recapitalization, the Company will enter into certain financing
transactions. Additional borrowings under the New Credit Facility, together with
the proceeds from the offering and issuance by the Company's subsidiary, DESA
International, Inc. ("International"), of $130,000,000 aggregate principal
amount of Senior Subordinated Notes, will be used by International to refinance
its existing indebtedness.
As of January 12, 1998, the Company entered into an agreement for the
acquisition of the Heath-Zenith business of Heath Holding Corp.However, no
assurances can be given that the acquisition will be ultimately consummated.
Heath-Zenith, headquartered in Benton Harbor, is the leading North American
manufacturer and marketer of residential motion sensor "security" lighting
products sold primarily to DIY retail home centers.
F-20
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Heath Company
Benton Harbor, Michigan
We have audited the accompanying balance sheet of Heath Company (a wholly-owned
subsidiary of Heath Holding Corp.) (excluding Heathkit Division) and subsidiary
as of December 31, 1996, and the related statement of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Heath Company (a wholly-owned subsidiary of
Heath Holding Corp.) (excluding Heathkit Division) and subsidiary as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
April 24, 1997 (December 12, 1997 as to Note 10)
F-20
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash $ 129
Accounts receivable:
Trade (net of allowances for doubtful accounts
and customer returns of $399) 6,105
Other 69
Inventories 12,197
Prepaid expenses 273
Deferred income taxes benefit 1,937
--------
Total current assets 20,710
PROPERTY, PLANT AND EQUIPMENT - NET 1,006
DEFERRED INCOME TAXES BENEFIT 1,904
--------
TOTAL ASSETS $ 23,620
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 7,130
Trade accounts payable 4,716
Payable to affiliate 1,426
Accrued expenses:
Warranty 1,292
Compensation and benefits 394
Merchandising programs 1,261
Settlements and other 2,370
--------
Total accrued expenses 5,317
Current maturities of long-term debt 221
--------
Total current liabilities 18,810
LONG-TERM DEBT, less current maturities 498
NEGATIVE GOODWILL, net of amortization of $286 1,755
MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY 3
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share - voting, 2,500
shares authorized; 1,500 shares issued and outstanding, 54
shares in treasury 15
Additional paid-in capital 1,485
Retained earnings 1,071
Foreign currency translation adjustment (17)
--------
Total shareholders' equity 2,554
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,620
========
See notes to financial statements.
F-21
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
NET SALES $ 44,415
COST OF GOODS SOLD 34,758
--------
GROSS PROFIT 9,657
OPERATING EXPENSES 7,837
--------
INCOME FROM OPERATIONS 1,820
OTHER EXPENSE - SETTLEMENTS AND OTHER - NET 2,696
--------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY (876)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 6
--------
LOSS BEFORE PROVISION FOR INCOME TAXES (882)
PROVISION FOR INCOME TAXES (312)
--------
NET LOSS $ (570)
========
See notes to financial statements.
F-22
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
Foreign
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
----- ------- -------- ---------- -----
BALANCE, JANUARY 1, 1996 $ 15 $1,485 $1,641 $ (17) $3,124
Net Loss (570) (570)
---- ------ ------ ------ ------
BALANCE, DECEMBER 31, 1996 $ 15 $1,485 $1,071 $ (17) $2,554
==== ====== ====== ====== ======
See notes to financial statements.
F-23
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (570)
Adjustments to reconcile net loss to net cash used in operating activities:
Allocation of Corporate income/expense - net (879)
Amortization of negative goodwill (149)
Depreciation 295
Gain on sale of equipment (1)
Deferred income taxes (312)
Minority interest in net income of subsidiary 6
Changes in operating assets and liabilities that provided (used) cash:
Accounts receivable (1,211)
Inventories (4,577)
Prepaid expenses (19)
Trade accounts payable 2,581
Payable to affiliate 1,173
Accrued expenses 2,457
-------
Net cash used in operating activities (1,206)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of equipment and tooling (477)
Proceeds from sales of equipment 7
-------
Net cash used in investing activities (470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable (line-of-credit) 2,230
Repayment of subordinated debt (250)
Payments on long-term debt (221)
-------
Net cash provided by financing activities 1,759
-------
NET INCREASE IN CASH 83
CASH AT BEGINNING OF YEAR 46
-------
CASH AT END OF YEAR $ 129
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 566
=======
See notes to financial statements.
