Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-31071
WELLS ALUMINUM CORPORATION
OFFER TO EXCHANGE ITS 10 1/8% SERIES B SENIOR NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
10 1/8% SERIES A SENIOR NOTES DUE 2005
($105,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON NOVEMBER 3, 1997 (AS SUCH DATE MAY BE EXTENDED, THE
"EXPIRATION DATE").
Wells Aluminum Corporation ("Wells" or the "Company") hereby offers (the
"Exchange Offer"), 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 an aggregate of up to $105,000,000 principal
amount of 10 1/8% Series B Senior Notes due 2005 (the "New Notes") for an
identical face amount of the outstanding 10 1/8% Series A Senior Notes due
2005 (the "Old Notes" and, with the New Notes, the "Notes"). The terms of the
New Notes are identical in all material respects to the terms of the Old
Notes except that the rights relating to the exchange of Old Notes for New
Notes and the restrictions on transfer set forth on the Old Notes will not
appear on the New Notes. See "The Exchange Offer." The New Notes are being
offered hereunder in order to satisfy certain obligations of the Company
under a Registration Rights Agreement dated as of May 28, 1997 (the
"Registration Rights Agreement") between the Company and Merrill Lynch & Co.
(the "Initial Purchaser"). Based on an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties unrelated to the Company, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold, and otherwise transferred by a holder thereof (other than a
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act of 1933, as amended (the "Securities Act")), without
compliance with the registration and the prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in or is engaged in or is planning to be engaged in the
distribution of such New Notes.
Interest on the New Notes will be payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 1997. The New Notes will
mature on June 1, 2005. The New Notes are redeemable, in whole or in part, in
cash, at any time after June 1, 2001, at the option of the Company, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any,
to the redemption date. In addition, at the option of the Company, up to 33
1/3% of the aggregate principal amount of the New Notes originally issued may
be redeemed prior to June 1, 2000 at a price of 110 1/8% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the
redemption date, with the net proceeds of one or more Public Equity Offerings
(as defined herein) of the Company; provided that at least $65 million of the
aggregate principal amount of the New Notes remain outstanding following such
redemption. In the event of a Change of Control (as defined herein) of the
Company, the Company will be required to make an offer to repurchase all or
any part of each holder's New Notes at a cash purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase. In addition, the New Notes will be redeemable, at the
option of the Company, in whole or in part, after a Change of Control at a
redemption price calculated pursuant to a formula described herein. See
"Description of New Notes."
The New Notes will be senior unsecured obligations of the Company, will be
senior in right of payment to all existing and future subordinated
indebtedness of the Company, will rank pari passu in right of payment with
all other existing and future senior indebtedness of the Company and will be
effectively subordinated in right of payment to all existing and future
secured indebtedness of the Company as to the assets securing such
indebtedness. As of July 15, 1997, the Company had no indebtedness
outstanding other than the Notes. See "Description of New Notes."
The Company will accept for exchange from an Eligible Holder any and all
Old Notes that are validly tendered prior to 5:00 p.m., New York City time,
on the Expiration Date. For purposes of the Exchange Offer, "Eligible Holder"
shall mean the registered owner of any Old Notes that remain Transfer
Restricted Securities, as reflected on the records of The Bank of New York,
as registrar for the Old Notes (in such capacity, the "Registrar"), or any
person whose Old Notes are held of record by the depository of the Old Notes.
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. For purposes of the Exchange Offer,
"Transfer Restricted Securities" means each Old Note until the earliest to
occur of (i) the date on which such Old Note is exchanged in this Exchange
Offer and entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery provisions of the Securities Act, (ii)
the date on which such Old Note is registered under the Securities Act and is
disposed of in a shelf registration statement, if applicable, or (iii) the
date on which such Old Note has been distributed to the public pursuant to
Rule 144 under the Securities Act or by a broker-dealer pursuant to the plan
of distribution described herein. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. If the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes,
it will promptly return the Old Notes to the holders thereof. See "The
Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will
make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "The Exchange Offer" and "Plan of Distribution."
Any broker-dealer that acquired Old Notes directly from the Company and not
as a result of market-making activities or other trading activities, in the
absence of an exemption from the registration requirements of the Securities
Act, must comply with such registration requirements and the prospectus
delivery requirements of the Securities Act in connection with any secondary
resales of New Notes received in exchange for such Old Notes.
Prior to this Exchange Offer, there has been no public market for the
Notes. 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. If a market for the New Notes should develop, the New Notes could
trade at a discount from their principal amount. The Company does not
currently intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system. There can be
no assurance that an active public market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is State Street Bank and Trust
Company (formerly known as Fleet National Bank).
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE
EXCHANGE OFFER.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is October 1, 1997.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities
Act with respect to the securities offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Each
statement made in this Prospectus referring to a document filed as an exhibit
or schedule to the Registration Statement is qualified in its entirety by
reference to the exhibit or schedule for a complete statement of its terms
and conditions, although all of the material terms of the Company's contracts
and agreements that would be material to an investor have been summarized in
this Prospectus. In addition, upon the effectiveness of the Registration
Statement filed with the Commission, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith the Company will file
periodic reports and other information with the Commission relating to its
business, financial statements and other matters. Any interested parties may
inspect and/or copy the Registration Statement, its schedules and exhibits,
and the periodic reports and other information filed in connection therewith,
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 W. Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained at
prescribed rates by addressing written requests for such copies to the Public
Reference Section of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants. The
Commission's Web site can be accessed on the World Wide Web at
http://www.sec.gov. The obligations of the Company under the Exchange Act to
file periodic reports and other information with the Commission may be
suspended, under certain circumstances, if the New Notes are held of record
by fewer than 300 holders at the beginning of any fiscal year and are not
listed on a national securities exchange. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding it will
furnish to the holders of the Notes, and if required by the Exchange Act,
file with the Commission all annual, quarterly and current reports that the
Company is or would be required to file with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act. In addition, for so long as any
of the Old Notes remain outstanding, the Company has agreed to make available
to any prospective purchaser of the Old Notes or beneficial owner of the Old
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE
COMPANY, INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY
REGISTERED HOLDER OR BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL
REQUEST AND WITHOUT CHARGE FROM WELLS ALUMINUM CORPORATION, 809 GLENEAGLES
COURT, SUITE 300, BALTIMORE, MARYLAND 21286, ATTENTION: CHIEF FINANCIAL
OFFICER. TELEPHONE REQUESTS MAY BE DIRECTED TO THE COMPANY AT (410) 494-4500.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD
BE MADE BY OCTOBER 15, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES
OFFERED HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
i
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. All capitalized terms used in this Prospectus
without definition are defined as set forth below under the caption
"Description of New Notes -- Certain Definitions."
THE COMPANY
Wells Aluminum Corporation ("Wells" or the "Company") is an extruder,
finisher and fabricator of aluminum products. For the years 1994 through
1996, over 92% of the products sold by the Company were engineered and
manufactured according to individual customer specifications, and include
custom designed extrusions and fabricated parts and assemblies. In addition
to mill finished extrusions (extrusions which have neither been painted nor
anodized), the Company's operations include painting, anodizing (an
electrolytic process which finely etches the surfaces of an extrusion
providing a hard coat which may contain color) and fabrication, which enables
the Company to provide its customers with assembly-ready components. Wells
also operates its own casting facility for aluminum billet, enabling the
Company to manage its internal billet requirements as well as to recycle its
scrap for use in its extrusion operations. The Company's network of plants
consists of seven facilities in six states in the midwestern and southeastern
United States. These plants contain 12 extrusion presses and are located to
meet various regional demands; minimize transportation costs; balance
production requirements among plants, affording more flexibility and higher
utilization; and provide single source reliability to large customers.
Through its regional plant system in the Midwest and Southeast, the
Company is able to produce a broad range of extruded, finished and fabricated
products used by its approximately 800 customers in the manufacture of their
end products. Approximately two-thirds of the Company's 1996 sales in pounds
were made to customers that have been customers of the Company for more than
10 years. The Company sells its products primarily to the building and
construction (for both new construction and replacement), transportation and
consumer durables industries. These products include: (i) door and window
components, commercial entrance doors and patio doors for the building and
construction market; (ii) school bus windows and components for truck cabs,
truck trailers, delivery vans, recreational vehicles and automotive
accessories for the transportation market; (iii) components for home and
office furniture, golf carts and pleasure boats for the consumer durables
market; and (iv) heat sinks and components for lighting fixtures for the
electrical and equipment market. For the twelve months ended June 29, 1997,
the Company sold 146.1 million pounds of aluminum extrusions, generating net
sales of $233.1 million, net earnings of $6.4 million, and Adjusted EBITDA
(see note (c) to the Summary Historical Financial Data) of $27.5 million.
COMPANY STRENGTHS
VALUE ADDED FINISHING AND FABRICATION. The Company provides a wide variety
of value added finishing and fabrication services, including painting,
anodizing, bending, cutting, milling, welding and assembly. Approximately 58%
of the Company's gross sales in 1996 included some degree of value added
processing, which provided Wells with a higher profit margin than the profit
margin for mill finished extrusions. The Company's ability to provide
finished components that are ready to be included in a customer's
manufacturing process enables the Company to better satisfy the needs of, and
expand its business with, existing customers as well as to attract additional
customers. In addition, the Company has broad expertise in product and die
engineering, enabling the Company to assist customers in utilizing extrusions
or fabricated components and assemblies and in creating complex extrusions to
replace several separate parts. For example, the Company has provided
engineering analysis as part of the redesign of an industrial vehicle
suspension, has assisted with the redesign of a boat deck in order to reduce
both the number of separate parts and customer assembly time, and is
collaborating with a manufacturer of light weight boat trailers on its
conversion from steel to aluminum.
1
LONG-TERM RELATIONSHIPS WITH DIVERSE CUSTOMER BASE. Over 66% of the
Company's sales in pounds in 1996 were made to customers that have been Wells
customers for over 10 years. Such strong relationships may decrease the
Company's exposure to volume reductions that may occur in a recession since
customers may be more likely to reduce volume from their less favored
suppliers. The Company's customers operate in many industries, including
building and construction, transportation, and consumer durables, and in a
broad range of markets within each industry. The diversity of its customer
base provides a foundation of experience on which the Company can build in
order to expand into new markets. For example, a fabrication technique
(coining) developed by the Company for the high-end office furniture market
has also found application with customers manufacturing pleasure boats,
increasing the Company's business in that segment. In addition, the Company's
familiarity with the quality, documentation and scheduling disciplines of
truck and automotive customers has facilitated entry into other industrial
markets.
REPUTATION FOR QUALITY PRODUCTS AND SERVICE. A 1995 survey of a broad
range of extrusion purchasers commissioned by the Company confirmed the
Company's reputation as a high quality extruder. For each of the past five
years, less than one percent of the Company's products have been rejected or
returned by customers. The Company believes that as a result of its ability
to provide a high level of service and quality products at competitive
prices, the Company is typically its customers' first or second choice to
provide aluminum extruded products. The quality of the Company's products
plays a key role in customer growth, retention and recapture. For example,
the Company has recaptured the business of a major truck trailer
manufacturer, which had switched to a lower priced supplier, despite the fact
that Company's prices are higher than those offered by the other supplier.
The Company has just become the sole supplier for a customer producing
pleasure boats after committing to a "zero defect" program and fulfilling
this program in three months. A customer in the storm door market has
indicated that the Company's defect rate is 80% less than that of its
competitors.
STRATEGIC NETWORK OF FACILITIES. The Company's seven plants in the
Southeast and Midwest are located near most of the Company's customers, which
minimizes transportation costs and helps generate collaborative relationships
between key Wells and customer personnel. The Company's ability to shift
production among its plants allows Wells to more efficiently meet the
requirements of its customers. The existence of a core fabrication capability
at or adjacent to each extrusion plant and of painting and anodizing
capabilities at several locations within the Company's network provides an
advantageous mix of services for customers in the most cost effective manner.
Because of this network of plants, the Company is well positioned to take
advantage of the current industrial trends of outsourcing and just-in-time
inventory management. For example, Wells is providing daily shipments of
extrusions to a major manufacturer of golf carts and utility vehicles so that
such customer can keep its inventory at a minimum yet support its
manufacturing requirements. The Company is also providing daily shipments of
components and assembled parts to a major truck manufacturer to coordinate
with and satisfy its daily assembly line requirements.
EFFECTIVE MANAGEMENT OF ALUMINUM PRICE FLUCTUATIONS. For the years 1994
through 1996, approximately 60% of the Company's cost of sales reflect the
cost of aluminum, its principal raw material. The Company focuses on
recovering the cost of aluminum in the sales price charged to its customers
in order to maintain profit margins. This is accomplished either by passing
cost increases through to customers by systematic market indexed sales
pricing or by fixing the cost of metal by hedging against committed fixed
price sales. The Company, however, does not engage in speculative hedging. In
addition, the Company maintains its inventory at levels consistent with its
operating needs (35 days on hand) through centralized purchasing and
logistics. The market price of aluminum was extremely volatile over the three
year period ending December 31, 1996, while the Company's Adjusted EBITDA
(which excludes any LIFO adjustments (see note (c) to the Summary Historical
Financial Data)) remained relatively stable despite such price fluctuations,
due to the Company's effective pricing management.
2
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy which includes the following
principal elements:
ENHANCE LONG-TERM CUSTOMER RELATIONSHIPS. The Company is committed to
enhancing its relationships with its customers by tailoring its business
approaches and systems to specific customer needs in order to improve quality
and performance. To that end, the Company utilizes a sales organization
comprised primarily of Company-employed representatives having broad
extrusion experience. Their responsibility is to create effective account
development strategies and to orchestrate the Company's manufacturing,
engineering and management resources to better serve the Company's long-term
customers. To expand its customer relationships beyond the traditional
sales/purchasing function, the Company has recently created
sales/engineering/manufacturing teams to address more substantive issues with
its customers. For example, the Company has begun a program with one customer
to create linked ordering and inventory management systems in order to better
support that customer's growth. The Company has also set up focus groups to
improve the shop-floor operations of a customer and is working with another
customer to overhaul its order-through-billing process. In addition, the
Company reserves manufacturing capacity across its plant network to retain
and increase business from long-term accounts.
INCREASE VALUE ADDED CONTENT. The Company can generate higher profit
margins and differentiate itself from its competitors by increasing the value
added content of its extrusions. On a per pound basis, for example, the
painting of a mill finished extrusion can increase the plant margin by 100%;
fabrication of a mill finished extrusion can increase the plant margin by
200-800%, depending upon the complexity of the process. Customers have an
incentive to purchase more value added products because the use of such
products reduces the number of vendors needed and order lead times, and
reduces operating costs and overhead by outsourcing internal operations. Over
88% of extrusion purchasers included in a survey commissioned by the Company
in 1995 indicated a need for finished and fabricated extrusions. The Company
is well-positioned to satisfy increased demand for value added services due
to its wide spectrum of finishing and fabrication capabilities, its diverse
manufacturing experience throughout its plant network, and its strong
technical service capabilities.
TARGET NEW APPLICATIONS AND MARKETS. The Company also strives to grow its
business by developing new opportunities for aluminum extrusion and
fabrication. The Company seeks out applications with multi-year life cycles
in markets where the use of aluminum enhances performance due to its light
weight, resistance to corrosion and cost advantages, capitalizing on its
detailed knowledge of design requirements and objectives within specific
industries. Over the past five years, the Company has built significant
volumes in such market niches as school bus windows, where the Company
estimates that it commands an 80% share of the market; high-end office
furniture, where the Company is a valued supplier to four of the leading
office furniture manufacturers; and industrial fixturing-guarding systems,
where the Company serves the three leading suppliers in the market.
IMPLEMENT STRATEGIC CAPITAL INVESTMENTS. The Company's capital
expenditures strategy, pursuant to which the Company is planning to spend
approximately $2.0 million in 1997 and $3.5 million annually thereafter
through 2002, is to expand capacity, improve productivity and increase value
added capabilities principally by upgrading its equipment rather than
purchasing new equipment. The Company expects that these investments will be
financed by excess cash flow from operations. The Company plans to upgrade
and modernize two extrusion presses each year for the next five years, which
is expected to increase extrusion capacity by 10% per press. In addition, the
Company plans to upgrade and modernize certain equipment at its casting
facility, which will expand capacity by 5% and improve the quality of billet
cast, and also to expand capabilities in its fabrication facilities. During
the last two years, the Company has successfully increased its casting
capacity by 15% and the capacities of two of its extrusion presses by an
average of 11% without the acquisition of new equipment.
3
ISSUANCE OF THE OLD NOTES
The outstanding $105.0 million principal amount of 10 1/8% Series A Senior
Notes due 2005 (the "Old Notes") were sold by the Company to Merrill Lynch &
Co. (the "Initial Purchaser") on May 28, 1997 (the "Closing Date") pursuant
to a Purchase Agreement, dated as of May 20, 1997 (the "Purchase Agreement"),
between the Company and the Initial Purchaser. The Initial Purchaser
subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act and other available exemptions under the Securities Act on or
about May 28, 1997. The Company and the Initial Purchaser also entered into a
Registration Rights Agreement, dated as of May 28, 1997 (the "Registration
Rights Agreement"), between the Company and the Initial Purchaser, 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
Effects."
The Old Notes were issued under an indenture, dated as of May 28, 1997
(the "Indenture"), between the Company and State Street Bank and Trust
Company (formerly known as Fleet National Bank) as trustee (in such capacity,
the "Trustee"). The New Notes are also being issued under the Indenture and
are entitled to the benefits of the Indenture. 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, and (ii) holders of New Notes will not be, and upon the consummation
of the Exchange Offer, Eligible 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 delivery of the Company to the Exchange Agent
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" and "--Procedures for Tendering" and
"Description of New Notes -- General."
The proceeds received by the Company from the issuance of the Old Notes
were used to repay certain existing indebtedness of the Company, to make a
Distribution (as defined herein) and to pay certain fees and expenses
associated with the issuance of the Old Notes. See "The Recapitalization."
There will be no proceeds to the Company from any exchange pursuant to the
Exchange Offer.
4
THE RECAPITALIZATION
The offering of the Old Notes, the repayment of indebtedness outstanding
under the Old Credit Facility (as defined herein in "The Recapitalization"),
the retirement of the Subordinated Notes (as defined herein in "The
Recapitalization") and the entering into of the New Credit Facility (as
defined herein in "The Recapitalization") were part of an overall
recapitalization of the Company. Indebtedness outstanding under the Old
Credit Facility and the Subordinated Notes was repaid from the net proceeds
of the offering of the Old Notes. Concurrently with the issuance of the Old
Notes, the Company entered into the New Credit Facility. As part of the
Recapitalization, the Board of Directors of the Company made the
Distribution, pursuant to which the Company paid a special cash dividend to
the holders of its common stock, settled existing employee stock options, and
repurchased, and may continue to repurchase, shares of common stock held by
certain stockholders. While the Company may repurchase additional shares of
common stock, the Company considers the Recapitalization to have occurred on
May 28, 1997.
The following table sets forth the sources and uses of funds for the
Recapitalization as of June 29, 1997. See "Management's Discussions and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
AMOUNT
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(IN THOUSANDS)
SOURCES OF FUNDS:
Sale of Old Notes .................... $105,000
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Total Sources of Funds.............. $105,000
==============
USES OF FUNDS:
Repayment of Old Credit Facility (a) $ 21,164
Retirement of Subordinated Notes (b) 16,303
Distribution (c) ..................... 61,706
Working capital ...................... 1,177
Fees and expenses (d)................. 4,650
--------------
Total Uses of Funds................. $105,000
==============
- ------------
(a) Includes $172 relating to interest expense.
(b) Includes $244 relating to prepayment penalty and $1,059 relating to
interest expense through July 15, 1997. The Subordinated Notes were
repurchased on July 15, 1997 at a price of 101.625%. Until such time,
the proceeds of the issuance of the Old Notes to be utilized for this
purpose were set aside in an escrow account and invested in government
securities and commercial paper.
(c) Includes $55,990 for the payment of the Dividend (as defined herein in
"The Recapitalization"), $3,056 for the cash settlement of stock
options, $1,102 for the repurchase of common stock and $1,558 as a
reserve to repurchase additional shares of common stock. To the extent
this reserve is not used, it will be added to working capital.
(d) Includes a fee of $500 to GGvA (as defined below) for financial
advisory services in connection with the Recapitalization.
Since its acquisition in 1987, the Company has been controlled by The
Fulcrum III Limited Partnership and The Second Fulcrum III Limited
Partnership (collectively, "Fulcrum III"), of which Gibbons, Goodwin, van
Amerongen ("GGvA") is the sole general partner. GGvA has informed the Company
that all of the shares owned by Fulcrum III will be transferred to a new
partnership of which GGvA will be the sole general partner. In connection
with that transfer, GGvA offered to purchase from the existing limited
partners of Fulcrum III their interests in the capital stock of the Company
owned by Fulcrum III. Certain limited partners accepted such offer and, as a
result, the interest of GGvA in the new partnership owning the capital stock
of the Company will increase to approximately 83% of the interests in the
capital stock of the Company owned by the new partnership. Consequently, GGvA
will continue to control the Company. After the Recapitalization, senior
management of the Company own approximately 21% of the Common Stock of the
Company on a fully diluted basis.
5
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 its 10 1/8% Series B Senior
Notes due 2005 (the "New Notes," and, with
the Old Notes, the "Notes") for an identical
face amount of the outstanding Old Notes
(the "Exchange Offer"). As of the date of
this Prospectus, $105.0 million in aggregate
principal amount of the Old Notes is
outstanding, the maximum amount authorized
by the Indenture for all Notes. As of
September 30, 1997, there was one registered
holder of the Old Notes, which held $105.0
million in aggregate principal amount of the
Old Notes. See "The Exchange Offer -- Terms
of the Exchange Offer."
Expiration Date ............... 5:00 p.m., New York City time, on
November 3, 1997, as the same may be
extended. See "The Exchange Offer --
Expiration Date; Extension; Termination;
Amendments."
Conditions of the Exchange
Offer ........................ The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer --
Conditions of the Exchange Offer."
Accrued Interest on the Old
Notes ........................ The New Notes will bear interest at a rate
equal to 10 1/8% per annum from and
including their date of issuance. Eligible
Holders whose Old Notes are accepted for
exchange will have the right to receive
interest accrued thereon from the date of
original issuance of the Old Notes or the
last Interest Payment Date, as applicable,
to, but not including, the date of issuance
of the New Notes, such interest to be
payable with the first interest payment on
the New Notes. Interest on the Old Notes
accepted for exchange, which accrues at the
rate of 10 1/8% per annum, will cease to
accrue on the day prior to the issuance of
the New Notes. The interest rate on the Old
Notes may increase under certain
circumstances if the Company is not in
compliance with its obligations under the
Registration Rights Agreement. See
"Description of New Notes -- General."
Procedures for Tendering Old
Notes ........................ Each holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together
with the Old Notes and any other required
documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. Old Notes may be physically
delivered, but physical delivery is not
required if a confirmation of a book-entry
of such Old Notes to the Exchange Agent's
account at The Depositary Trust Company
("DTC" or the "Depositary") is delivered in
a timely fashion. By executing the Letter of
Transmittal, each holder will
6
represent to the Company that, among other
things, the New Notes acquired pursuant to
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not
such person is the holder, that neither the
holder nor any such other person is engaged
in, or intends to engage in, or has an
arrangement or understanding with any person
to participate in, the distribution of such
New Notes and that neither the holder nor
any such other person is an "affiliate," as
defined under Rule 405 of the Securities
Act, of the Company. Each broker or dealer
that receives New Notes for its own account
in exchange for Old Notes, where such Old
Notes were acquired by such broker or dealer
as a result of market-making activities or
other trading activities, must acknowledge
that it will deliver a prospectus in
connection with any resale of such New
Notes. See "The Exchange Offer -- Procedures
for Tendering" and "Plan of Distribution."
Guaranteed Delivery
Procedures ................... Eligible Holders of Old Notes who wish to
tender their Old 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 Notes and
Delivery of New Notes ........ Upon satisfaction or waiver of all
conditions 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 --
Procedures for Tendering."
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 of Tenders."
The Exchange Agent ............ State Street Bank and Trust Company
(formerly known as Fleet National 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 -- Exchange Agent."
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."
7
Resales of the New Notes ...... Based on interpretations by the staff of 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 an Eligible Holder in
exchange for Old Notes may be offered for
resale, resold and otherwise transferred by
such Eligible 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 the Eligible 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 for its own account 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 --
Purpose and Effects" and "Plan of
Distribution."
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $105.0 million aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects
to the Old Notes, except for certain transfer restrictions and other rights
relating to the exchange of the Old Notes for New Notes. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of the Indenture under which both the Old Notes were, and the New Notes will
be, issued. See "Description of New Notes."
Notes Offered ................. $105,000,000 aggregate principal amount of
10 1/8% Series B Senior Notes due 2005.
Maturity Date ................. June 1, 2005.
Interest Payment Dates ........ June 1 and December 1 of each year,
commencing December 1, 1997.
Optional Redemption ........... The New Notes will be redeemable at the
option of the Company, in whole or in part,
in cash, at any time on or after June 1,
2001, at the redemption prices set forth
herein, together with accrued and unpaid
interest, if any, to the date of redemption.
In addition, at the option of the Company,
up to 33 1/3% of the aggregate principal
amount of the New Notes originally issued
may be redeemed prior to June 1, 2000 at a
price of 110 1/8% of the principal amount
thereof, together with accrued and unpaid
interest, if any, to the redemption date,
with the net proceeds of one or more Public
Equity Offerings of the Company; provided
that at least $65 million of the aggregate
principal amount of the New Notes remain
outstanding following such redemption. See
"Description of New Notes -- Optional
Redemption."
8
Change of Control ............. Upon the occurrence of a Change of Control,
each holder of New Notes will, subject to
the limitations described herein, have the
right to require the Company to purchase all
or a portion of such holder's New Notes at a
cash purchase price equal to 101% of the
principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date
of purchase. In addition, the New Notes will
be redeemable, at the option of the Company,
in whole or in part, after a Change of
Control at a redemption price equal to the
sum of (i) the outstanding principal amount
thereof, plus (ii) accrued and unpaid
interest, if any, to the redemption date,
plus (iii) the greater of (x) 1.0% of the
outstanding principal amount of the New
Notes and (y) the excess of (A) the present
value of the required interest and principal
payments due on such New Notes, computed
using a discount rate equal to the Treasury
Rate (as defined) plus the Applicable Spread
(as defined), over (B) the outstanding
principal amount of the New Notes. There can
be no assurance that the Company will have
the financial resources necessary to
repurchase the New Notes upon a Change of
Control. See "Description of New Notes --
Purchase of New Notes Upon a Change of
Control."
Ranking ....................... The New Notes will be senior unsecured
obligations of the Company and the
Indebtedness represented by the New Notes
and the payment of principal of, premium, if
any, and interest on the New Notes, will be
senior in right of payment to all existing
and future subordinated indebtedness of the
Company, will rank pari passu in right of
payment with all other existing and future
senior indebtedness of the Company and will
be effectively subordinated in right of
payment to all existing and future secured
indebtedness of the Company as to the assets
securing such indebtedness. As of July 15,
1997, the Company had no indebtedness
outstanding other than the New Notes.
Certain Covenants ............. The Indenture (as defined herein) pursuant
to which the New Notes will be issued will
contain certain covenants, including, among
others, covenants with respect to the
following matters: (i) limitation on
indebtedness; (ii) limitation on restricted
payments; (iii) limitation on certain
transactions with affiliates; (iv)
limitation on disposition of proceeds of
asset sales; (v) limitation on liens; (vi)
limitation on transfer of assets; (vii)
limitation on guarantees by subsidiaries;
(viii) limitation on sale and leaseback
transactions; (ix) limitation of dividends
and other payment restrictions affecting
subsidiaries; (x) limitation on subsidiary
capital stock; and (xi) restrictions on
mergers, consolidations or the sale of all
or substantially all of the assets of the
Company. See "Description of New Notes --
Certain Covenants."
Use of Proceeds ............... There will be no proceeds to the Company
from any exchange pursuant to the Exchange
Offer. The net proceeds to the
9
Company from the sale of the Old Notes were
used to fund the Recapitalization.
Absence of a Public Market for
the New Notes ................ The New Notes will be new securities for
which there is currently no established
trading market. Although the Initial
Purchaser has informed the Company that it
currently makes a market in the Notes, it is
not obligated to do so, and any such
market-making may be discontinued at any
time without notice, at its sole discretion.
Accordingly, there can be no assurance as to
the development or the liquidity of any
market for the New Notes. The Company does
not intend to apply for listing of the New
Notes on any securities exchange or for
quotation through the Nasdaq National Market
or any other quotation system.
RISK FACTORS
See "Risk Factors" beginning on page 13 for a discussion of certain
factors which should be considered by Eligible Holders evaluating the
Exchange Offer.
10
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER POUND AMOUNTS)
The following table sets forth summary historical financial data with
respect to the Company for the periods ended and as of the dates indicated.
The summary historical financial data for the five years ended December 31,
1996 are derived from the audited financial statements of the Company. The
summary historical financial data for the six month periods ended June 29,
1997 and June 30, 1996 are derived from unaudited financial statements of the
Company included elsewhere in this Prospectus. Such unaudited financial
statements, in the opinion of the Company's management, include all
adjustments necessary for the fair presentation of the financial condition
and the results of operations of the Company for such periods and as of such
dates. Operating results for the six months ended June 29, 1997 are not
necessarily indicative of the results of operations that may be expected for
the year ended December 31, 1997. This information should be read in
conjunction with the financial statements of the Company and the notes
thereto appearing elsewhere in this Prospectus, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Selected
Financial Data."
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
--------------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Net sales .................................... $151,314 $155,401 $197,991 $232,555 $228,161 $115,066 $120,038
Cost of sales ................................ 129,366 130,128 168,810 194,414 191,206 96,949 99,882
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................................. 21,948 25,273 29,181 38,141 36,955 18,117 20,156
Selling, general and administrative expenses . 12,886 13,536 14,536 16,211 15,877 7,990 7,923
Compensation from settlement of employee
stock options................................ -- -- -- -- -- -- 4,070
Operating profit ............................. 9,062 11,737 14,645 21,930 21,078 10,127 8,163
Interest expense ............................. 9,226 8,487 8,443 7,087 5,176 2,727 3,094
Income taxes ................................. 799 1,697 3,016 6,262 7,059 3,285 2,237
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary loss and
cumulative effect of accounting change (a) $ (963) $ 1,553 $ 3,186 $ 8,581 $ 8,843 $ 4,115 $ 2,832
========== ========== ========== ========== ========== ========== ==========
AS OF JUNE 29, 1997
-------------------
BALANCE SHEET DATA (AT END OF PERIOD):
Cash .................................. $ 19,788
Working capital ....................... 42,985
Inventories ........................... 21,508
Property, plant and equipment, net ... 25,885
Total assets .......................... 138,932
Total indebtedness (b) ................ 120,000
Total stockholders' equity (deficit) . (19,668)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
--------------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
OTHER FINANCIAL DATA
Adjusted EBITDA (c) ...................... $ 12,783 $ 15,658 $ 24,651 $ 23,406 $22,285 $10,753 $15,990
Net cash provided by operating
activities............................... 5,067 2,775 1,913 17,420 14,087 6,880 1,579
Net cash (used in) investing activities .. (553) (1,977) (1,512) (1,054) (2,589) (1,373) (391)
Net cash provided by (used in) financing
activities............................... (2,933) (1,887) 311 (17,851) (11,563) (5,049) 18,323
Capital expenditures ..................... 553 1,977 1,512 1,054 2,589 1,373 391
Depreciation and amortization (d) ....... 3,721 3,921 4,455 4,006 3,539 1,760 1,823
OTHER DATA:
Pounds of product shipped ................ 118,352 123,069 148,970 137,779 138,380 67,321 75,090
Adjusted EBITDA per pound ................ $ 0.108 $ 0.127 $ 0.165 $ 0.170 $ 0.161 $ 0.160 $ 0.213
Average aluminum market price per pound .. $ 0.576 $ 0.541 $ 0.688 $ 0.875 $ 0.725 $ 0.753 $ 0.770
(continued on following page)
11
- ------------
(a) Earnings (loss) before extraordinary loss and cumulative effect of
accounting change excludes an extraordinary loss of $1,143 (net of
applicable income taxes of $731) on the refinancing of debt in the six
months ended June 30, 1997, an extraordinary loss of $1,092 (net of
applicable income taxes of $698) on the refinancing of debt in 1994 and
a cumulative effect of accounting change for income taxes in 1993 of
$618.
(b) Includes $15.0 million of Subordinated Notes which were prepaid on July
15, 1997, using a portion of the proceeds of the issuance of the Old
Notes, which had been placed in escrow on May 28, 1997 for such
purpose.
(c) Adjusted EBITDA is defined as earnings before interest expense, income
taxes and depreciation and amortization and excludes LIFO income or
charges, extraordinary items and compensation from settlement of
employee stock options. Adjusted EBITDA reported above excludes LIFO
charges (income) of $0, $0, $5,551, ($2,530), ($2,332), ($1,134) and
$1,935 during the years ended December 31, 1992, 1993, 1994, 1995 and
1996, respectively, and for the six months ended June 30, 1996 and June
29, 1997, respectively. Adjusted EBITDA should not be considered in
isolation of, nor as a substitute for, net income, cash flows from
operations, or other income or cash flow data prepared in accordance
with generally accepted accounting principles. Because EBITDA and
Adjusted EBITDA are not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies.
(d) Amortization does not include amortization of debt issuance costs of
$550, $334, $474, $570, $495, $248 and $278 during the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively, and for the
six months ended June 30, 1996 and June 29, 1997, respectively.
12
RISK FACTORS
Prospective purchasers of the New Notes should carefully consider the
following risk factors, as well as the other information contained in this
Prospectus, before making an investment in the New Notes. This Prospectus
contains statements which constitute forward looking statements. These
statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the
Company or its officers primarily with respect to the future operating
performance of the Company. Prospective purchasers of the New Notes are
cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as
a result of various factors. The accompanying information contained in this
Prospectus, including the information set forth below, identifies important
factors that could cause such differences.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
Following the Recapitalization, the Company will be highly leveraged. As
of July 15, 1997, the Company had $105 million of indebtedness outstanding,
consisting of the Old Notes. See "Capitalization."
The significant indebtedness to be incurred as a result of the
Recapitalization will have several important consequences to the holders of
the New Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be
dedicated to service the Company's indebtedness, and the failure of the
Company to generate sufficient cash flow to service such indebtedness could
result in a default under such indebtedness, including under the New Notes;
(ii) while the Company has a $15 million revolving credit facility, the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be
impaired; (iii) the Company's flexibility to expand, make capital
expenditures and respond to changes in the industry and economic conditions
generally may be limited; (iv) the New Credit Facility (as defined herein)
and the Indenture will contain, and future agreements relating to the
Company's indebtedness may contain, numerous financial and other restrictive
covenants, including, among other things, limitations on the ability of the
Company to incur additional indebtedness, to create liens and other
encumbrances, to make certain payments and investments, to sell or otherwise
dispose of assets, or to merge or consolidate with another entity, the
failure to comply with which may result in an event of default, which, if not
cured or waived, could have a material adverse effect on the Company; and (v)
indebtedness under the New Credit Facility will be at variable rates of
interest, which will cause the Company to be vulnerable to increases in
interest rates. See "Description of New Credit Facility," "Description of New
Notes" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The ability of the Company to satisfy its obligations pursuant to such
indebtedness, including pursuant to the New Notes and the Indenture, will be
dependent upon the Company's future performance which, in turn, will be
subject to management, financial, business, regulatory and other factors
affecting the business and operations of the Company, some of which are not
in the Company's control. If the Company is unable to generate sufficient
cash flow to meet its debt obligations, the Company may be required to
restructure its debt, reduce or delay capital expenditures, sell assets or
obtain additional financing. If the Company could not satisfy its obligations
related to such indebtedness, substantially all of the Company's long-term
debt could be in default and could be declared immediately due and payable.