F-24
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heath Company, which is wholly owned by Heath
Holding Corp., consists of the Heath Zenith ("Heath Zenith") division and
the HeathKit ("Heathkit") division. Heath Company owns 99.5% of Heath
Limited which is located in Hong Kong with assets of approximately $4.6
million. The Heath Zenith division, located in Benton Harbor, Michigan is
engaged in the distribution of motion-senor lighting products and wireless
home-control devices. Heath Limited is engaged in the importing and
exporting of electronic components, parts and accessories, and the
supervision of manufacturing of electronic components, parts and
accessories carried out by sub-contractors. All of Heath Limited's sales
are to Heath Zenith. The customers of the Heath Zenith division are located
throughout the United States and Canada.
Heath Acquisition Corp. was formed in December 1994, solely for the purpose
of acquiring the outstanding common stock of Heath Company, a non
affiliated Company. In January 1995, Heath Acquisition Corp. acquired Heath
Company. Subsequently, Heath Acquisition Corp. amended its name to Heath
Holding Corp.
Basis of Presentation - The financial statements include the accounts of
Heath Zenith and Heath Limited. All significant intercompany transactions
have been eliminated.
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 disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Although management believes the
estimates are reasonable, actual results could differ from those estimates.
Payable to affiliate - Represents the payable to Heathkit.
Inventories - Inventories are carried at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment - Is recorded at cost. Depreciation is
computed by the straight-line method based on the estimated useful lives of
the related assets ranging from 2 to 20 years. Expenditures for maintenance
and repairs are charged to expense as incurred.
Taxes on Income - Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Heath Company and Heath Limited are separate taxable entities. A portion of
the deferred tax asset benefit attributable to Heath Company was allocated
to the accounts of Heath Zenith based on the differences between the
financial statement and tax bases of the assets and liabilities of Heath
Zenith. Also included in the deferred tax asset benefit are amounts
attributable to Heath Limited. The provision for income taxes was allocated
to Heath Zenith based on the effective income tax rate of Heath Company.
Deferred tax assets attributable to net operating loss (NOL's)
carryforwards available to Heath Company have been allocated 100% to Heath
Zenith. No benefit related to future utilization of NOL's has been
allocated to Heathkit.
Negative Goodwill - Negative goodwill was allocated to the accounts of
Heath Zenith and Heath Limited based on the values of the assets and
liabilities attributable to Heath Zenith and Heath Limited on January 25,
1995 (date of acquisition) and is being amortized on a straight-line basis
over fifteen years.
F-25
Foreign Currency Translation - The functional currency for the Heath Zenith
foreign operations is the Hong Kong dollar. The translation from Hong Kong
dollars is performed for balance sheet accounts using current exchange
rates in effect at the date of the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. The
gains or losses resulting from such translation are included as a separate
component of shareholder's equity. Gains or losses from foreign currency
transactions were not material during the year ended December 31, 1996 and
are reflected in income from operations.
Revenue Recognition - Sales are recognized at the time product is shipped.
Returns, including "destroy-in-field" items, are netted against sales and
amounted to approximately $2,707,000 for the year ended December 31, 1996.
Research and Development Costs - Such costs are expensed as incurred and
are included in operating expenses in the accompanying statement of income.
Research and development costs incurred for the year ended December 31,
1996 were approximately $1,100,000.
Corporate Allocations - Interest expense, management fees (see Note 8) and
general and administrative expenses have been allocated to Heath Zenith.
Heath Company's bank debt is currently recorded on the accounts of Heath
Zenith. An allocation of interest expense was made to Heathkit based on the
average receivable balance from the division and Heath Company's borrowing
rate (see Note 4). Management fees were allocated to Heath Zenith based on
the division's sales as a % of total Heath Company sales volume. General
and administrative expenses, consisting primarily of salaries for corporate
support functions and occupancy costs are allocated based on estimates of
time attributable to the division and square footage, respectively. Other
administrative expenses have been allocated based on a budget formula that
was agreed upon by management at the beginning of the year.