The New Credit Facility will be secured by inventory, accounts receivable
and other like assets, and by a pledge of capital stock of any subsequently
acquired or organized subsidiaries of the Company (although such subsidiaries
will be required to guarantee the New Notes in such circumstances) and the
New Notes will be effectively subordinated to any indebtedness under the New
Credit Facility as to the assets securing the New Credit Facility.
13
CUSTOMERS IN CYCLICAL MARKETS
Demand for the Company's products is subject to changes in general
economic conditions that affect its customers' markets. For example, sales to
the building and construction markets (approximately 49% of pounds sold in
1996) follow the trends in residential and commercial construction, while
sales to the transportation market (approximately 20% of pounds sold in 1996)
are driven by trends in the automotive, truck and other vehicle manufacturing
industries. Such industries have experienced recessionary or slow growth
conditions for substantial periods in the past and may experience such
recessionary conditions at the same time in the future. Adverse economic
conditions in such industries may have a material adverse effect on the
Company's financial condition and operations.
COMPETITION
The aluminum extrusion industry is fragmented and highly competitive. The
Company's competitors include primary aluminum producers that have extruding
operations, regional multi-plant extruders and small local extruders.
Competition is generally based upon price, delivery time, quality, service,
and specialty engineering/design/production capabilities. The Company
believes that the extrusion industry offers only moderate barriers to entry,
and extrusion presses and other capital equipment are readily available on
the open market. Although the Company is aware of no significant recent
entrants, there can be no assurance that new entrants will not increase
competition in the aluminum extrusion industry, which could materially
adversely affect the Company. Competition could adversely affect the
Company's operating results by forcing it to reduce its prices or incur
additional costs. A decline in the demand for aluminum extrusions could
result in a greater decline in the prices for the Company's products in light
of the high fixed costs and capacity of the aluminum extrusion industry. Some
of the Company's competitors have greater financial and other resources than
the Company. See "Business -- Competition."
Other materials, such as vinyl and rolled steel, may be used as
substitutes for aluminum extrusions in certain markets and under certain
circumstances. An increase in the use of substitutes for aluminum extrusions
could have a material adverse effect on the financial condition and
operations of the Company. See "Business -- Competition."
PRICING OF RAW MATERIALS
The Company's principal raw materials, primary aluminum ingot and aluminum
scrap, are subject to extensive price volatility. During the period January
1, 1992 through December 31, 1996, the average Midwest U.S. transaction price
(the "MWTP") for primary aluminum has ranged from approximately $.50 to $1.00
per pound. For the month of March 1997, the MWTP was approximately $.80 per
pound. In 1996, aluminum represented 65% of the Company's total production
costs.
The Company manages its exposure to volatility in aluminum prices either
by tying the purchase price of its raw materials to the MWTP at a fixed
spread and passing any increase in the MWTP through to its customers or by
hedging the fixed price on its purchases of raw materials through
simultaneously entering into forward sales contracts with its customers. It
is the Company's policy not to engage in speculative hedging activity. Any
increase in the price of such raw materials could have an adverse effect on
the Company's operations and financial condition if the Company is unable to
pass such increases through to its customers or does not effectively hedge
against such price changes. See "Business -- Raw Materials."
SOURCES OF RAW MATERIALS
The Company purchases all of its raw materials (other than internally
generated scrap) from outside aluminum suppliers. Pursuant to a supply
agreement (the "Venalum Agreement") with CVG Industria Venezolana de Aluminio
C.A. ("Venalum"), the Company purchases primary aluminum (ingot and billet)
from Venalum; this contract represents approximately 60-65% of the Company's
aluminum requirements purchased from outside suppliers. Venalum currently
owns approximately 20% of the outstanding shares of the Company's Common
Stock. The Company believes that the terms of the Venalum Agreement are no
less favorable to the Company than would be obtained in an arms' length
transaction. The Venalum
14
Agreement is scheduled to expire in December 1997, but may be extended based
upon negotiations between the Company and Venalum. There can be no assurance
that the Venalum Agreement will be extended. If the Venalum Agreement is
terminated, there can be no assurance that the Company can enter into a new
supply agreement upon the same or more favorable pricing terms. The loss of
certain of the rights and benefits provided under the Venalum Agreement could
adversely affect the Company's business. In addition, without a long-term
supply contract, any limitation in the supply of primary aluminum or aluminum
scrap could have a material adverse effect on the Company's operations and
financial condition. See "Business -- Raw Materials" and "Certain
Transactions."
ENVIRONMENTAL MATTERS
The Company is subject to extensive and evolving federal, state and local
environmental and land use laws and regulations, which have become
increasingly stringent in recent years as a result of greater public interest
in protecting and cleaning up the environment. These laws and regulations
affect the Company's business and operations in many ways. See "Business --
Environmental Matters."
In the ordinary course of its business, the Company may become involved in
a variety of legal and administrative proceedings relating to environmental
matters. These may include proceedings by federal, state or local agencies
seeking to impose civil or criminal penalties on the Company for violations
of such laws and regulations, or to impose liability on the Company under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA") or comparable state statutes, or to revoke or deny renewal of, or
place limitations on, a permit necessary for the lawful operation of the
Company's business.
Certain of the Company's manufacturing facilities have been in operation
for several decades and, over such time, these facilities have used
substances and generated and disposed of wastes which are or may be
considered hazardous. For example, certain of these facilities have in the
past stored or disposed of wastewater treatment sludge in on-site ponds,
lagoons or other surface impoundments. Although the Company believes that
these facilities are in substantial compliance with current environmental
laws and regulations applicable to such storage and disposal activities, it
is possible that additional environmental issues and related matters may
arise relating to such past activities which could require additional
expenditures by the Company, some of which could be material.
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations
will be administered or interpreted or what environmental conditions may be
found to exist. Enactment of more stringent laws or regulations or more
strict interpretation of existing laws and regulations could require
additional expenditures by the Company, some of which could be material.
DEPENDENCE ON KEY PERSONNEL
The Company considers its management to be an important business strength
of the Company. See "Business -- Company Strengths." If for any reason, a
number of such key personnel do not continue to be active in management
without appropriate replacements being hired, the Company's operations could
be materially adversely affected.
CONTROL BY PRINCIPAL STOCKHOLDER
GGvA is the sole general partner of Fulcrum III which currently owns
approximately 62% of the outstanding shares of the Company's common stock. As
a result, GGvA controls the Company and has the power to elect a majority of
the directors of the Company and to control all matters submitted to the
stockholders of the Company, including approving business combinations
involving the Company. See "Principal Stockholders." GGvA has informed the
Company that all of the shares owned by Fulcrum III will be transferred to a
new partnership of which GGvA will be the sole general partner. As a result,
GGvA will continue to control the Company.
15
CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control at any time, the Company will
be required to offer to repurchase each holder's New Notes at a price equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase. There can be no assurance that the
Company will have the financial resources necessary to repurchase the New
Notes upon a Change of Control. In addition, the requirement to repurchase
the New Notes upon a Change of Control may discourage persons from making a
tender offer for or a bid to acquire the Company. See "Description of New
Notes -- Purchase of New Notes Upon a Change of Control." In addition, a
Change of Control may constitute a default under the New Credit Facility. See
"Description of New Credit Facility."
FRAUDULENT CONVEYANCE
The incurrence by the Company of indebtedness such as the Notes may be
subject to review under federal bankruptcy law or relevant state fraudulent
transfer laws if a bankruptcy case or lawsuit (including in circumstances
where bankruptcy is not involved) were ever commenced by or on behalf of
unpaid creditors of the Company. Under applicable provisions of the federal
bankruptcy code or comparable provisions of state fraudulent transfer or
conveyance law, if, in a bankruptcy case, or similar proceeding or a lawsuit
by or on behalf of unpaid creditors of the Company, a court were to find
that, at the time the Notes were issued and the net proceeds thereof were
applied, either (a) the Company received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and the Company
(i) was insolvent or was rendered insolvent by the issuance of the Notes,
together with the substantially concurrent use of the proceeds therefrom,
(ii) was engaged or about to engage in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital
to carry on its business, (iii) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured (as all
such foregoing terms are defined in or interpreted under the fraudulent
conveyance statutes), or (iv) was a defendant in an action for money damages
or had a judgment for money damages docketed against it (if, in either case,
after final judgment, the judgment is unsatisfied), or (b) the Company
incurred such indebtedness with the intent to hinder, delay or defraud its
creditors, such court could void, in whole or in part, the Company's
obligations under the Notes and direct the repayment of any amounts paid
thereunder to the creditors of the Company, or subordinate the Notes to
presently existing or future indebtedness of the Company. In such event,
there can be no assurance that any repayment of the Notes could ever be
recovered by Holders of the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however,
the Company would be considered to have been insolvent at the time the Notes
were issued if the sum of its debts was, at that time, greater than the sum
of the value of all of its property at a fair valuation, or if the then fair
saleable value of its assets on a going concern basis was less than the
amount that was then required to pay its probable liability on its existing
debts as they became absolute and matured. There can be no assurance as to
what standard a court would apply in order to determine whether the Company
was insolvent as of the date the Notes were issued, or that, regardless of
the method of valuation, a court would not determine that the Company was
insolvent on that date, or that, regardless of whether the Company was
insolvent on the date the Notes were issued, that the issuances constituted
fraudulent transfers on another of the grounds summarized above.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes will be new securities for which there is currently no
established trading market, and none may develop. The Initial Purchaser has
indicated to the Company that it has made a market in the Notes, as permitted
by applicable laws and regulations, but it is under no obligation to do so;
and such market-making could be discontinued at any time without notice, at
the sole discretion of the Initial Purchaser. In addition, such market-making
activities may be limited during the Exchange Offer or the pendency of the
Shelf Registration Statement, if it is filed. Accordingly, no assurance can
be given that an active trading market for the New Notes will develop or, if
such a market develops, as to the liquidity of such market. Following the
Exchange Offer, the Company does not intend to list the New Notes on any
securities exchange or to arrange for the New Notes to be quoted on the
Nasdaq National Market or other
16
quotation system. If the New Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending
upon prevailing interest rates, the market for similar securities, the
performance of the Company and certain other factors.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold or otherwise transferred by Holders
thereof (other than any such holder which 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 arrangement with any person to
participate in the distribution of such Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that, by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that it will make this Prospectus
available to any such broker-dealer for use in connection with any such
resale. See "Plan of Distribution." However, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be
offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Old Notes will be adversely affected.
17
THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Old Notes were sold by the Company on May 28, 1997 to the Initial
Purchaser, who resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act).
In connection with the sale of the Old Notes, the Company and the Initial
Purchaser entered into a Registration Rights Agreement dated as of May 28,
1997 (the "Registration Rights Agreement") pursuant to which the Company
agreed to file with the Commission a registration statement (the "Exchange
Offer Registration Statement") with respect to an offer to exchange the Old
Notes for New Notes within 45 days following the closing date of the Old
Notes. In addition, the Company agreed to use its best efforts to cause the
Exchange Offer Registration Statement to become effective under the
Securities Act and to issue the New Notes pursuant to the Exchange Offer. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Exchange Offer Registration Statement.
The Exchange Offer is being made pursuant to the Registration Rights
Agreement to satisfy the Company's obligations thereunder. For purposes of
the Exchange Offer, the term "Eligible Holder" shall mean the registered
owner of any Old Notes that remain Transfer Restricted Securities, as
reflected on the records of State Street Bank and Trust Company (formerly
known as Fleet National Bank) as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record
by the depository of the Old Notes. The Company is not required to include
any securities other than the New Notes in the Exchange Offer Registration
Statement. Holders of Old Notes who do not tender their Old Notes or whose
Old Notes are tendered but not accepted would have to rely on exemptions from
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Old Notes.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to the Company, 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 any holder of such New Notes (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and except as set forth in the next paragraph) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder is not participating and
does not intend to participate, and has no arrangement or understanding with
any person to participate, in the distribution of such New Notes.
If any person were to be participating in the Exchange Offer for the
purpose of distributing securities in a manner not permitted by the
Commission's interpretation, (i) the position of the staff of the Commission
enunciated in interpretive letters would be inapplicable to such person and
(ii) such person would be required to 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. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction. Prior to the
Exchange Offer, however, the Company will use its best efforts to register or
qualify the New Notes for offer and sale under the securities or blue sky
laws of such jurisdictions as is necessary to permit consummation of the
Exchange Offer and do any and all other acts or things necessary or advisable
to enable the offer and sale in such jurisdictions of the New Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any
and all Old Notes validly tendered prior to 5:00 p.m.,
18
New York City time, on the Expiration Date (as defined below). The Company
will issue up to $105,000,000 aggregate principal amount of New Notes in
exchange for a like principal amount of outstanding Old Notes which are
validly tendered and accepted in the Exchange Offer. Subject to the
conditions of the Exchange Offer described below, the Company will accept any
and all Old Notes which are so tendered. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer; however, the Old Notes may be
tendered only in multiples of $1,000. See "Description of New Notes."
The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that (i) the New
Notes will be registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) because the New Notes will
be registered, holders of New Notes will not be, and upon the consummation of
the Exchange Offer, Eligible Holders of Old Notes will no longer be, entitled
to certain rights under the Registration Rights Agreement intended for the
holders of unregistered securities.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Maryland 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. Old Notes which are not tendered for exchange or are tendered but
not accepted in the Exchange Offer will remain outstanding and be entitled to
the benefits of the Indenture, but will not be entitled to any registration
rights under the Registration Rights Agreement.
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 for the Exchange Offer. The Exchange Agent will act as agent
for the tendering holders for the purposes of receiving the New Notes from
the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in
connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on
November 3, 1997, subject to extension by the Company by notice to the
Exchange Agent as herein provided. The Company reserves the right to so
extend the Exchange Offer at its discretion, in which event the term
"Expiration Date" shall mean the time and date on which the Exchange Offer as
so extended shall expire. The Company will notify the Exchange Agent of any
extension by oral or written notice and will make a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
The Company reserves the right (i) to delay accepting for exchange any Old
Notes for any New Notes or to extend or terminate the Exchange Offer and not
accept for exchange any Old Notes for any New Notes if any of the events set
forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Company by giving oral or
written notice of such delay or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance for exchange, extension or amendment will be followed as promptly
as practicable by public announcement 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 Old Notes of such amendment,
and the Company will extend the Exchange Offer for a minimum of five business
days, depending upon the significance of the amendment and the manner of
disclosure to the holders of Old Notes, if the
19
Exchange Offer would otherwise expire during such five business-day period.
The rights reserved by the Company in this paragraph are in addition to the
Company's rights set forth below under the caption "Conditions of the
Exchange Offer."
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event that (i) the Exchange Offer Registration Statement
is not filed with the Commission on or prior to the 45th calendar day
following the date of original issue of the Old Notes, (ii) the Exchange
Offer Registration Statement is not declared effective on or prior to the
130th calendar day following the date of original issue of the Old Notes,
(iii) the Exchange Offer is not consummated or, if an Exchange Offer has not
been consummated, a Shelf Registration Statement is not declared effective,
in either case, on or prior to the 165th day following the date of original
issue of the Old Notes, or (iv) if an Exchange Offer has been consummated,
any required Shelf Registration Statement is not declared effective on or
prior to the later of (A) the 165th day following the date of original issue
of the Old Notes and (B) the 90th day following the date the Company becomes
obligated to file a Shelf Registration Statement (each such event referred to
in clauses (i) through (iv) above, a "Registration Default"), the interest
rate borne by the Old Notes shall be increased by one quarter of one percent
per annum upon the occurrence of any Registration Default, which rate will
increase by an additional one quarter of one percent each 90-day period that
such additional interest continues to accrue under any such circumstance,
with an aggregate maximum increase in the interest rate equal to one percent
(1%) per annum. Following the cure of all Registration Defaults the accrual
of additional interest will cease and the interest rate will revert to the
original rate.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to certain
other rights under the Registration Rights Agreement intended for holders of
Transfer Restricted Securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the
Registrar under the Indenture of 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.
PROCEDURES FOR TENDERING
Only an Eligible Holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, an Eligible 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 such tender is being effected
pursuant to the procedure for book-entry transfer described below) and any
other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility System may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, 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 as set forth
under the caption "Exchange Agent" below prior to 5:00 p.m., New York City
time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
The tender by an Eligible 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.
20
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 Eligible Holders. Instead of delivery by mail, it is recommended that
Eligible Holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent on
or before the Expiration Date. No Letter of Transmittal or Old Notes should
be sent to the Company. Eligible Holders may request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect the
tenders for such holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered for the account
of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member of a signature guarantee
program within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes the Company's acceptance
of which might, in the judgment of the Company or its counsel, be unlawful.
The Company also reserves the right to waive any defects, 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 times as the Company in its sole
discretion shall determine. Although the Company intends to request the
Exchange Agent to notify holders of defects or irregularities with respect to
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects
or irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, 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
(subject to limitations contained in the Indenture) (i) to purchase or make
offers for any Old Notes that remain outstanding subsequent to the Expiration
Date and (ii) to the extent permitted by applicable law, to purchase Old
Notes in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each Eligible Holder will represent to the Company that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business by the person receiving
such New Notes, whether or not such person is the holder and that neither the
Eligible Holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes and that
neither the Eligible Holder nor any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder
is a broker-dealer that will receive New Notes for its own account in
exchange for Old Notes that were
21
acquired as a result of market-making activities or other trading activities,
such holder by tendering will acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes.
GUARANTEED DELIVERY PROCEDURES
Eligible 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 and other required documents to the Exchange Agent or cannot complete
the procedure for book-entry transfer prior to the Expiration Date, 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 Eligible Holder, the certificate
number(s) of such Old Notes (if available) and the principal amount of Old
Notes tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date,
the certificate(s) representing the Old Notes to be tendered in proper
form for transfer (or a confirmation of a book entry transfer into the
Exchange Agent's account at the Depositary of Old Notes delivered
electronically) and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such 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 the Depositary of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Eligible 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,
unless previously accepted for exchange.
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, and prior to acceptance for exchange thereof by the
Company. 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 have the Trustee with respect to the Old Notes register the transfer of
such Old Notes into the name of the person 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 in its sole discretion, 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 re-tendered. Any Old Notes which have been tendered but
which are not accepted for exchange or which are withdrawn 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 re-tendered by following one of the
procedures described above under "Procedures for Tendering" at any time prior
to the Expiration Date.
22
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, the
Company will not be required to accept for exchange any Old Notes tendered
for any New Notes and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Notes, if any of the following
conditions exist:
(a) Any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority with respect
to the Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of
the Exchange Offer to the Company; or
(b) There shall have occurred any change, or any development involving a
prospective change, in the business or financial affairs of the Company,
which in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(c) There shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of
the Exchange Offer to the Company; or
(d) There shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on the
New York Stock Exchange (whether or not mandatory), (ii) a declaration of
a banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iii) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the
United States, (iv) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood
of affecting, the extension of credit by banks or other lending
institutions in the United States, or (v) in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer,
a material acceleration or worsening thereof.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to
such conditions or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. If the Company waives or
amends the foregoing conditions, the Company will, if required by applicable
law, extend the Exchange Offer for a minimum of five business days from the
date that the Company first gives notice, by public announcement or
otherwise, of such waiver or amendment, if the Exchange Offer would otherwise
expire within such five business-day period. Any determination by the Company
concerning the events described above will be final and binding upon all
parties.
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; however, additional solicitation may be
made by telecopy, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company 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 Company will pay the other expenses
to be incurred in connection with the Exchange Offer, including fees and
expenses of the Trustee, accounting and legal fees and printing costs.
23
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 for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
holder.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of the Old Notes for the New Notes in the Exchange Offer
should not constitute an exchange for federal income purposes. Consequently,
(i) no gain or loss should be realized by a U.S. Holder upon receipt of a New
Note; (ii) the holding period of the New Note should include the holding
period of the Old Note exchanged therefor and (iii) the adjusted tax basis of
the New Note should be the same as the adjusted tax basis of the Old Note
exchanged therefor immediately before the exchange. Even if the exchange of
an Old Note for a New Note were treated as an exchange, however, such an
exchange should constitute a tax-free recapitalization for federal income tax
purposes. Accordingly, a New Note should have the same issue price as an Old
Note and a U.S. Holder should have the same adjusted basis and holding period
in the New Note as it had in an Old Note immediately before the exchange. As
used herein, the term "U.S. Holder" means a person who is, for United States
federal income tax purposes, (i) a citizen or resident of the United States;
(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof; or
(iii) an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Generally, Eligible Holders (other than any holder who is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may
offer such New Notes for resale, resell such New Notes, and otherwise
transfer such New Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided such New Notes
are acquired in the ordinary course of the holders' business, and such
holders have no arrangement with any person to participate in a distribution
of such New Notes. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." To comply with
the securities laws of certain jurisdictions, it may be necessary to qualify
for sale or register the New Notes prior to offering or selling such New
Notes. Upon request by Eligible Holders prior to the Exchange Offer, the
Company will register or qualify the New Notes in certain jurisdictions
subject to the conditions in the Registration Rights Agreement. If an
Eligible Holder does not exchange such Old Notes for New Notes pursuant to
the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon and will not have
the benefit of any covenant regarding registration under the Securities Act.
In general, the Old Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. 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.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
24
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term
of the New Notes.
EXCHANGE AGENT
State Street Bank and Trust Company (formerly known as Fleet National
Bank) has been appointed as Exchange Agent for the Exchange Offer. All
correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
By Facsimile: By Overnight Courier:
(617) 664-5232 State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
Attn: Ms. Sandra Szczsponik 4th Floor
Attn: Sandra Szczsponik
Confirm by telephone: Two International Place
(617) 664-5314 Boston, Massachusetts 02110
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
25
THE COMPANY
The Company is an extruder, finisher and fabricator of aluminum products.
In the early 1950s, the predecessor of the Company entered the aluminum
extrusion industry as a supplier to the building and construction market. In
1967, the Company was acquired by Revere Copper and Brass, Incorporated
("Revere"). During the 1970s the Company added capacity and expanded its
regional capabilities through the acquisition of additional extrusion plants.
In 1987, all of the common stock of the Company was acquired from Revere
in a leveraged buyout. The equity participants included Fulcrum III, certain
members of the Company's then current management and certain institutional
investors. Subsequently, in 1988, Venalum purchased a 20% interest in the
Company.
The Company is a Maryland corporation organized in 1967. The Company's
principal executive office is located at 809 Gleneagles Court, Suite 300,
Baltimore, Maryland 21286. The Company's telephone number is (410) 494-4500.
26
THE RECAPITALIZATION
The offering of the Old Notes was part of an overall recapitalization of
the Company, pursuant to which the Company would repay all of its outstanding
indebtedness (approximately $37.4 million as of May 28, 1997) and pay a
special cash dividend (the "Dividend") to the holders of Common Stock (as
defined herein in "Principal Stockholders") of $62.00 per share, or
approximately $56 million (based upon 903,063 shares outstanding as of May
28, 1997). Following the issuance of the Old Notes, the Company paid the
Dividend and settled existing employee stock options through a combination of
the payment of the difference between the amount of the Dividend per share
and the exercise price per share and the issuance of shares of Common Stock.
Option holders who received shares of Common Stock in settlement of their
options also received bonuses to enable them to satisfy a portion of the
income tax incurred by virtue of their receipt of shares of Common Stock. As
part of the Recapitalization, the Company repurchased, and may continue to
repurchase, shares of Common Stock held by certain stockholders to the extent
of any remaining proceeds from the issuance of the Old Notes (the Dividend,
the settlement of employee stock options and the stock repurchase are
collectively referred to as the "Distribution"). Payment of the Distribution
did not constitute a violation of any covenants in the Indenture which
restrict such dividends. See Note 5 to the financial statements of the
Company.
The Company's credit facility (the "Old Credit Facility") under which a
$7.5 million Term A Loan, a $6.2 million Term B Loan and $6.5 million in
revolving loans were outstanding as of March 30, 1997, and the Company's
$15.0 million aggregate principal amount of 14.125% Senior Subordinated Notes
due 2001 (the "Subordinated Notes") were repaid using a portion of the
proceeds from the offering of the Old Notes. Concurrent with the offering of
the Old Notes, the Company entered into a new credit agreement (or an
amendment and restatement to the Old Credit Facility) (the "New Credit
Facility") that provides for a $15.0 million five-year secured revolving
credit facility. See "Description of New Credit Facility."
The repayment of the Old Credit Facility, the retirement of the
Subordinated Notes, the entering into of the New Credit Facility and the
Distribution are collectively referred to herein as the "Recapitalization."
While the Company may repurchase additional shares of Common Stock, the
Company considers the Recapitalization to have occurred on May 28, 1997.
The following table sets forth the sources and uses of funds for the
Recapitalization as of June 29, 1997.
AMOUNT
--------------
(IN THOUSANDS)
SOURCES OF FUNDS:
Sale of Old Notes..................... $105,000
--------------
Total Sources of Funds.............. $105,000
==============
USES OF FUNDS:
Repayment of Old Credit Facility (a) $ 21,164
Retirement of Subordinated Notes (b) 16,303
Distribution (c) ..................... 61,706
Working capital ...................... 1,177
Fees and expenses (d) ................ 4,650
--------------
Total Uses of Funds................. $105,000
==============
- ------------
(a) Includes $172 relating to interest expense.
(b) Includes $244 relating to prepayment penalty and $1,059 relating to
interest expense through July 15, 1997. The Subordinated Notes were
repurchased on July 15, 1997 at a price of 101.625%. Until such time,
the proceeds of the issuance of the Old Notes to be utilized for this
purpose were set aside in an escrow account and invested in government
securities and commercial paper.
(c) Includes $55,990 for the payment of the Dividend, $3,056 for the cash
settlement of stock options, $1,102 for the repurchase of common stock
and $1,558 as a reserve to repurchase additional shares of common
stock. To the extent this reserve is not used, it will be added to
working capital.
(d) Includes a fee of $500 to GGvA (as defined below) for financial
advisory services in connection with the Recapitalization.
Since its acquisition in 1987, the Company has been controlled by Fulcrum
III, of which GGvA is the sole general partner. GGvA has informed the Company
that all of the shares owned by Fulcrum III will be transferred to a new
partnership of which GGvA will be the sole general partner. In connection
with that transfer, GGvA offered to purchase from the existing limited
partners of Fulcrum III their interests in the capital stock of the Company
owned by Fulcrum III. Certain limited partners accepted such offer and, as a
result, the interest of GGvA in the new partnership owning the capital stock
of the Company will increase to approximately 83% of the interests in the
capital stock of the Company owned by the new partnership. After the
Recapitalization, members of senior management of the Company own
approximately 21% of the Common Stock, on a fully diluted basis.
27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 29, 1997 and reflects the Recapitalization. This table should be read in
conjunction with the information set forth under "The Recapitalization" and
the other financial information appearing elsewhere in this Prospectus.
JUNE 29, 1997
---------------
(IN THOUSANDS)
Short-term debt................................................... $ --
Long-term debt:
Revolving Credit Facility ....................................... $ --
Term A Loan ..................................................... --
Term B Loan ..................................................... --
New Credit Facility (a) ......................................... --
Notes offered hereby ............................................ 105,000
Subordinated Notes (b)........................................... 15,000
Total long-term debt ........................................... 120,000
---------------
Stockholders' equity:
Common Stock, Class A, $.01 par value, 975,000 shares
authorized, 923,205 shares issued and outstanding; Common
Stock, Class B, $.01 par value, 125,000 shares authorized, no
shares issued and outstanding .................................. 9
Additional paid-in capital ...................................... 1,215
Retained earnings (deficit) ..................................... (20,400)
Additional minimum pension liability ............................ (492)
---------------
Total stockholders' equity (c) ................................. (19,668)
Total capitalization........................................... $100,332
===============
- ------------
(a) The New Credit Facility consists of a $15 million five-year secured
revolving credit facility, which is expected to be undrawn as of the
consummation of the Recapitalization.
(b) The Subordinated Notes were repurchased on July 15, 1997. Until such
time, the proceeds of the issuance of the Old Notes to be utilized for
this purpose were set aside in an escrow account.
(c) Reflects the payment of the Distribution. See "The Recapitalization."
28
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Company's
financial statements and related notes, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the other financial
information included elsewhere herein. The following table sets forth
selected financial data and other operating information of the Company. The
selected financial data for the five years ended December 31, 1996 have been
derived from the audited financial statements of the Company. The financial
data for the six month periods ended June 29, 1997 and June 30, 1996 are
derived from unaudited financial statements of the Company included elsewhere
in this Prospectus. Such unaudited financial statements, in the opinion of
the Company's management, include all adjustments necessary for the fair
presentation of the financial condition and the results of operations of the
Company for such periods and as of such dates. Operating results for the six
months ended June 29, 1997 are not necessarily indicative of the results of
operations that may be expected for the year ended December 31, 1997.
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales ................................ $151,314 $155,401 $197,991 $232,555 $228,161 $115,066 $120,038
Cost of sales ............................ 129,366 130,128 168,810 194,414 191,206 96,949 99,882
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit ............................. 21,948 25,273 29,181 38,141 36,955 18,117 20,156
Selling, general and administrative
expenses................................. 12,886 13,536 14,536 16,211 15,877 7,990 7,923
Compensation from settlement of employee
stock options............................ -- -- -- -- -- -- 4,070
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit ......................... 9,062 11,737 14,645 21,930 21,078 10,127 8,163
Interest expense ......................... 9,226 8,487 8,443 7,087 5,176 2,727 3,094
Income taxes ............................. 799 1,697 3,016 6,262 7,059 3,285 2,237
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary loss
and cumulative effect of accounting
change (a) .............................. $ (963) $ 1,553 $ 3,186 $ 8,581 $ 8,843 $ 4,115 $ 2,832
========== ========== ========== ========== ========== ========== ==========
AS OF DECEMBER 31,
AS OF AS OF
--------------------------------------------------------- JUNE 30, JUNE 29
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER POUND AMOUNTS)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash ..................................... $ 2,204 $ 1,115 $ 1,827 $ 342 $ 277 $ 800 $ 19,788
Working capital .......................... (433) 17,675 19,813 19,355 18,175 18,976 42,985
Inventories .............................. 16,957 18,705 24,665 19,972 19,838 21,198 21,508
Property, plant and equipment, net ...... 26,177 29,996 28,241 26,489 26,723 26,696 25,885
Total assets ............................. 101,786 109,366 124,800 112,261 108,726 117,122 138,932
Total indebtedness (b) ................... 67,067 65,180 69,064 51,683 40,091 46,604 120,000
Total stockholders' equity ............... 14,468 14,938 17,142 25,246 34,472 29,391 (19,668)
OTHER FINANCIAL DATA:
Adjusted EBITDA(c)........................ $ 12,783 $ 15,658 $ 24,651 $ 23,406 $ 22,285 $ 10,753 $ 15,990
Net cash provided by operating
activities............................... 5,067 2,775 1,913 17,420 14,087 6,880 1,579
Net cash (used in) investing activities .. (553) (1,977) (1,512) (1,054) (2,589) (1,373) (391)
Net cash provided by (used in) financing
activities............................... (2,933) (1,887) 311 (17,851) (11,563) (5,049) 18,323
Capital expenditures...................... 553 1,977 1,512 1,054 2,589 1,373 391
Depreciation and amortization (d) ........ 3,721 3,921 4,455 4,006 3,539 1,760 1,823
Ratio of earnings to fixed charges (e) ... -- 1.36x 1.70x 2.96x 3.80x 3.48x 2.52x
OPERATING DATA:
Pounds of product shipped................. 118,352 123,069 148,970 137,779 138,380 67,321 75,090
Adjusted EBITDA per pound................. $ 0.108 $ 0.127 $ 0.165 $ 0.170 $ 0.161 $ 0.160 $ 0.213
Average aluminum market price per pound .. $ 0.576 $ 0.541 $ 0.688 $ 0.875 $ 0.725 $ 0.753 $ 0.770
(footnotes on following page)
29
- ------------
(a) Earnings (loss) before extraordinary loss and cumulative effect of
accounting change excludes an extraordinary loss of $1,143 (net of
applicable income taxes of $731) on the refinancing of debt in the six
months ended June 29, 1997, an extraordinary loss of $1,092 (net of
applicable income taxes of $698) on the refinancing of debt in 1994 and
a cumulative effect of accounting change for income taxes in 1993 of
$618.
(b) Total indebtedness as of June 29, 1997 includes $15.0 million of
Subordinated Notes which were prepaid on July 15, 1997, using a portion
of the proceeds of the issuance of the Old Notes, which had been placed
in escrow on May 28, 1997 for such purpose.
(c) Adjusted EBITDA is defined as earnings before interest expense, income
taxes and depreciation and amortization and excludes LIFO income or
charges, extraordinary items and compensation from settlement of
employee stock options. Adjusted EBITDA reported above excludes LIFO
charges (income) of $0, $0, $5,551 ($2,530), ($2,332), ($1,134) and
$1,935 during the years ended December 31, 1992, 1993, 1994, 1995 and
1996, respectively, and for the six months ended June 30, 1996 and June
29, 1997, respectively. Adjusted EBITDA should not be considered in
isolation of, nor as a substitute for, net income, cash flows from
operations, or other income or cash flow data prepared in accordance
with generally accepted accounting principles. Because EBITDA and
Adjusted EBITDA are not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies.
(d) Amortization does not include amortization of debt issuance costs of
$550, $334, $474, $570, $495, $248 and $278 during the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively, and for the
six months ended June 30, 1996 and June 29, 1997, respectively.
(e) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings (loss) before income taxes and fixed
charges. Fixed charges consist of interest expense, whether expensed or
capitalized, including amortization of deferred financing costs, and
the portion of rental expense considered to be interest. For the year
ended December 31, 1992, the Company's earnings were insufficient to
cover fixed charges by $164.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is an extruder of soft alloy aluminum products, serving
principally the building and construction, transportation and consumer
durables markets. The following discussions of financial condition and the
results of operations for the six months ended June 29, 1997 and June 30,
1996, and the years ended December 31, 1996, 1995 and 1994, are based on the
historical results achieved by the Company.
CUSTOMER DISTRIBUTION
The following tables profile customers of the Company by market sector or
distribution channel, the first by sales dollars and the second by pounds
shipped.
Customer Distribution (Sales Dollars):
SIX MONTHS ENDED
-----------------------------------------
1994 1995 1996 JUNE 30, 1996 JUNE 29, 1997
-------------------- -------------------- -------------------- -------------------- --------------------
DOLLARS % DOLLARS % DOLLARS % DOLLARS % DOLLARS %
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Building/Construction
Commercial ..........$ 36,625 17.7% $ 43,131 18.7% $ 44,984 20.7% $ 22,531 20.7% $ 19,634 16.7%
Residential ......... 52,579 25.5 53,200 23.1 58,530 26.9 29,064 26.7 29,600 25.2
Transportation ....... 62,060 30.1 74,027 32.2 52,802 24.2 28,347 26.1 31,032 26.5
Consumer Durables ... 18,487 9.0 21,399 9.3 24,189 11.1 12,313 11.3 11,041 9.4
Equipment/Electrical.. 12,341 6.0 16,086 7.0 17,003 7.8 7,107 6.5 10,173 8.7
Distributors/Other .. 24,424 11.7 22,312 9.7 20,255 9.3 9,484 8.7 15,868 13.5
---------- -------- ---------- -------- ---------- ---------- -------- -------- --------- --------
206,516 100.0% 230,155 100.0% 217,763 100.0% 108,846 100.0% 117,348 100.0%
======== ======== ========== ======== ========
Less Returns/Freight/
Discounts............ 8,525 8,753 9,129 4,393 4,441
---------- ---------- ---------- --------- ----------
Net Sales--Products. $197,991 $221,402 $208,634 $104,453 $112,907
========== ========== ========== ========= ==========
Customer Distribution (Pounds Sold):
SIX MONTHS ENDED
-----------------------------------------
1994 1995 1996 JUNE 30, 1996 JUNE 29, 1997
-------------------- -------------------- -------------------- -------------------- --------------------
POUNDS % POUNDS % POUNDS % POUNDS % POUNDS %
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(POUNDS IN THOUSANDS)
Building/Construction
Commercial .......... 27,621 18.5% 27,223 19.8% 30,020 21.7% 15,689 23.3% 13,702 18.2%
Residential ......... 38,730 26.0 32,958 23.9 38,063 27.5 20,007 29.7 19,942 26.6
Transportation ....... 39,413 26.5 40,178 29.2 27,514 19.9 14,894 22.1 17,946 23.9
Consumer Durables ... 13,269 8.9 12,655 9.2 15,820 11.4 7,953 11.8 7,135 9.5
Equipment/Electrical 9,562 6.4 10,074 7.3 11,269 7.0 4,684 7.0 6,776 9.0
Distributors/Other .. 20,375 13.7 14,691 10.6 15,694 11.4 4,094 6.1 9,589 12.8
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Pounds of Product
Shipped............. 148,970 100.0% 137,779 100.0% 138,380 100.0% 67,321 100.0% 75,090 100.0%
========== ======== ========== ======== ========== ======== ========== ======== ========== ========
FINANCIAL PRESENTATION
The table below sets forth for the periods indicated, net sales, gross
profit, operating profit and net earnings, and for performance measurement,
pounds of product shipped, gross sales price per pound, Adjusted EBITDA (see
note (c) to the Summary Historical Financial Data) and Adjusted EBITDA per
pound. The table also identifies average market prices of aluminum per pound.