2. INVENTORY
Inventory at December 31 consisted of the following (in thousands):
Raw materials $ 690
Work-in-process 2,944
Finished goods 8,563
--------
Total $12,197
========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following (in
thousands):
Buildings and improvements $ 688
Machinery and equipment 1,194
Tooling 251
Construction in progress
------
2,133
Less accumulated depreciation 1,127
------
Total $1,006
======
F-26
4. NOTE PAYABLE
Heath Company has a loan agreement (the "Agreement") with a bank which
provides a revolving line of credit and a term loan (see Note 5). Terms of
the Agreement include certain restrictions on expenditures for property and
operating leases. The Company is also required to maintain minimum levels
of working capital and net worth, along with certain financial ratios
measured annually. Borrowings under the agreement are collateralized by
substantially all assets of the Company.
The revolving line of credit has a maximum borrowing commitment of $11
million and is subject to a borrowing formula. The line of credit agreement
requires the payment of interest at the bank prime rate or base lending
rate, plus 1% (9.25% at December 31, 1996) or the LIBOR rate, plus 3.00%
(8.62% at December 31, 1996). The line of credit expires January 26, 1998.
The agreement also provides for letters of credit up to $3 million. No
advances were taken against the letters at December 31, 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Term notes payable to bank - payable in monthly installments of $12, plus
interest at 1.25% over the prime rate (9.50% at December 31, 1996) or
LIBOR rate plus 3.25% (8.62%
at December 31, 1996) through January 1998 $ 719
Less current portion 221
-----
Total long-term debt $ 498
=====
The annual aggregate maturities of long-term debt at December 31, 1996, are
as follows (in thousands):
1997 $ 221
1998 498
-----
Total $ 719
=====
6. RETIREMENT
Heath Company has a 401(k) defined contribution profit sharing plan
covering substantially all employees. The Company has the option to make
matching contributions at the discretion of management. The Company
contributed approximately $41,000 on behalf of Heath Zenith employees
during the year ended December 31, 1996.
7. FEDERAL INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
Current tax liability $ 180
Benefit of operating loss carryforward (180)
Deferred tax credit (312)
--------
Provision for income taxes $ (312)
========
F-27
The effective tax rate on income differs from the federal statutory rate
primarily due to state income taxes and non-taxable amortization of
negative goodwill.
Deferred tax assets resulting from temporary differences are as follows at
December 31 (in thousands):
Deferred Tax
Assets
-----------------------
(In Thousands)
-----------------------
Current Non Current
------- -----------
Accounts receivable $ 136
Inventory 248
Settlements 620
Accrued warranty 438
Accrued promotional allowances 429
Accrued vacations 48
Fixed assets $1,056
Net operating loss 1,063
All other 18 23
------ ------
Subtotal 1,937 2,142
Less - valuation allowance -- 238
------ ------
Total $1,937 $1,904
====== ======
The Company has net operating loss carryforwards of approximately
$2,100,000 available to offset future taxable income. Of the total net
operating loss carryforward amount, $1,343,000 expires at a rate of
$133,000 each year for the next 10 years, while the remainder expires in 15
years.
8. RELATED PARTY TRANSACTIONS
The Company is required to pay $21,000 per month to HIG Capital Management,
Inc., a majority shareholder, for management services. During the year
ended December 31, 1996 the Company paid approximately $250,000 of which
approximately $217,000 was allocated to Heath Zenith.
9. MAJOR CUSTOMER TRANSACTIONS
Sales to one customer approximated $21.7 million for the year ended
December 31, 1996. Accounts receivable from this customer approximated $2.9
million at December 31, 1996.
10. LITIGATION
On November 18, 1997, Heath Company reached a settlement in a case
involving the Company as both a defendant and plaintiff, concerning alleged
patent infringement. The cases were initiated prior to December 31, 1996.
The settlement resulted in the Company paying a net amount of $1.825
million, for which the parties received certain licenses and covenant not
to sue rights. The Company believes the license received is of nominal
future value and, therefore the settlement amount has been recorded as an
expense and accrued as a liability in the 1996 financial statements. During
1996, the Company incurred other costs of approximately $1.1 million
related to the lawsuit.