31
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------- ----------------------
JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER POUND DATA)
Net sales--Products ......................... $197,991 $221,402 $208,634 $104,453 $112,907
Net sales--Metal ............................ -- 11,153 19,527 10,613 7,131
---------- ---------- ---------- ---------- ----------
Net sales .................................. 197,991 232,555 228,161 115,066 120,038
Cost of sales--Products ..................... 168,810 183,332 171,656 86,345 93,008
Cost of sales--Metal ........................ -- 11,082 19,550 10,604 6,874
---------- ---------- ---------- ---------- ----------
Cost of sales .............................. 168,810 194,414 191,206 96,949 99,882
Gross profit ................................ 29,181 38,141 36,955 18,117 20,156
Operating profit ............................ 14,645 21,930 21,078 10,127 8,163
Earnings before extraordinary item .......... 3,186 8,581 8,843 4,115 2,832
Pounds of product shipped ................... 148,970 137,779 138,380 67,321 75,090
Gross sales price per pound ................. $ 1.386 $ 1.670 $ 1.574 $ 1.617 $ 1.563
Adjusted EBITDA ............................. 24,651 23,406 22,285 10,753 15,990
Adjusted EBITDA per pound ................... 0.165 0.170 0.161 0.160 0.213
Average aluminum market price per pound .... 0.688 0.875 0.725 0.753 0.770
Market price of aluminum per pound at period
end ........................................ 0.950 0.797 0.736 0.701 0.759
Aluminum Prices. For the periods indicated, approximately 60% of the
Company's cost of sales reflect the cost of aluminum, its principal raw
material. The Company seeks to manage aluminum price fluctuations, which can
be volatile, principally either by passing aluminum prices through to
customers by systematic market indexed pricing or by fixing the cost of
aluminum by hedging against committed fixed price sales to customers. As a
result, increases and decreases in aluminum prices have generally caused
similar increases and decreases in selling prices, sales and costs of sales,
and generally have had little impact on the Company's level of profitability
for the periods described herein.
Business Activity. The Company's experience indicates that pounds of
product shipped has a direct impact on profitability, since a significant
portion of the Company's operating costs are fixed. The Company defines
pounds of product shipped as the weight of all extrusions shipped, including
those pounds transferred within the Company from which it manufactures
fabricated parts, components and assemblies, but excluding the pounds of
aluminum related to excess metal sales (as described herein).
Performance/Other Measures. The Company believes that its abilities to
manage its sales spread (gross sales minus aluminum costs), control variable
spending and minimize its fixed cost structure are significant determinants
of profitability and resultant cash flow. The Company, therefore, monitors
its sales spread per pound, variable costs per pound and fixed costs per
pound, focusing on operating profit as a key performance measure. In
addition, the Company monitors Adjusted EBITDA (see note (c) to the Summary
Historical Financial Data) as it is relevant for debt covenant analysis under
the New Credit Facility and it can also be used as a measure of the Company's
ability to service its debt.
LIFO Inventory. The Company values its aluminum inventory under the
last-in, first-out (LIFO) method. During periods of rising aluminum prices,
compared to historical LIFO inventory values, the Company may incur LIFO
charges, which will reduce taxable income, and when aluminum prices
subsequently decline, the Company may recognize LIFO income, which will
increase taxable income. As a result of the fluctuations in earnings levels
resulting from the application of LIFO, the Company excludes LIFO charges and
income from certain measures, such as Adjusted EBITDA.
Excess Metal Sales. The Company's policy is to sell excess metal (primary
aluminum ingot and billet) on the open market when necessary to maintain
aluminum inventory levels consistent with near-term business needs.
Imbalances in inventory can arise from the ongoing and efficient operation of
the Company's casting facility and from the Company's obligations to purchase
fixed amounts of primary aluminum ingot and billet under the Venalum
Agreement. The sale of excess metal, which also reflects aluminum price
fluctuations, has minimal effect on profit performance since the prices of
metal bought
32
and metal sold are closely matched. Pounds of excess metal sold are not
included in the calculation of pounds of product shipped, the Company's
principal indicator of business activity. In the normal course of business,
the Company also sells secondary aluminum billet and aluminum scrap, which
are not accounted for as excess metal sales.
SIX MONTHS ENDED JUNE 29, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The Company's net sales increased to $120.0 million in the six months
ended June 29, 1997 from $115.1 million in the six months ended June 30,
1996, an increase of $4.9 million or 4.3%. Net sales--products increased to
$112.9 million in the six months ended June 29, 1997 from $104.5 million in
the six months ended June 30, 1996, an increase of $8.4 million or 8.0%.
Sales of value added products increased $1.2 million, or 1.9%, to $64.9
million for the six months ended June 29, 1997 from $63.7 million for the six
months ended June 30, 1996. Sales of mill finished extrusions increased
16.1%, reflecting a slight decrease in aluminum prices which was more than
offset by an increase in shipments of mill finished products, particularly to
trailer manufacturers and several material handling accounts. The gross sales
price per pound declined 3.3% due to a higher sales mix of mill finished
extrusions offsetting an increase of $0.017 in the average market price per
pound of aluminum.
Pounds of product shipped increased 7.8 million pounds, or 11.6%, to 75.1
million in the six months ended June 29, 1997 from 67.3 million pounds of
product shipped in the six months ended June 30, 1996. Shipments to
commercial construction decreased 2.0 million pounds, largely due to the loss
of a curtain wall and store front account, the completion of a contract
involving a bridge renovation project and the loss of a commercial door
account. In residential construction, shipments were relatively flat,
decreasing 0.1 million pounds. Shipments to transportation increased 3.1
million pounds, due to a significant order involving delivery vehicles and
increased business with major tractor and trailer manufacturers. In consumer
durables, shipments were down 0.8 million pounds with an increase in demand
for office furniture more than offset by a decrease in demand for pleasure
boats and other consumer durables. Shipments to equipment/electrical
increased 2.1 million pounds due to continuing strong performance of several
niche accounts, particularly those related to materials handling. The
increase of 5.5 million pounds to distributors/other resulted mainly from
continuing sales efforts to increase custom extrusion business with select
distributors.
Cost of sales increased to $99.9 million for the six months ended June 29,
1997 from $96.9 million in the six months ended June 30, 1996, an increase of
$3.0 million or 3.1%. Cost of sales--products increased to $93.0 million
for the six months ended June 29, 1997 from $86.3 million for the six months
ended June 30, 1996, an increase of $6.7 million or 7.8%. This increase
resulted from a $3.1 million increase in LIFO charges, a $1.6 million
increase in operating costs and a $2.0 million increase in aluminum costs.
Variable costs per pound, however, decreased to $0.415 in the six months
ended June 29, 1997 from $0.444 in the six months ended June 30, 1996, an
improvement of $0.029 per pound. This improved performance was due to better
capacity utilization, improved extrusion press and casting efficiencies, and
control of variable spending.
Gross profit increased to $20.2 million in the six months ended June 29,
1997 from $18.1 million in the six months ended June 30, 1996, an increase of
$2.1 million or 11.6%.
Selling, general and administrative expenses, including compensation from
the settlement of employee stock options, increased to $12.0 million in the
six months ended June 29, 1997 from $8.0 million in the six months ended June
30, 1996, an increase of $4.0 million or 50%. This increase is primarily
attributable to an increase of $4.1 million in compensation related to the
settlement of employee stock options as part of the Recapitalization. Other
selling, general and administrative expenses decreased slightly by $0.1
million.
Operating profit decreased to $8.2 million in the six months ended
June 29, 1997 from $10.1 million in the six months ended June 30, 1996,
a decrease of $1.9 million or 18.8%.
Interest expense increased to $3.1 million in the six months ended
June 29, 1997 from $2.7 million in the six months ended June 30, 1996,
an increase of $0.4 million. This increase was mainly attributable to the
increase in debt outstanding and higher effective interest rates as a result
of the Recapitalization.
33
Income tax expense decreased to $2.2 million in the six months ended June 29,
1997 from $3.3 million in the six months ended June 30, 1996, a decrease of
$1.1 million. The effective tax rate for the six months ended June 29, 1997
and June 30, 1996 was 44%, which differed from the federal statutory rate of
35% due to the goodwill amortization and state income taxes.
The Company incurred an extraordinary loss of $1.1 million (net of
applicable income taxes of $0.7 million) on the refinancing of debt related
to the Recapitalization.
As a result of the above factors, net earnings decreased to $1.7 million
in the six months ended June 29, 1997 from $4.1 million in the six months
ended June 30, 1996, a decrease of $2.4 million or 58.5%.
Adjusted EBITDA, as previously defined in note (c) to the Summary
Historical Financial Data, increased to $16.0 million in the six months ended
June 29, 1997 from $10.8 million in the six months ended June 30, 1996, an
increase of $5.2 million or 48.1%. The improvement in Adjusted EBITDA
consisted of $2.4 million from increased sales volume, $2.7 million from a
net reduction in operating costs (as previously discussed), and $0.1 million
from an increase in sales spread. Adjusted EBITDA per pound, in turn,
increased $0.053 to $0.213 to the six months ended June 30, 1997 since the
increase in Adjusted EBITDA was substantially greater than the increase in
pounds shipped.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net sales decreased to $228.2 million in 1996 from $232.6
million in 1995, a decrease of $4.4 million or 1.9%. Net sales--products
decreased to $208.6 million in 1996 from $221.4 million in 1995, a decrease
of $12.8 million or 5.8%. Sales of value added products increased $6.0
million, or 5.0%, to $126.7 million for the year ended December 31, 1996 from
$120.7 million for the year ended December 31, 1995. Sales of mill finished
extrusions declined 16.8%, reflecting a decrease in both aluminum prices and
shipments of mill finished products, particularly to trailer manufacturers.
The $0.096 decrease in gross sales price per pound was less than the $0.150
decline in the average market price per pound of aluminum, due to a higher
sales mix of value added products, led by an increase of 18.6% in sales of
painted or anodized products.
Pounds of product shipped increased 0.6 million pounds, or 0.4%, to 138.4
million in 1996 from 137.8 million pounds of product shipped in 1995.
Shipments to commercial construction increased 2.8 million pounds, reflecting
business from a new architectural account, and residential construction
increased 5.1 million pounds, mainly because of a management decision to
dedicate more press capacity to mobile home products. In transportation,
shipments decreased 12.7 million pounds, primarily as a result of a 20%
decline in shipments to truck and trailer manufacturing as the industry
consolidated after record production in the 1994-1995 period. Consumer
durables increased 3.2 million pounds primarily due to growth in demand for
office furniture and pleasure boats. Shipments to equipment/electrical
increased by 1.2 million pounds due to the continuing strong performance of
several niche accounts. The increase of 1.0 million pounds to
distributors/others resulted mainly from sales efforts to obtain custom
extrusion business with select distributors.
Cost of sales decreased to $191.2 million in 1996 from $194.4 million in
1995, a decrease of $3.2 million or 1.6%. Cost of sales--products decreased
to $171.7 million in 1996 from $183.3 million in 1995, a decrease of $11.6
million or 6.3%. This decrease resulted from a $14.7 million decrease in
aluminum costs, a $0.2 million increase in LIFO adjustments, and a $2.9
million increase in operating costs. Production labor costs per pound
increased $0.011 mainly due to a shift in production mix from large truck
trailer extrusion shapes to smaller extrusion shapes requiring more press
labor and higher costs of labor and shipping materials, due to more extensive
protective packing. Other variable costs increased $0.014 mainly due to a
large increase in natural gas prices.
Gross profit decreased to $37.0 million in 1996 from $38.1 million in
1995, a decrease of $1.1 million or 2.9%.
Selling and administrative expenses decreased to $15.9 million in 1996
from $16.2 million in 1995, a decrease of $0.3 million or 1.9%. The
contributing factors included professional fees, which decreased $0.2
million; and travel expenses, which decreased $0.3 million; both decreases
were due to completion of
34
supervisory training principally undertaken in 1995. Offsetting these
decreases were personnel costs, which increased $0.3 million due to increased
management incentive bonuses and employee stock option compensation.
Operating profit decreased to $21.1 million in 1996 from $21.9 million in
1995, a decrease of $0.8 million or 3.7%.
Interest expense decreased to $5.2 million in 1996 from $7.1 million in
1995, a decrease of $1.9 million or 26.8%. The decrease in interest expense
resulted from a reduction in debt outstanding and a performance-based
decrease in interest rates under the Old Credit Facility. In 1996, the
Company was able to reduce debt from $51.7 million to $40.1 million, a
decrease of $11.6 million. Income tax expense increased to $7.1 million in
1996 from $6.3 million in 1995, an increase of $0.8 million. Effective tax
rates for the years ended December 31, 1996 and 1995 were 44% and 42%,
respectively, which differed from the federal statutory rate of 35% due to
goodwill amortization and state income taxes, and in the case of 1996, the
payment of income taxes due from prior periods.
As a result of the above factors, net earnings increased to $8.8 million
in 1996 from $8.6 million in 1995, an increase of approximately $0.2 million
or 2.3%.
Adjusted EBITDA decreased to $22.3 million in 1996 from $23.4 million in
1995, a decrease of $1.1 million or 4.7%. The decline in Adjusted EBITDA
consisted of $3.2 million from a net increase in operating costs (as
previously discussed) offset by an improvement in sales spread of $1.9
million and of $0.2 million due to a slight increase in sales volume.
Adjusted EBITDA per pound, in turn, decreased $0.009 to $0.161 in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net sales increased to $232.6 million in 1995 from $198.0
million in 1994, an increase of $34.6 million or 17.5%. Net sales--products
increased to $221.4 million in 1995 from $198.0 million in 1994, an increase
of $23.4 million or 11.8%. Sales of value added products increased $4.3
million, or 3.7%, to $120.7 million for the year ended December 31, 1995 from
$116.4 million for the year ended December 31, 1994. Sales of mill finished
extrusions increased 21.5%, reflecting an increase in aluminum prices which
was offset by a decrease in shipments of mill finished products, particularly
to the residential construction and distributor markets. The increase of
$0.284 in the Company's gross sales price per pound was greater than the
$0.187 increase in the average market price per pound of aluminum, reflecting
improved sales spread.
Pounds of product shipped decreased 11.2 million or 7.5% to 137.8 million
in 1995 from 149.0 million pounds of product shipped in 1994, which was the
Company's all-time high shipment level. Shipments to commercial construction
were relatively flat. Residential construction decreased 5.8 million pounds
primarily due to an inventory correction after the build-up of customer
inventories in the second half of 1994. In transportation, shipments
increased 0.8 million pounds with demand in trailer manufacturing offsetting
a decrease in components for utility vehicles. The decline of 0.6 million
pounds in consumer durables paralleled the market decline in consumer
durables. Shipments increased to equipment/electrical due to continuing
strong performance of several niche accounts of the Company. Business with
distributors/others declined by 5.7 million pounds, of which 4.3 million
reflected an adverse response by distributors to the Company's emphasis on
deliveries to other markets in 1994.
Cost of sales increased to $194.4 million in 1995 from $168.8 million in
1994, an increase of $25.6 million or 15.2%. Cost of sales--products
increased to $183.3 million in 1995 from $168.8 million in 1994, an increase
of $14.5 million or 8.6%. This increase resulted from a $25.8 million
increase in aluminum costs, an $8.1 million decrease in LIFO adjustments, and
a $3.2 million decrease in operating costs. Production labor costs per pound
increased slightly by $0.002, reflecting normal wage increases, whereas other
variable costs increased $0.010, mainly because of increased purchases of
parts and services to support more value added business in 1995.
Gross profit increased to $38.1 million in 1995 from $29.2 million in
1994, an increase of $8.9 million or 30.5%.
35
Selling and administrative expenses increased to $16.2 million in 1995
from $14.5 million in 1994, an increase of approximately $1.7 million or
11.7%. The main contributing factors were an investment of $0.4 million in
supervisory training, which increased professional fees and out-of-pocket
travel expenses, an increase in bad debts expense of $0.4 million related to
a bankrupt customer, and an increase in expense of $0.5 million related to
the adoption of Statement of Financial Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, on a prospective
basis.
Operating profit increased to $21.9 million in 1995 from $14.6 million in
1994, an increase of $7.3 million or 50.0%.
Interest expense decreased to $7.1 million in 1995 from $8.4 million in
1994, a decrease of $1.3 million or 15.5%. The decrease in interest expense
resulted from the refinancing of $35.5 million of 13.375% Senior Subordinated
Notes in December 1994 and a reduction in debt outstanding under the Old
Credit Facility. In 1995, the Company was able to reduce debt from $69.1
million to $51.7 million, a decrease of $17.4 million. Income tax expense
increased to $6.3 million in 1995 from $3.0 million in 1994, an increase of
$3.3 million. The effective tax rates for the years ended December 31, 1995
and 1994 were 42% and 49%, respectively, which differed from the federal
statutory rate of 35% and 34%, respectively, primarily due to goodwill
amortization and state income taxes.
As a result of the above factors, earnings before extraordinary item
increased to $8.6 million in 1995 from $3.2 million in 1994, an increase of
$5.4 million or 168.8%. The Company's net earnings for 1994 were $2.1 million
after taking into account an extraordinary loss of $1.1 million on the
refinancing of debt.
Adjusted EBITDA decreased to $23.4 million in 1995 from $24.7 million in
1994, a decrease of approximately $1.3 million or 5.3%. The decline in
Adjusted EBITDA followed the decline in operating profit after excluding
non-cash LIFO adjustments and a decrease in depreciation charges of $0.5
million. Adjusted EBITDA per pound, in turn, increased $0.005 to $0.170 in
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically obtained funds from its operations, augmented
by borrowings made under various credit agreements. Aluminum price changes
increase or decrease working capital requirements since the dollar value of
accounts receivable, inventories and accounts payable reflect these changes.
Working capital requirements are generally higher during periods of higher
aluminum prices.
Cash Flows from Operating Activities
Cash provided by operations for the six months ended June 29, 1997 and
June 30, 1996 and for the years ended 1996, 1995 and 1994 was $1.6 million,
$6.9 million, $14.1 million, $17.4 million and $1.9 million, respectively.
Cash flow for the six months ended June 29, 1997 was significantly lower than
cash flow for the six months ended June 30, 1996, primarily as a result of
reduced net earnings, reflecting the non-recurring compensation charge. In
addition, cash flow decreased as a result of increases in accounts receivable
and inventories resulting from increased levels of business activity and
increased aluminum prices. In 1996, cash flow was strong reflecting a modest
improvement in profit performance and continued emphasis on working capital
management. In 1995, cash flow improved significantly from 1994 due to
improved profit performance and effective working capital management. Total
working capital (excluding current portion of long term debt) at June 29,
1997 and June 30, 1996 and at December 31, 1996, 1995 and 1994 was $43.0
million, $19.0 million, $18.2 million, $19.4 million and $25.3 million,
respectively. For the six months ended June 29, 1997, increased cash,
resulting from the escrow of funds for the retirement of the Subordinated
Notes, and increases in other working capital accounts, reflecting the impact
of increased business activity and the effect of rising aluminum prices,
resulted in higher working capital than for the six months ended June 30,
1996. In 1994, both higher aluminum prices and increased volume required
higher working capital than 1995, whereas in 1995, higher aluminum prices and
higher inventory levels resulted in higher working capital requirement than
1996.
Cash Flows from Investing Activities
Expenditures for property, plant and equipment were $0.4 million, $1.4
million, $2.6 million, $1.1 million and $1.5 million in the six months ended
June 29, 1997 and June 30, 1996 and in the years 1996,
36
1995 and 1994, respectively. During the last two years, the Company has
successfully increased its casting capacity by 15% and capacities on two of
its extrusion presses by an average of 11% without the acquisition of
expensive new equipment. The Company also made investments in computerized
numerical control ("CNC") mills, benders, saws and presses to increase its
fabrication capabilities. The Company curtailed its capital expenditure
program during the six months ended June 29, 1997 due to the
Recapitalization. The Company anticipates that expenditures for property,
plant and equipment will approach $2.0 million in 1997 and will average $3.5
million per annum over the next five years. Approximately $2.5 million of the
annual $3.5 million expenditure is expected to be invested in productivity
improvements and capacity enhancements, with the remainder expected to be
used for maintenance capital.
Cash Flows from Financing Activities
On May 28, 1997, the Company issued and sold the Old Notes to the Initial
Purchaser. The Old Notes bear interest at a rate of 10.125% per annum, and
the Company is required to make semi-annual payments of interest on the Old
Notes. The Company used a portion of the proceeds from the issuance of the
Old Notes to repay the Old Credit Facility (approximately $21.2 million
outstanding as of May 28, 1997) and put a portion of proceeds into an escrow
account for the redemption of the Subordinated Notes. Upon the issuance of
the Old Notes, the Company entered into the New Credit Facility, which
provides a $15.0 million five-year secured revolving credit facility for
working capital and general corporate purposes. The New Credit Facility is
expected to be undrawn as of the consummation of the Recapitalization. See
"The Recapitalization."
The offering of the Old Notes, the repayment of the Old Credit Facility,
the retirement of the Subordinated Notes and the entering into of the New
Credit Facility were part of the Recapitalization. As part of the
Recapitalization, the Company used a substantial portion of the proceeds
received from the issuance and sale of the Notes to make the Distribution. In
the six months ended June 29, 1997, the Company paid the Dividend of $62.00
per share, or $56.0 million, to the holders of the common stock of the
Company, paid or put into escrow an aggregate of $37.5 million related to the
retirement of debt and paid $1.1 million for the repurchase of shares of
common stock from certain shareholders. The Company also incurred $4.1
million of compensation expense related to the settlement of employee stock
options.
In December 1994, the Company entered into the Old Credit Facility, a
$62.0 million bank credit agreement comprised of a $22.0 million working
capital line of credit, a $33.0 million term loan and a $7.0 million term
loan. Under the Old Credit Facility, the Company is required to make payments
of interest on a monthly or quarterly basis and quarterly scheduled principal
payments of $1.4 million on the $33.0 million term loan. The Company is in
full compliance with the Old Credit Facility and has prepaid $14.5 million of
the $33.0 million term loan as of March 30, 1997. In addition, in December
1994, the Company issued $15.0 million aggregate principal amount of
Subordinated Notes, which mature in July 2001 to refinance a like amount of
subordinated notes maturing in July 1999. The Company is required to make
semi-annual payments of interest on the Subordinated Notes.
Indebtedness and Liquidity
As of June 29, 1997, the Company had $105 million of Old Notes outstanding
and no borrowings under the New Credit Facility. In addition, the Company had
$15.0 million of Subordinated Notes outstanding, which were prepaid on July
15, 1997, using a portion of the proceeds of the issuance of the Old Notes,
which had been placed in escrow on May 28, 1997 for such purpose. The
significant indebtedness to be incurred by the Company as a result of the
Recapitalization will have several important consequences, the foremost being
that interest expense will be substantially higher than immediately prior to
such transactions. The ability of the Company to satisfy its obligations
pursuant to such indebtedness, including pursuant to the New Notes and the
Indenture, will be dependent upon the Company's future performance which, in
turn, will be subject to management, financial, and other business factors
affecting the business and operations of the Company, some of which are not
in the Company's control. The Company's liquidity may also be impacted by
environmental and other regulatory matters. See "Risk Factors -- Substantial
Leverage; Ability to Service Indebtedness."
37
The Company currently believes that cash flow from operating activities,
together with borrowings available under the New Credit Facility, will be
sufficient to fund currently anticipated working capital needs and capital
expenditure requirements for at least several years. However, there can be no
assurance that this will be the case.
Futures Contracts and Forward Sales Contracts
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of finished
products at scheduled intervals. The aluminum cost component of the forward
sales contract is fixed for the duration of the contract, based on forward
market prices at the inception of the contract. In order to hedge its
exposure to aluminum price volatility under these forward sales contracts,
the Company enters into aluminum futures contracts (a financial hedge) based
on the scheduled deliveries.
At June 29, 1997, the Company was party to $7.3 million of aluminum
futures contracts through nationally recognized brokerage firms and major
metal brokers. These aluminum futures contracts are for periods between July
1997 and November 1998, covering 10.0 million pounds of aluminum at prices
expected to be settled financially in cash as they reach their respective
settlement dates. The Company does not engage in any speculative trading of
futures contracts.
LIFO Adjustment and Inflation
The largest component of the Company's cost of sales is aluminum, its
principal raw material. Aluminum costs can be volatile, and reported results
may vary due to LIFO adjustments, as previously discussed. With the exception
of LIFO adjustments, the Company does not believe that inflation has had a
significant impact on its results of operations for the six months ended June
29, 1997 and June 30, 1996 and the years 1996, 1995 and 1994.
SEASONALITY
The Company generally does not experience significant seasonality in its
business. However, working capital requirements are often higher and
operating results are often lower during the fourth quarter principally due
to reduced shipments of product and increased inventory due to the decrease
in sales during the holiday season and increased accounts receivable due to
customers' delaying payment until after the year-end.
38
BUSINESS
Wells is an extruder, finisher and fabricator of aluminum products. For
the years 1994 through 1996, over 92% of the products sold by the Company
were engineered and manufactured according to individual customer
specifications, and include custom designed extrusions and fabricated parts
and assemblies. In addition to mill finished extrusions (extrusions which
have neither been painted nor anodized), the Company's operations include
painting, anodizing (an electrolytic process which finely etches the surfaces
of an extrusion providing a hard coat which may contain color) and
fabrication, which enables the Company to provide its customers with
assembly-ready components. Wells also operates its own casting facility for
aluminum billet, enabling the Company to manage its internal billet
requirements as well as to recycle its scrap for use in its extrusion
operations. The Company's network of plants consists of seven facilities in
six states in the midwestern and southeastern United States. These plants
contain 12 extrusion presses and are located to meet various regional
demands; minimize transportation costs; balance production requirements among
plants, affording more flexibility and higher utilization; and provide single
source reliability to large customers.
Through its regional plant system in the Midwest and Southeast, the
Company is able to produce a broad range of extruded, finished and fabricated
products used by its approximately 800 customers in the manufacture of their
end products. Approximately two-thirds of the Company's 1996 sales in pounds
were made to customers that have been customers of the Company for more than
10 years. The Company sells its products primarily to the building and
construction (for both new construction and replacement), transportation and
consumer durables industries. These products include: (i) door and window
components, commercial entrance doors and patio doors for the building and
construction market; (ii) school bus windows and components for truck cabs,
truck trailers, delivery vans, recreational vehicles and automotive
accessories for the transportation market; (iii) components for home and
office furniture, golf carts and pleasure boats for the consumer durables
market; and (iv) heat sinks and components for lighting fixtures for the
electrical and equipment market. For the twelve months ended June 29, 1997,
the Company sold 146.1 million pounds of aluminum extrusions, generating net
sales of $233.1 million, net earnings of $6.4 million, and Adjusted EBITDA
(see note (c) to the Summary Historical Financial Data) of $27.5 million.
INDUSTRY OVERVIEW
The Company participates on a regional basis in the U.S. market for
extruded aluminum products, an overall market estimated at approximately 3.5
billion pounds for 1996. The Company believes that this market has been
subject to annual fluctuations reflecting general economic conditions. The
1996 demand represents a 3.1% increase from the 1995 volume of 3,400 million
pounds and a 6.8% increase from the 1994 volume of 3,281 million pounds. The
following table provides an estimate of extrusion shipments by end market for
1994, 1995 and 1996.
U.S. ALUMINUM EXTRUSION MARKET (MILLIONS OF POUNDS)
1994 1995 1996
------------------ ------------------ -----------------
POUNDS % POUNDS % POUNDS %
-------- -------- -------- -------- -------- -------
Building/Construction 984 30.0% 943 27.7% 998 28.5%
Transportation ........ 895 27.3 941 27.7 875 25.0
Consumer Durables .... 385 11.7 367 10.8 377 10.8
Equipment/Electrical . 284 8.7 288 8.5 300 8.6
Distributors/Other(a) 733 22.3 861 25.3 955 27.1
-------- -------- -------- -------- -------- -------
Estimated Market .... 3,281 100.0% 3,400 100.0% 3,505 100.0%
======== ======== ======== ======== ======== =======
- ------------
Sources: Information based on data from the Aluminum Extruders Council, the
Aluminum Association and management estimates. The categories of "Electric"
and "Machinery and Electrical" have been combined and presented as
"Equipment/Electrical." Similarly, the categories of "Exports" and "Other"
have been combined and presented as "Other" in "Distributors/Other." The
Company believes that these categorizations portray more realistically the
aluminum extrusion market and its segments.
(a) Extrusions sold to distributors may be resold to any of the above
categories but are not included in such categories.
39
The Company believes that the structure of the aluminum extrusion industry
has changed substantially since the early 1970s, as follows. Initially,
primary aluminum producers dominated the industry through vertical
integration which provided their captive extruders with lower raw material
costs. In the mid-1970s, however, supplies from offshore and the increasing
use of aluminum scrap transformed aluminum ingot into a worldwide product.
Extruders not affiliated with primary producers were then able to purchase
aluminum at competitive prices. The reduced cost advantages of the primary
captive extruders allowed the entry of low-cost, service-oriented independent
extruders.
The Company believes that the economic recession of the late 1980s and
early 1990s resulted in the closure of a number of small aluminum extrusion
operations and the contraction of extrusion press capacity at regional
extruders and primary aluminum producers. Currently, according to industry
sources, there are more than 75 independent and integrated aluminum extruders
operating at least 140 plants in the United States with a minimum of 450
extrusion presses. The Company believes that the aluminum extrusion market in
the United States continues to be highly fragmented, although some
consolidation has taken place during the last two years. Due to logistics,
higher transportation costs and the need for generally rapid response to
custom orders, imports have not, and the Company believes are not likely to
be, a significant factor in the U.S. market. The exception would be in the
states on the geographical borders of the United States, where extrusions
produced in Canada or Mexico can be a competitive factor.
The Company believes that the markets for extruder-provided finishing and
fabrication will grow faster than the extrusion market as a whole, as
extrusion users out-source more value added operations. The Company believes
that, with its regional network of plants and its production capabilities, it
is well-positioned to respond to changes in the aluminum extrusion
marketplace.
COMPANY STRENGTHS
VALUE ADDED FINISHING AND FABRICATION. The Company provides a wide variety
of value added finishing and fabrication services, including painting,
anodizing, bending, cutting, milling, welding and assembly. Approximately 58%
of the Company's gross sales in 1996 included some degree of value added
processing, which provided Wells with a higher profit margin than the profit
margin for mill finished extrusions. The Company's ability to provide
finished components that are ready to be included in a customer's
manufacturing process enables the Company to better satisfy the needs of, and
expand its business with, existing customers as well as to attract additional
customers. In addition, the Company has broad expertise in product and die
engineering, enabling the Company to assist customers in utilizing extrusions
or fabricated components and assemblies and in creating complex extrusions to
replace several separate parts. For example, the Company has provided
engineering analysis as part of the redesign of an industrial vehicle
suspension, has assisted with the redesign of a boat deck in order to reduce
both the number of separate parts and customer assembly time, and is
collaborating with a manufacturer of light weight boat trailers on its
conversion from steel to aluminum.
LONG-TERM RELATIONSHIPS WITH DIVERSE CUSTOMER BASE. Over 66% of the
Company's sales in pounds in 1996 were made to customers that have been Wells
customers for over 10 years. Such strong relationships may decrease the
Company's exposure to volume reductions that may occur in a recession since
customers may be more likely to reduce volume from their less favored
suppliers. The Company's customers operate in many industries, including
building and construction, transportation, and consumer durables, and in a
broad range of markets within each industry. The diversity of its customer
base provides a foundation of experience on which the Company can build in
order to expand into new markets. For example, a fabrication technique
(coining) developed by the Company for the high-end office furniture market
has also found application with customers manufacturing pleasure boats,
increasing the Company's business in that segment. In addition, the Company's
familiarity with the quality, documentation and scheduling disciplines of
truck and automotive customers has facilitated entry into other industrial
markets.
REPUTATION FOR QUALITY PRODUCTS AND SERVICE. A 1995 survey of a broad
range of extrusion purchasers commissioned by the Company confirmed the
Company's reputation as a high quality extruder. For each of the past five
years, less than one percent of the Company's products have been rejected or
returned by customers. The Company believes that as a result of its ability
to provide a high level of service and quality
40
products at competitive prices, the Company is typically its customers' first
or second choice to provide aluminum extruded products. The quality of the
Company's products plays a key role in customer growth, retention and
recapture. For example, the Company has recaptured the business of a major
truck trailer manufacturer, which had switched to a lower priced supplier,
despite the fact that Company's prices are higher than those offered by the
other supplier. The Company has just become the sole supplier for a customer
producing pleasure boats after committing to a "zero defect" program and
fulfilling this program in three months. A customer in the storm door market
has indicated that the Company's defect rate is 80% less than that of its
competitors.
STRATEGIC NETWORK OF FACILITIES. The Company's seven plants in the
Southeast and Midwest are located near most of the Company's customers, which
minimizes transportation costs and helps generate collaborative relationships
between key Wells and customer personnel. The Company's ability to shift
production among its plants allows Wells to more efficiently meet the
requirements of its customers. The existence of a core fabrication capability
at or adjacent to each extrusion plant and of painting and anodizing
capabilities at several locations within the Company's network provides an
advantageous mix of services for customers in the most cost effective manner.
Because of this network of plants, the Company is well positioned to take
advantage of the current industrial trends of outsourcing and just-in-time
inventory management. For example, Wells is providing daily shipments of
extrusions to a major manufacturer of golf carts and utility vehicles so that
such customer can keep its inventory at a minimum yet support its
manufacturing requirements. The Company is also providing daily shipments of
components and assembled parts to a major truck manufacturer to coordinate
with and satisfy its daily assembly line requirements.
EFFECTIVE MANAGEMENT OF ALUMINUM PRICE FLUCTUATIONS. For the years 1994
through 1996, approximately 60% of the Company's cost of sales reflect the
cost of aluminum, its principal raw material. The Company focuses on
recovering the cost of aluminum in the sales price charged to its customers
in order to maintain profit margins. This is accomplished either by passing
cost increases through to customers by systematic market indexed sales
pricing or by fixing the cost of metal by hedging against committed fixed
price sales. The Company, however, does not engage in speculative hedging. In
addition, the Company maintains its inventory at levels consistent with its
operating needs (35 days on hand) through centralized purchasing and
logistics. The market price of aluminum was extremely volatile over the three
year period ending December 31, 1996, while the Company's Adjusted EBITDA
(which excludes any LIFO adjustments (see note (c) to the Summary Historical
Financial Data)) remained relatively stable despite such price fluctuations,
due to the Company's effective pricing management.