Heath Company has received notification of other possible patent
infringements, none of which is currently in litigation. The Company
believes it has no material liability for which it is alleged that
infringement of patents has occurred, however, the ultimate outcome cannot
be determined at this time.
F-28
Heath Company's insurance company has received notification of litigation
claim surrounding product liability. The insurance company's attorneys and
management of the Company has evaluated the circumstances surrounding the
case and believe it has no merit. In management's opinion, additional
liability in excess of insurance coverages, if any, will not have a
material affect on the Company's results of operations, financial position
or liquidity.
11. STOCK OPTION PLAN
During 1995, the Company's Board of Directors approved the "1995 stock
option plan." The plan allows eligible employees, as selected by the plan
administrator, to receive options to purchase shares of common stock at a
price determined by the administrator, but not less than the fair market
value at date of grant. The maximum term of an option may not exceed 10
years. There are 300,000 shares reserved under the plan. Transactions under
the plan are summarized as follows:
Shares Price Range
Options outstanding at January 26, 1995 191,000 $1.00
Options granted 5,000 $1.00-$1.10
-----------
Options outstanding at December 31, 1995 196,000 $1.00-$1.10
Options granted 4,000 $7.00
Options terminated (1,000) $1.00-$1.10
-----------
Options outstanding at December 31, 1996 199,000 $1.00-$7.00
===========
Subsequent to year-end, 2,000 of the options granted in 1996 were
terminated and the exercise price of the remaining 2,000 options granted in
1996 was revised to $1.00.
Statement of Financial Accounting Standards ("SFAS") No. 123 became
effective for the Company during 1996. The Company has elected to continue
to follow the "Intrinsic Value" method of Accounting Principles Board
opinion No. 25 ("APB 25") and include the required disclosures under SFAS
123. Stock options granted did not have a material affect on the Company's
financial position or results of operations.
12. SERIES A PREFERRED STOCK
The Company has authorized 500,000 shares of Series A Preferred Stock at a
par value of $1.00. The shares contain both voting and conversion rights.
Each share of Series A Preferred Stock is convertible, at any time at the
option of the holder, into shares of Common Stock. Additionally, Series A
Preferred Stock will be automatically converted to Common Stock upon the
occurrence of the closing of an underwritten public offering or upon the
conversion by the holders of eighty percent of the then issued and
outstanding shares of the Series A Preferred Stock into shares of Common
Stock. No preferred shares were outstanding at December 31, 1996 and
December 31, 1995.
F-29
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
BALANCE SHEET (unaudited)
5 October 1997
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash $ 131
Accounts receivable:
Trade (net of allowance for doubtful accounts and customer returns) 8,268
Other 1,079
Inventories 10,539
Prepaid expenses 160
Deferred income taxes benefit 1,561
-------
Total current assets 21,738
PROPERTY, PLANT AND EQUIPMENT - NET 1,040
DEFERRED INCOME TAXES BENEFIT 1,561
-------
TOTAL ASSETS $24,339
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 7,160
Trade accounts payable 3,307
Payable to affiliate 1,273
Accrued expenses:
Warranty 1,459
Compensation and benefits 512
Merchandising programs 1,411
Settlements and other 2,739
-------
Total accrued expenses 6,121
Current maturities of long-term debt 221
-------
Total current liabilities 18,082
LONG-TERM DEBT, less current maturities 313
NEGATIVE GOODWILL, net of amortization) 1,651
MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY --
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share - voting, 2500 shares authorized; 1,500
shares issued and outstanding, 54 shares in treasury 15
Additional paid-in-capital 1,485
Retained Earnings 2,793
Foreign currency translation adjustment
-------
Total shareholders' equity 4,293
-------
TOTAL LIABILITIES AND SHARHOLDERS' EQUITY $24,339
=======
F-30
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF OPERATIONS (unaudited)
Thirty-nine Weeks Ended October 5, 1997 and September 29, 1996
(In thousands)
Thirty-nine Weeks Ended
---------------------------------------------
September 29, 1996 October 5, 1997
-------------------- ---------------------
NET SALES 30,723 $41,151
COST OF GOODS SOLD 23,937 31,409