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy which includes the following
principal elements:
ENHANCE LONG-TERM CUSTOMER RELATIONSHIPS. The Company is committed to
enhancing its relationships with its customers by tailoring its business
approaches and systems to specific customer needs in order to improve quality
performance. To that end, the Company utilizes a sales organization comprised
primarily of Company-employed representatives having broad extrusion
experience. Their responsibility is to create effective account development
strategies and to orchestrate the Company's manufacturing, engineering and
management resources to better serve the Company's long-term customers. To
expand its customer relationships beyond the traditional sales/purchasing
function, the Company has recently created sales/engineering/manufacturing
teams to address more substantive issues with its customers. For example, the
Company has begun a program with one customer to create linked ordering and
inventory management systems in order to better support that customer's
growth. The Company has also set up focus groups to improve the shop-floor
operations of a customer and is working with another customer to overhaul its
order-through-billing process. In addition, the Company reserves
manufacturing capacity across its plant network to retain and increase
business from long-term accounts.
INCREASE VALUE ADDED CONTENT. The Company can generate higher profit
margins and differentiate itself from its competitors by increasing the value
added content of its extrusions. On a per pound basis, for example, the
painting of a mill finished extrusion can increase the plant margin by 100%;
fabrication
41
of a mill finished extrusion can increase the plant margin by 200-800%,
depending upon the complexity of the process. Customers have an incentive to
purchase more value added products because the use of such products reduces
the number of vendors needed and order lead times, and reduces operating
costs and overhead by outsourcing internal operations. Over 88% of extrusion
purchasers included in a survey commissioned by the Company in 1995 indicated
a need for finished and fabricated extrusions. The Company is well-positioned
to satisfy increased demand for value added services due to its wide spectrum
of finishing and fabrication capabilities, its diverse manufacturing
experience throughout its plant network, and its strong technical service
capabilities.
TARGET NEW APPLICATIONS AND MARKETS. The Company also strives to grow its
business by developing new opportunities for aluminum extrusion and
fabrication. The Company seeks out applications with multi-year life cycles
in markets where the use of aluminum enhances performance due to its light
weight, resistance to corrosion and cost advantages, capitalizing on its
detailed knowledge of design requirements and objectives within specific
industries. Over the past five years, the Company has built significant
volumes in such market niches as school bus windows, where the Company
estimates that it commands an 80% share of the market; high-end office
furniture, where the Company is a valued supplier to four of the leading
office furniture manufacturers; and industrial fixturing-guarding systems,
where the Company serves the three leading suppliers in the market.
IMPLEMENT STRATEGIC CAPITAL INVESTMENTS. The Company's capital
expenditures strategy, pursuant to which the Company is planning to spend
approximately $2.0 million in 1997 and $3.5 million annually thereafter
through 2002, is to expand capacity, improve productivity and increase value
added capabilities principally by upgrading its equipment rather than
purchasing new equipment. The Company expects that these investments will be
financed by excess cash flow from operations. The Company plans to upgrade
and modernize two extrusion presses each year for the next five years, which
is expected to increase extrusion capacity by 10% per press. In addition, the
Company plans to upgrade and modernize certain equipment at its casting
facility, which will expand capacity by 5% and improve the quality of billet
cast, and also to expand capabilities in its fabrication facilities. During
the last two years, the Company has successfully increased its casting
capacity by 15% and the capacities of two of its extrusion presses by an
average of 11% without the acquisition of new equipment.
PRODUCTS AND SERVICES
For the years 1994 through 1996, over 92% of the products sold by the
Company were designed and manufactured according to individual customer
specifications. Such products include door and window components for both new
construction and the replacement market, commercial entrance doors, patio
doors, heat sinks, school bus windows, and components for truck cabs, truck
trailers, home and office furniture, lighting fixtures, delivery vans,
architectural specialties, recreational vehicles, golf carts, pleasure boats,
and automotive accessories. The Company believes that the large share of
customized products sold by the Company can be attributed to the Company's
product quality, high level of customer service, the coordination between its
sales force and engineering staff at each plant, its engineering design
capabilities and its extensive extrusion, finishing and fabrication
capabilities. Over 91% of the Company's approximately 30,000 extrusion dies,
which are located throughout the Company's network of plants, are
customer-specific and are used to produce custom-designed extrusions. The
Company has the capability to cut, bend, punch, mill, weld, paint, and
anodize a wide array of aluminum shapes in sizes as small as 1/2 inch or as
large as 11 inches in diameter. Moreover, the Company can supply quality
products and services on a local or regional basis, which provides a
competitive advantage in meeting the needs of customers with multiple plant
locations.
42
CUSTOMER DISTRIBUTION (POUNDS SOLD)
1992 1993 1994 1995 1996
------------------- ------------------- ------------------- ------------------- ------------------
POUNDS % POUNDS % POUNDS % POUNDS % POUNDS %
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------
(POUNDS IN THOUSANDS)
Building/Construction:
Commercial ........... 26,450 22.3% 27,514 22.4% 27,621 18.5% 27,223 19.8% 30,020 21.7%
Residential .......... 30,210 25.5 33,251 27.0 38,730 26.0 32,958 23.9 38,063 27.5
Transportation ........ 32,998 27.9 32,940 26.8 39,413 26.5 40,178 29.2 27,514 19.9
Consumer Durables .... 11,243 9.5 10,580 8.6 13,269 8.9 12,655 9.2 15,820 11.4
Equipment/Electrical .. 6,133 5.2 7,349 6.0 9,562 6.4 10,074 7.3 11,269 8.1
Distributors/Other ... 11,318 9.6 11,435 9.2 20,375 13.7 14,691 10.6 15,694 11.4
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------
118,352 100.0% 123,069 100.0% 148,970 100.0% 137,779 100.0% 138,380 100.0%
========= ======== ========= ======== ========= ======== ========= ======== ========= =======
The Company believes that the Company's stable customer base is
attributable, in part, to the status that the Company has attained with many
of its customers. Many aluminum extrusion users attempt to diversify their
supply risk by utilizing multiple extruders. The Company believes that as a
result of the Company's ability to provide a high level of service and
quality products at competitive prices, the Company is typically its
customers' first or second choice to provide aluminum extruded products.
Construction. The Company produces components for residential and
commercial window and door frames, storm doors, vents and louvers, railings,
stadium seating systems, patio enclosures and a variety of architectural
specialties for the residential and commercial construction and replacement
markets. In addition, the Company manufactures and markets a proprietary line
of sliding patio doors and a line of commercial entrance doors and storefront
systems. Extrusions for use in window and door frames constitute the largest
portion of the Company's sales to the construction market, representing over
62% of the Company's building and construction activity and approximately 30%
of the Company's total volume (in pounds sold) in 1996.
Transportation. The Company produces extrusions for truck cabs, commercial
truck trailers, recreational vehicles, utility trailers and automotive
accessories. It also produces a number of complex assemblies, including
complete door frames and structural sub frames for use in Class 8 truck
tractors and complete window assemblies for the school bus and delivery van
markets.
Consumer Durables. Customers in this industry use the Company's extrusions
and assemblies for a wide variety of applications. Manufacturers of high-end
office furniture, golf carts, and pleasure boats are among the major
consumers of the Company's products.
Equipment/Electrical. Companies producing material handling systems, heat
sinks, electrical distribution and bus bar systems, industrial
guarding/fixturing and commercial lighting are examples of the Company's
customers in the Equipment/Electrical segment.
Distributors. These customers resell the aluminum extrusions and
components purchased from the Company to manufacturers, contractors and other
industrial end users. The Company's focus in the distribution market is on
producing application-specific components, which are sold via specialty,
value-added distributors. The Company does not regularly participate in the
stock shape/metal service center portion of the distribution market. Thus,
the Company believes that the end use of products that are purchased from the
Company by distributors and then resold tends to parallel the uses of
customers which the Company serves directly.
In 1996, the Company's top ten customers received approximately 40% of the
Company's shipped volume (in pounds sold), with the top twenty-five customers
accounting for approximately 60%. No single customer accounted for more than
10% of the Company's net sales (in dollars) in 1996.
43
MANUFACTURING PROCESS
The Company's manufacturing processes involve casting, extruding,
finishing, and fabricating aluminum:
Casting. The first step in the casting process is to melt primary aluminum
and aluminum scrap in a large furnace. The liquid aluminum is either directly
alloyed in this furnace or transferred to another furnace where alloying
materials are added. The aluminum is then cast into logs of varying diameters
with lengths of up to 16 feet. Next, these logs are heated and then cooled at
a controlled rate. This allows the cast aluminum to achieve the optimally
distributed chemical composition for extrusion. Afterwards, some logs are cut
into shorter lengths called billets. The cast aluminum is transferred to the
Company's extrusion plants in either log or billet form.
Extrusion. Extrusion is a manufacturing process by which the billet is
heated and pushed by a press, or extruded, through a die to produce a piece
of metal in the shape of the die at a desired length. Almost all of the
Company's dies are designed to produce extrusions according to individual
customer specifications. Extrusions are then straightened by stretching and
cut to the required lengths which range from 8 to 50 feet. Most extrusions
are hardened by aging in large ovens for 6 to 12 hours. During the extrusion
process, aluminum scrap is generated at several stages and is collected and
sent to the Company's casting facilities for recasting into billet; some
scrap is sold to dealers. Typically, 75% of the results of the extrusion
process are salable products; the remaining 25% is aluminum scrap, which is
either recast by the Company or sold on the open market.
Finishing. The Company has extensive finishing capabilities in painting
and anodizing. Two painting and two anodizing facilities cover markets from
the East Coast through the Midwest. This allows the Company to provide its
customers a single source for components ready for processing. Often
additional finishing-related services are provided, including two-tone
painting and taping of painted surfaces for protection during the customer's
manufacturing process. These services enhance the Company's value to its
customers and provide appreciable added income and profit margin. In 1996,
the operating income from painting and anodizing operations (before corporate
expenses) was approximately $4 million.
Fabrication. The Company provides additional services to its customers by
fabricating mill or finished extrusions into components or sub-assemblies
ready to be incorporated into the customer's end products. A variety of
fabrication processes, including bending, punching, tight tolerance cutting,
welding, CNC machining, and assembly are employed. The end result may range
from a curved, fully formed trim cap for use on an office partition, to a
step assembly for a truck cab, to a panel van window assembly complete with
glass. The Company's fabrication capabilities are attractive to those
customers interested in outsourcing certain manufacturing in order to better
control operating costs, manage inventory, accommodate growth, or more
sharply focus their own operations. The Company's fabrication services
provide additional opportunities to enhance margins and help protect the
business from market penetration by other competitors. In 1996, fabrication
accounted for $9 million of the Company's operating income (before corporate
expenses).
FACILITIES AND OPERATIONS
Management of the Company is structured to provide strong decentralized
plant operations in combination with certain centralized corporate functions.
Operations management focuses on plant site issues, such as productivity,
operating costs, and labor, that are directly under its control. Corporate
management provides oversight guidance and direction to the plants and has
centralized control over sales, marketing, metal procurement, capital
spending, and information services, which serves to eliminate disparities in
price among the Company's plants serving the same customers, eliminate
unwanted competition and territoriality among plants, and facilitate the
control of inventory.
44
Wells has seven production facilities, which enable the Company to serve
customers effectively in markets in the East, Midwest and Southeast, as
follows:
SITE FACILITIES
-------------------- -----------------------
LOCATION OPERATIONS ACRES OWN/LEASE SQ. FEET OWN/LEASE
- ----------------------- --------------------- ------- ----------- ---------- -----------
Monett, Missouri ....... extrusion, painting, 21.1 Owned 185,000 Owned
casting 0.3 Leased
Cassville, Missouri ... fabrication 9.6 Leased 32,224 Leased
0.5 Owned
North Liberty, Indiana extrusion, anodizing, 48.9 Owned 215,890 Owned
fabrication
Kalamazoo, Michigan ... extrusion, complex 23.3 Owned 132,784 Owned
fabrication
Sidney, Ohio ........... complex fabrication 3.7 Leased 102,400 Leased
4.8 Owned
Belton, South Carolina extrusion, painting, 54.5 Owned 165,000 Owned
fabrication
Moultrie, Georgia ...... extrusion, anodizing, 24.1 Leased 315,352 Leased
fabrication 65.3 Owned
These regional plants allow the Company to service national customers on a
multi-plant basis and decrease the Company's exposure to economic downturns
in specific industries or geographic regions. The Company can also balance
production requirements between plants, which affords more flexibility and
higher utilization. The Company's production facilities are equipped with
well maintained equipment.
Casting. At its Monett location, the Company has two casting furnaces and
ancillary equipment currently capable of producing 170 million pounds of
billet annually. In 1996 the Company produced 162 million pounds of billet,
operating at an average of 24 hours per day, 6 days per week, 50 weeks per
year. The Company believes that operating at this utilization level
significantly reduces the cost of billet produced and reduces working capital
requirements since the steady flow of raw material and billet lowers
inventory requirements at all extrusion facilities.
Extrusion. The Company operates five extrusion plants, which have in the
aggregate twelve extrusion presses.
PRODUCTION CAPACITY
(IN MILLIONS OF POUNDS)
EXTRUSION PLANTS MONETT NORTH LIBERTY KALAMAZOO BELTON MOULTRIE
- ------------------ -------- --------------- ----------- --------- ----------
Extrusion Presses .. 3 3 1 3 2
Size (Tons: Inches) 1675:7 1675:7 2200:8 1675:7 1675:7
1675:7 1800:7 3600:10 2600:8
1800:7 3600:10 2500:8
Capacity (mm lbs) .. 39 39 15 45 24
Capacity utilization by production facility, based on operations of 6.5
days per week, 3 shifts per day, 50 weeks per year, is summarized below.
COMPANY MONETT NORTH LIBERTY KALAMAZOO BELTON MOULTRIE
----------- ---------- --------------- ----------- ---------- ------------
1996 ..... 85% 95% 88% 73% 88% 69%
1995 ..... 85% 85% 92% 87% 87% 69%
1994 ..... 92% 98% 94% 95% 98% 66%
1993 ..... 76% 86% 87% 79% 68% 55%
1992 ..... 73% 80% 86% 77% 70% 43%
45
The Company believes that overall capacity utilization is an imperfect
indicator of the level of business activity, as it does not take into account
the fact that certain extruded shapes can only be produced on certain
presses. For example, in 1996 the decline in the truck trailer market
combined with the Company's strategy of focusing on profitable on-going
accounts resulted in reduced utilization of the Company's 10" presses at the
same time that several of the Company's 7" and 8" presses operated at over
100% capacity.
Finishing. The Company has four finishing facilities. The capabilities of
the Company's finishing facilities, based on operations of 6.5 days per week,
3 shifts per day, 50 weeks per year, are summarized below.
FINISHING CAPABILITIES
MONETT NORTH LIBERTY BELTON MOULTRIE
---------- ----------------- ---------- ------------
Anodizing Line .......... -- 1 -- 1
Capacity (mm sq ft) .... -- 12 -- 18
Paint Line .............. 1 -- 1 --
Capacity (mm lbs) ....... 18 -- 20 --
Fabrication. The Company has six fabrication plants with a combined annual
capacity of 35.2 million pounds. The Kalamazoo and Sidney plants produced
over six million pounds each during 1996. The following table details the
fabrication capabilities at the Company's various locations:
FABRICATION CAPABILITIES
FABRICATION NORTH
COMPLEXITY CAPABILITY DESCRIPTION BELTON CASSVILLE KALAMAZOO MOULTRIE LIBERTY SIDNEY
- --------------- ------------------------------- ---------- ------------- ------------- ------------ ----------- ----------
Tier #3 ........ Welding, high tolerance X X
machining, assembly with sheet
metal components
Tier #2 ........ Milling, automatic sawing and X X X X X X
drilling, assembly,
high capacity punching, bending
Tier #1 ........ Manual sawing and drilling, X X X X X X
light punching, hand deburring
RAW MATERIALS
The Company's principal raw material, aluminum, is subject to extensive
price volatility in the world market. Aluminum is an important part of the
Company's cost structure, representing 65%, 67% and 55% of total production
costs in 1996, 1995 and 1994, respectively.
The material form used in aluminum extrusion is aluminum billet. The
majority of the Company's aluminum billet requirements are supplied by its
own casting facility while a relatively small amount is supplied by outside
producers. In 1996, the Company produced 88% of its aluminum billet
requirements at its Monett facility. The Company's ability to cast a
significant amount of its aluminum billet needs gives it a cost advantage
over non-casters.
The principal materials used in the production of aluminum billet are
aluminum scrap and primary aluminum ingot. Over 64% of the aluminum scrap
required is sourced from the Company's own manufacturing process; the
remainder is purchased from a variety of scrap brokers and dealers. By
reusing its own scrap, the Company is able to reduce its operating costs. The
Company purchases approximately 60-65% of its primary aluminum requirements
from Venalum pursuant to the Venalum Agreement. The Venalum Agreement is
scheduled to expire in December 1997, but may be extended based upon
negotiations between the Company and Venalum. See "Risk Factors -- Sources of
Raw Materials" and "Certain Transactions."
46
The Company seeks to reduce its exposure to the volatility in aluminum
prices either by fixing the cost of metal by hedging against committed fixed
price sales or by passing cost increases through to customers by systematic
market indexed sales pricing. The Company, however, limits its hedging
activities to committed sales and does not engage in speculative hedging. The
Company maintains its inventory at levels consistent with its operating needs
(35 days on hand) through centralized purchasing and logistics. The Company
sells any excess primary aluminum in the open market, closely matching the
cost of metal purchased to the price of such metal sold.
The Company's ability to manage its raw material costs is reflected by the
change in its spread, the difference between gross sales price per pound and
aluminum cost per pound. The Company's spread has improved from $0.723 cents
in 1992 to $0.819 cents in 1996, or 3.2% percent per annum. This improvement
can be attributed to the Company's sales price discipline, effective aluminum
purchasing, billet casting productivity and risk management (hedging)
activities.
CAPITAL IMPROVEMENTS
Capital expenditures for the years 1992-1996 totaled $7.7 million or an
average of $1.5 million per year. Beginning in 1992, the Company's capital
investment program was focused primarily on cost reductions and the
maintenance of existing facilities and equipment. The Company also made
investments during that time to upgrade its fabrication and anodizing
capabilities. Since the middle of 1995, the Company has focused its capital
investment on technology and productivity improvements in extrusion and
casting that support the Company's market initiatives. These investments
generally have expected payback periods of less than 18 months and have
increased capacity without requiring the acquisition of major new equipment.
The Company has made extensive investments in automated, centralized
information systems with all facilities on-line on a real time basis. The
capabilities include automated order entry and pricing, automated die
selection and billet requirements planning, automated production scheduling
and detailed job costing.