------- -------
GROSS PROFIT 6,786 9,742
OPERATING EXPENSES 5,942 6,256
------- -------
INCOME FROM OPERATIONS 844 3,486
OTHER EXPENSE 676 1,012
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 168 2,474
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 5 5
------- -------
GAIN/(LOSS) BEFORE PROVISION FOR INCOME TAX 163 2,469
PROVISION FOR INCOME TAX 28 728
------- -------
NET INCOME / (LOSS) $ 135 $ 1,741
======= =======
F-31
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF CASH FLOWS (unaudited)
Thirty-nine Weeks Ending October 5, 1997 and September 29, 1996
(In thousands)
Thirty-nine weeks ending
---------------------------
September October 5,
29, 1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 135 $ 1,741
Adj. to reconcile net income to net cash used in operating activities:
Amortization of negative Goodwill (113) (106)
Depreciation 256 351
(Gain) Loss on sale of equipment -- (1)
Deferred income taxes 253 720
Changes in operating assets and liabilities that provided (used) cash:
Accounts Recievable (987) (3,173)
Payable to affiliate 210 (156)
Inventories 1,208 1,658
Prepaid Expenses 3 113
Trade Accounts Payable (444) (1,409)
Accrued Expenses 301 803
------- -------
Net cash used in operating activities 822 541
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and tooling (389) (386)
Proceeds from sales of equipment -- 2
------- -------
Net cash provided by financing activities (389) (384)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable (line of credit) (265) 30
Repayment of subordinated debt -- --
Payments on long-term debt (166) (185)
------- -------
Net cash provided by financing activities (431) (155)
NET INCREASE / (DECREASE) IN CASH 2 2
CASH AT BEGINNING OF FISCAL YEAR 30 129
------- -------
CASH AT PERIOD END $ 32 $ 131
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid for Interest $ 566 $ 587
See notes to financial statements
DISCLOSURE: As of December 1995, balance sheet accounts were not accounted
for on a divisional basis. Therefore, figures above were
derived utilizing estimated balance sheet accounts for
Heath-Zenith at December 1995.
F-32
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
Thirty-nine Weeks Ended October 5, 1997 and September 29, 1996
(In thousands)
Foreign
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 1, 1996 $15 $1,485 $1,641 ($17) $3,124
Net Income 135 135
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 29, 1996 $15 $1,485 $1,776 ($17) $3,259
=========== =========== =========== =========== ===========
BALANCE, JANUARY 1, 1996 $15 $1,485 $1,071 ($17) $2,554
Net loss 1,741 (2) 1,739
----------- ----------- ----------- ----------- -----------
BALANCE, OCTOBER 5, 1997 $15 $1,485 $2,812 ($19) $4,293
=========== =========== =========== =========== ===========
See notes to financial statements.
F-33
DESA INTERNATIONAL, INC.
REGISTRATION STATEMENT ON FORM S-4
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that in the case of a non-derivative action, any person made a party
to any action by reason of the fact that he is or was a director, officer,
employee or agent of the Company may and, in certain cases, must be indemnified
by the Company against, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorney's fees), if in either type of action he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. In a derivative action, this
indemnification does not apply to matters as to which it is adjudged that the
director, officer, employee or agent is liable to the Company, unless upon court
order it is determined that, despite such adjudication of liability, but in view
of all the circumstances of the case, he is fairly and reasonably entitled to
indemnity for expenses.
Article Tenth of the Company's Certificate of Incorporation states that the
Company shall indemnify any person who was, is, or is threatened to be made a
party to a proceeding by reason of the fact that the or she (i) is or was a
director or officer of the Company or (ii) while a director or officer of the
Company, is or was serving at the request of the Company as a director, officer,
partner, venturer, proprietor, trustee, employee, agent, or similar functionary
or another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the DGCL, as the same exists or may hereafter be
amended.
Item 21. Exhibits and Financial Statement Schedules.
Listed below are the exhibits which are filed as part of this registration
statement (according to the number assigned to them in Item 601 of Regulation
S-K).
Exhibit No. Description of Document Exhibit File No.
- - - - ----------- ----------------------- ----------------
2.1 Recapitalization Agreement, dated as of October 8, 1997, among J.W. 2.1
Childs Equity Partners, L.P., Desa Holdings Corporation and each
Stockholder of Desa Holdings Corporation named therein
2.2 Stock Purchase Agreement, dated as of January 12, 1998, by and among 2.2
Heath Holding Corp., its Shareholders and Optionholders and the Company
3.1 Articles of Incorporation of the Company 3.1
3.1A Articles of Incorporation of Desa Holdings Corporation 3.1A
3.2 By-laws of the Company 3.2
3.2A By-laws of Desa Holdings Corporation 3.2A
4.1 Indenture, dated as of November 26, 1997, by and among the Company, 4.1
Holdings and Marine Midland Bank relating to $130,000,000 of the
Company's 97/8% Senior Subordinated Notes Due 2007
4.2 Registration Rights Agreement, dated as of November 26, 1997 by and 4.2
among the Company, Holdings, NationsBanc Montgomery Securities,
Inc. and UBS Securities LLC
II-1
Exhibit No. Description of Document Exhibit File No.
- - - - ----------- ----------------------- ----------------
4.3 Purchase Agreement, dated as of November 21, 1997, by and among the 4.3
Company, Holdings, NationsBanc Montgomery Securities, Inc. and UBS
Securities LLC
4.4 Global Note Payable to CEDE & Co. 4.4
4.5 Holdings Guarantee 4.5
5 Opinion of Sullivan & Worcester LLP *
10.1 Credit Agreement, dated as of November 26, 1997 by and among the
Company, Holdings, NationsBank, N.A., UBS Securities LLC and
NationsBanc Montgomery Securities, Inc. 10.1
10.2 Management Incentive Plans of the Company, dated March 1, 1997 10.2
10.3 Sales Compensation and Incentive Plan of the Company for FY 1998 10.3
10.4 Services Agreement between the Company and Hamilton Ryker 10.4
Company
10.5 Services Agreement between the Company and Manpower Services 10.5
10.6 Manufacturer's Representative Agreement between the Company and 10.6
Sales & Marketing Specialists
10.7 Manufacturer's Representative Agreement between the Company and 10.7
The Upper Midwest Group
10.8 Manufacturer's Representative Agreement between the Company and 10.8
Marketing Consultants, Inc.
10.9 Manufacturer's Representative Agreement between the Company and 10.9
Belmont Enterprises, Inc.
10.10 Manufacturer's Representative Agreement between the Company and 10.10
Kitchin & Son, Inc.
10.11 Manufacturer's Representative Agreement between the Company and 10.11
Hurley Marketing Services
10.12 Manufacturer's Representative Agreement between the Company and 10.12
Marketing Services Group
10.13 Manufacturer's Representative Agreement between the Company and 10.13
Sales Managers, Inc.
10.14 Manufacturer's Representative Agreement between the Company and 10.14
Manufacturers Products, Inc.
10.15 Intellectual Property Agreement between the Company and Worgas 10.15
Bruciatori SRL dated December 1, 1996
10.16 Intellectual Property Agreement between the Company and Valor 10.16
Limited dated May 21, 1996
10.17 Intellectual Property Agreement between the Company and Remington 10.17
Arms Company dated August 29, 1969
10.18 Intellectual Property Agreement between the Company and Remington 10.18
Arms Company dated January 29, 1988
10.19 Lease Agreement between the Company and Shelbyville Industrial Spec. *
Building - WRS Partnership
10.20 Agreement to produce and sell finished goods between the Company and *
Tangible/Shinn Fu
II-2
Exhibit No. Description of Document Exhibit File No.
- - - - ----------- ----------------------- ----------------
10.21 Agreement to produce and sell finished goods between the Company and 10.21
BYSE
10.22 Agreement to produce and sell finished goods between the Company and 10.22
NU-TEC
10.23 Agreement to produce and sell finished goods between the Company and 10.23
International Pin
10.24 Agreement to produce and sell finished goods between the Company and 10.24
Kingsman Industries
10.25 Agreement to produce and sell finished goods between the Company and 10.25
Sealey
10.26 Agreement to produce and sell finished goods between the Company and 10.26
Hudson Manufacturing
10.27 Agreement to produce and sell finished goods between the Company and 10.27
Sengoka Works, Ltd
10.28 Employment Agreement, dated as of November 26, 1997, between the 10.28
Company and Robert H. Elman
10.29 Employment Agreement, dated as of November 26, 1997, between the 10.29
Company and John M. Kelly
10.30 Employment Agreement, dated as of November 26, 1997, between the 10.30
Company and Terry G. Scariot
11 Schedule Re Computation of Earnings Per Share. *
12 Schedule of Earnings to Fixed Charges *
21 Subsidiaries of the Company 21
23.1 Consent of Sullivan & Worcester LLP Contained in Exhibit 5
23.2 Consent of Ernst & Young LLP *
23.3 Consent of Deloitte & Touche LLP *
24 Powers of Attorney Pages II-4 through II-7 of
the Registration Statement
27 Financial Data Schedule 27
99.1 Statement of Eligibility of Marine Midland Bank as trustee under the *
Indenture
99.2 Form of Letter of Transmittal to be used in connection with the Exchange *
Offer
99.3 From of Notice of Guaranteed Delivery *
- - - - ----------
* To be filed by amendment.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bowling Green, state of
Kentucky, on the 26th day of January, 1998.
Desa International, Inc.
By: /s/ Robert E. Elman
Name: Robert H. Elman
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on January 26, 1998. Each of the undersigned officers and
Directors of the Company hereby severally constitutes and appoints Robert H.
Elman, Terry G. Scariot, Adam L. Suttin and Dana L. Schmaltz, and each of them,
to sign for him, and in his name in the capacity indicated below, such
Registration Statement for the purpose of registering the securities registered
hereby under the Securities Act, and any and all amendments thereto, inclusing
without limitation any registration statement or post-effective amendment
thereof filed under and meeting the requirements of Rule 462(b) under the
Securities Act, hereby ratifying and confirming our signatures as they may be
signed by our attorneys to such Registration Statement and any and all
amendments thereto.
Signature Title Date
--------- ----- ----
/s/ Robert H. Elman Chairman and Chief Executive January 26, 1998
Robert H. Elman Officer
/s/ John W. Childs Director January 26, 1998
John W. Childs
/s/ Raymond B. Rudy Director January 26, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director January 26, 1998
Adam L. Suttin
/s/ Michael Greene Director January 26, 1998
Michael Greene
II-4
/s/ Terry G. Scariot President and Director January 26, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, January 26, 1998
Edward G. Patrick Treasurer (principal financial
officer)
/s/ Scott M. Nehm Vice President and Controller January 26, 1998
Scott M. Nehm (principal accounting officer)
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Holdings has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bowling Green, state of
Kentucky, on the 26th day of January, 1998.
Desa Holdings Corporation
By: /s/ Robert H. Elman
Name: Robert H. Elman
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on January 26, 1998. Each of the undersigned officers and
Directors of the Company hereby severally constitutes and appoints Robert H.
Elman, Terry G. Scariot, Adam L. Suttin and Dana L. Schmaltz, and each of them,
to sign for him, and in his name in the capacity indicated below, such
Registration Statement for the purpose of registering the securities registered
hereby under the Securities Act, and any and all amendments thereto, inclusing
without limitation any registration statement or post-effective amendment
thereof filed under and meeting the requirements of Rule 462(b) under the
Securities Act, hereby ratifying and confirming our signatures as they may be
signed by our attorneys to such Registration Statement and any and all
amendments thereto.
Signature Title Date
--------- ----- ----
/s/ Robert H. Elman Chairman and Chief Executive January 26, 1998
Robert H. Elman Officer
/s/ John W. Childs Director January 26, 1998
John W. Childs
/s/ Raymond B. Rudy Director January 26, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director January 26, 1998
Adam L. Suttin
/s/ Michael Greene Director January 26, 1998
Michael Greene
II-6
/s/ Terry G. Scariot President and Director January 26, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, January 26, 1998
Edward G. Patrick Treasurer (principal financial
officer)
/s/ Scott M. Nehm Vice President and Controller January 26, 1998
Scott M. Nehm (principal accounting officer)
II-7