The Company plans to make capital expenditures of approximately $2.0
million in 1997 and $3.5 million annually thereafter through 2002. The
Company expects to spend less than 25% of its capital budget on maintenance
of facilities and equipment in 1997. The Company intends to continue to
expand capacity by upgrading its equipment rather than purchasing expensive
new equipment. During the last two years, the Company has successfully
increased its casting capacity by 15% and the capacities of two of its
extrusion presses by an average of 11% without the acquisition of major new
equipment. The Company believes that by upgrading its extrusion presses, the
Company receives 90% of the productivity benefits realized from replacing
equipment but makes only 50% of the capital investment required. Over the
next five years, the Company plans to update and modernize two extrusion
presses each year, increasing extrusion capacity by 10% per press and
reducing scrap generated in the process by 1.5%. The Company plans to upgrade
and modernize the homogenizing ovens at its casting facility which will
expand capacity by 5% and improve the metallurgical properties of the billet
cast. Improved billet quality will improve productivity and reduce the
quantity of scrap generated in the extrusion process. The Company estimates
that the casting improvements will reduce its operating costs by $0.5 million
annually. The Company is also investing in advanced computerized isothermal
extrusion control equipment. The Company estimates that this technology
improvement can increase capacity by 11% and increase operating margins by
$0.2 million per year. The Company believes that, if this technology is
implemented, it will be the first U.S. extruder utilizing advanced isothermal
extrusion control equipment. The Company also plans to spend $0.7 million in
1997 to improve its fabrication capabilities and quality.
SALES AND MARKETING
The Company's sales and marketing activities are directed by a Senior Vice
President, Sales and Marketing at the corporate headquarters. This executive
works with the Vice President, Sales to develop and implement customer
strategies, maintain pricing disciplines, and direct the Company's extrusion
sales force. All extrusion pricing is centrally managed and administered by
the Vice President, Sales. In
47
addition, the central Sales and Marketing organization directs the Company's
market research, promotional materials and activities, and product/market
development activities.
Two regional sales managers, located in the Southeast and Midwest, have
day-to-day responsibility for directing the extrusion sales force and
implementing agreed-to market and customer strategies. With the Company's
sales force, they orchestrate the Company's manufacturing, engineering and
management resources to improve the Company's profitability. While reporting
to the Vice President, Sales, they work hand-in-hand with the operations
managers of each plant to coordinate customer service and tailor their sales
activities to meet the business needs of the plants. This arrangement allows
local sales and operations personnel to react quickly to changing market
conditions, while facilitating a uniform approach to the market and the
reassignment of production requirements among plants when warranted to
maintain customer service or plant utilization. The Company employs 12 direct
sales persons and utilizes 10 independent manufacturers' representatives for
its extrusion and fabrication businesses; the Company also utilizes a number
of specialty representatives for its patio door and commercial entrance door
business. Compensation for the direct sales force is comprised of salary plus
performance-based bonuses.
The Company's two door product lines, residential patio doors and
commercial entrance systems, are led by product managers with extensive
experience in their respective end markets, reporting to the Senior Vice
President, Sales and Marketing. The Company is moving to expand the product
manager concept to create additional centers of expertise relative to
important end-use markets.
In order to provide additional focus on fabrication opportunities, a
General Manager, Fabrication is responsible for both fabrication and sales.
Two Kalamazoo-based product managers lead the Company's efforts to develop
fabrication business in the truck and office furniture markets, as well as
pursue other fabrication opportunities. In addition, the regional extrusion
sales force actively solicits fabrication business from their established
customer base. The Senior Vice President, Sales and Marketing, Vice
President, Sales and General Manager, Fabrication regularly collaborate on
marketing programs, account strategies and pricing.
The Company has begun implementing a program to upgrade its regional sales
organization. Key elements include increasing the responsibility of sales
managers and representatives for account strategy development and
forecasting, providing easy access to the Company's central data bases via
laptops, adding additional employed sales representatives, and tieing sales
manager compensation to account profitability.
Pricing and Hedging Program
The Company offers its customers three basic pricing alternatives: forward
sales contracts, formula pricing and market pricing. These alternatives can
be tailored to meet a customer's specific market and risk management
requirements.
Forward sales contracts, which accounted for approximately 33% of total
pounds sold by the Company in 1996, are "take or pay" agreements negotiated
with long-standing customers. These contracts fix the sales price at which
the Company agrees to sell and the customer agrees to purchase a specified
quantity of aluminum extrusions in the future. These contracts typically
cover a substantial portion of the customer's contract requirements for a
three to six month period. The fixed sales price is based on the price at
which aluminum can be hedged for future delivery plus a conversion spread to
cover operating costs and provide a profit margin.
The Company also offers a formula pricing mechanism, which adjusts pricing
monthly based on aluminum price movements, to long-standing customers
(approximately 45% of pounds sold in 1996). Monthly price changes are based
on the previous month's MWTP plus a negotiated mark-up covering conversion
costs and profit margin. Formula pricing allows the Company to stay current
with the aluminum market, balancing upward and downward movements on a
monthly basis.
The Company also quotes individual orders opportunistically, based on the
MWTP in the previous month, for its remaining open market accounts. Margins
on such market accounts are generally significantly higher than on forward
sales contracts or formula accounts, due to the reduced leverage held
48
by these typically smaller customers. In addition, the Company's exposure to
aluminum price movements is nominal since such orders are based on 30 day
delivery, enabling the Company to monitor its metal cost.
Fabricated components, including the Company's patio and commercial
entrance door product lines, are typically priced quarterly utilizing a
formula mechanism based on the previous quarter's average metal cost.
Aluminum costs are generally a less significant component of such product
costs, which typically include purchased parts and substantial fabrication
and assembly labor. However, pricing is tightly controlled via a quote
process during which outside components quotes and internal costs are
established and appropriate burden rates and target margins are then added.
The quarterly metal price adjustments allow for a "natural" hedge in the
first month, which minimizes the risk of changes in metal prices. In certain
cases, the Company will enter into aluminum futures contracts to hedge
against price volatility in the second and third months based on expected
purchases, although this hedge has certain risks because customers are not
bound to purchase fixed volume.
The Company takes forward positions in the aluminum market, but only when
supported by forward sales contracts or by firm orders for fabricated goods.
The Company does not engage in speculative hedging activities.
Customer Service
The Company seeks to provide high quality customer service for the markets
it serves by capitalizing on its manufacturing flexibility, technical
expertise and marketing experience. The Company believes that its strategic
network of facilities and the integration among manufacturing, marketing and
sales provide it with a competitive advantage by allowing it to respond
quickly to customer demands. Customer service organizations are located at
each of the Company's plants, reporting to the operations manager, in order
to ensure sensitivity and facilitate quick response to customer needs and
inquiries. Customer service representatives are responsible for order entry
and routinely initiate day-to-day contact with long-standing customers, in
coordination with the field sales force. The Company believes that this
close, local contact between experienced customer service personnel and its
established customers is a critical factor in maintaining strong customer
relationships.
COMPETITION
The aluminum extrusion market is highly competitive. Competitors include
the extrusion units of primary aluminum producers, sizeable multi-plant
independent extruders, small local operators, and Mexican and Canadian
exporters. Competition is generally based upon price, delivery time, quality,
service, and specialty engineering/design/production capabilities. Market
data indicates that in 1996, the top 10 companies in the aluminum extrusion
market (including the Company) supplied 80-85% of the market. The Company
estimates its market share at 4%.
The Company believes that overall market share has only a modest influence
on new business and profit performance. Instead, the Company believes that
competition is regionally oriented and that aluminum extrusion end users are
typically looking for "local" plants with a strong focus on customer service
and a reputation for fair product pricing. A regional network of plants is
also important to large end users in order to meet the needs of their
multi-plant locations and to ensure continuity of sourcing.
Primary Aluminum Producers. The Company believes that initially, primary
aluminum producers dominated the extrusion market because of the economics of
vertical integration. The advent of a worldwide commodity market for primary
aluminum in the 1970's and the increased use of scrap in the production of
aluminum billet has virtually eliminated that advantage. However, the
extrusion units of primary aluminum producers, such as Kaiser Aluminum
Corporation, Aluminum Company of America Inc. ("Alcoa"), Reynolds Metals
Company, and Alumax, Inc., remain significant competitors in certain
geographic and industry markets.
Multi-Plant Independents. The Company believes that independent regional
extruders with their multi-plant operations achieved success once primary
aluminum and aluminum scrap became readily available at competitive prices.
This competitive structure allowed for the advantages of central
49
purchasing leverage on a system-wide basis, while retaining an
entrepreneurial character at each facility. Regional extruders can react
quickly to changing markets and compete effectively by providing a high level
of service and by reducing transportation costs. The Company believes that
extruders with a network of plants will continue to be significant factors in
the aluminum extrusion market. Key regional competitors, including the
decentralized operations of primary aluminum producers, are Alumax/ Cressona,
Aluminum Shapes, Inc., Easco, Inc., William L. Bonnell Company, Inc. and
V.A.W. of America, Inc.
Smaller Local Operators. Wells also faces competition from small extruders
typically involving one location and one or two extrusion presses. These
extruders are able to compete because of low labor costs, minimal
administrative costs and proximity to customers. These competitors include
Elixir Industries (Indiana), Western Extrusions Corp. (Texas), Jordon Company
(Tennessee) and Astro Shapes, Inc. (Ohio).
Importers. Canadian and Mexican producers also provide competition for
customers located adjacent to the geographical borders of such countries.
Often such companies will reach further into the United States, competing on
an opportunistic pricing basis in order to fill their presses. Such
competitors include Cuprum S.A. de C.V. (Mexico), Exal Aluminum Inc. (Canada)
and Caradon Indalex, a division of Caradon Ltd. (Canada).
Generally, for a specific customer, the Company competes most frequently
with extruders operating plants in the Company's regions. Because not all
extruders cover all markets, the Company competes most frequently with Easco,
Inc., William L. Bonnell Company, Inc., Alumax/Cressona, and a few small
local operators.
Substitution. In recent years, vinyl, with its penetration of the
residential window and door market, has been the most commonly used
substitute for aluminum extrusions. Vinyl window shipments have grown 93%
since 1989 to surpass aluminum window products, which have decreased by 31%
in volume over the same time period. Each such material appears to have found
its niche, with vinyl most often used in the mid to high end residential
lines where cost is less important than thermal characteristics. The Company
does relatively little business in this market. In areas where the Company
does significant business, such as window components for the modular and
mobile home market, which represented approximately 20% of pounds sold by the
Company in 1996, vinyl is not a good substitute due to cost and strength
limitations. Industry forecasts indicate that the movement away from aluminum
has slowed and that aluminum should essentially maintain its unit volumes
(though not its market share) in the window and door market through the end
of the 1990s. Rolled steel may be another substitute for aluminum when
aluminum costs rise to such an extent that rolled steel becomes a viable
economic alternative for certain manufacturing requirements. The Company
believes that when the price of aluminum rises to 95 cents per pound or more,
rolled steel poses a substantial substitution risk for aluminum extrusions in
certain markets. However, the Company estimates its participation in markets
which may utilize rolled steel as a replacement to be approximately 2% of
pounds sold by the Company in 1996. See "Risk Factors -- Competition."
ENVIRONMENTAL MATTERS
The Company is subject to extensive and evolving environmental laws and
regulations that have been enacted in response to technological advances and
increased concern over environmental issues. These regulations are
administered by the United States Environmental Protection Agency and various
other federal, state and local environmental, transportation, and health and
safety agencies. The Company believes that, over time, there will continue to
be increased regulation, legislation and regulatory enforcement actions.
In order to operate its business, the Company must obtain and maintain in
effect one or more permits for each of its facilities and comply with complex
rules governing air emissions, waste water discharges, the use, storage,
treatment and disposal of solid and hazardous wastes and other items which
might affect environmental quality. As a result, the Company from time to
time is required to make expenditures for pollution control equipment or for
other purposes related to its permits and compliance.
50
Among the laws that may affect the Company are CERCLA and analogous state
laws that impose joint and several liability, without regard to fault, on
persons that own or operate locations where there has been, or is threatened
to be, a release of any hazardous substances into the environment, as well as
persons who arranged for the disposal of such substances at such locations.
Such persons may become liable for the costs of investigating and remediating
such substances. There are often also substantial legal and administrative
expenses incurred in dealing with remediation claims and activities.
The Company has been notified by either the United States Environmental
Protection Agency or other persons that it is considered to be a "potentially
responsible party" for the costs of investigating and remediating hazardous
substances at several locations owned and operated by third persons. At each
such location, the Company understands that it is one of many "potentially
responsible parties." The Company believes that the volume of hazardous
substances, if any, for which it may be held responsible at each such
location is not significant. While the Company believes that it may have
valid defenses to liability claims at these locations, it has been settling
such claims where an opportunity to do so is presented at a cost which
probably would not exceed the expenses of asserting such defenses through
available administrative and judicial processes. The Company believes that
none of these contingencies, individually or in the aggregate, could have a
material adverse impact on the Company's operations or financial condition.
Certain of the Company's manufacturing facilities have been in operation
for several decades and, over such time, these facilities have used
substances and generated and disposed of wastes which are or may be
considered hazardous. For example, certain of these facilities have in the
past stored or disposed of wastewater treatment sludge in on-site ponds,
lagoons or other surface impoundments. Although the Company believes that
these facilities are in substantial compliance with current environmental
laws and regulations applicable to such storage and disposal activities, it
is possible that additional environmental issues and related matters may
arise relating to such past activities which could require additional
expenditures by the Company.
BACKLOG
Extrusion turnaround time is generally sufficiently short so as to permit
the Company to fill orders for most of its products in a short time period.
Accordingly, the Company does not consider backlog to be material to its
business.
EMPLOYEES
As of June 29, 1997, the Company had approximately 1,400 full-time
employees, 772 of whom are covered by collective bargaining agreements. The
Company's collective bargaining agreements are as follows:
PLANT UNION EXPIRATION OF CONTRACT
- ------- ----- ----------------------
Kalamazoo, Michigan ........ United Steelworkers of America, 1/14/00
Local 6265
Moultrie, Georgia .......... United Steelworkers of America, 2/26/99
Local 7834
North Liberty, Indiana .... International Union of United 2/20/98
Automobile, Aerospace and
Agricultural Implement Workers
of America, Local 194
Monett/Cassville, Missouri International Brotherhood of 11/8/99
Teamsters, Local 823
The Company believes that its relationship with its employees is
satisfactory. The Company has not experienced any union activities resulting
in work slowdowns or work stoppages during the past five years.
PROPERTY
In addition to the facilities and properties described above under
"--Facilities and Operations," the Company leases its corporate headquarters
in Baltimore, Maryland. Pursuant to such lease, the Company leases
approximately 10,751 square feet until August 31, 1999.
51
PATENTS
Although the Company owns certain patents, the Company does not believe
that its business is dependent on its intellectual property rights.
LEGAL PROCEEDINGS
From time to time, the Company is a party to legal actions in the normal
course of its business. The Company is not currently involved in any legal
proceedings that it believes would have a material adverse effect upon its
financial condition or results of operations.
TAX RETURNS
The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's federal income tax returns for its fiscal years
ended 1994 and 1995. Thus far, no significant issues have been raised by the
IRS.
52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a table setting forth certain information with respect to
the individuals who are the directors and executive officers of the Company.
NAME AGE POSITION
- ------ ----- --------
Russell W. Kupiec ...... 50 President, Chief Executive Officer and Director
W. Russell Asher ....... 55 Senior Vice President, Chief Financial Officer and
Director
Lynn F. Brown .......... 52 Senior Vice President, Sales and Marketing, and Director
Leo A. McCafferty ...... 60 Vice President, Operations
William J. Milam ....... 57 Vice President, Sales and Product Management
David J. Raymonda ...... 40 Controller, Treasurer and Secretary
Hector Alvarez ......... 45 Director
Elizabeth Varley Camp . 39 Director
Elena de Costas......... 44 Director
Todd Goodwin ........... 66 Director
Edward R. Heiser ....... 62 Director
Lewis W. van Amerongen 57 Director
Pursuant to an agreement among the Company and certain of its
stockholders, Venalum has the right to nominate two directors to the Board of
Directors. Mr. Alvarez and Ms. de Costas have been nominated by Venalum. See
"Certain Transactions."
Each director of the Company holds office until the next annual meeting of
stockholders of the Company or until his or her successor has been elected
and qualified. Officers of the Company are elected by the Board of Directors
and serve at the discretion of the Board of Directors.
RUSSELL W. KUPIEC joined the Company in 1991. Mr. Kupiec has been
President and Chief Executive Officer since April 1996. From March 1995 to
April 1996, he served as Chief Operating Officer. From November 1991 to March
1995, he served as Vice President, Manufacturing of the Company. From April
1991 to November 1991, he served as Vice President, Administration of the
Company. Mr. Kupiec has been a director of the Company since 1991.
W. RUSSELL ASHER, a certified public accountant, joined the Company in
January 1994 and has been Chief Financial Officer since that time. From
December 1991 to January 1994, he served as the Chief Financial Officer of
the Federal Emergency Management Agency. Prior thereto, Mr. Asher was Vice
President Finance of MB America Inc., a packaging and printing business, and
President and General Manager of AmeriForms Inc., a printing company which
was a subsidiary of MB America Inc. Mr. Asher has been a director of the
Company since 1994.
LYNN F. BROWN joined the Company in January 1996 and has been Senior Vice
President, Sales and Marketing since that time. From December 1994 to January
1996, he served as Executive Vice President, Sales and Marketing of Terra
Green Technologies, a start-up company in the ceramics industry. From July
1986 to December 1994, Mr. Brown was Business Manager of International
Paper's Fountainhead Products Group. Mr. Brown has been a director of the
Company since June 1997.
LEO A. MCCAFFERTY joined the Company in October 1995. Mr. McCafferty has
been Vice President, Operations since July 1996. From October 1995 to July
1996, he served as Vice President, Manufacturing. From May 1993 to October
1995, Mr. McCafferty was president of Solutions Et Al, a consulting company
engaged in strategic planning and operations control. From 1986 to May 1993,
he was president of PEMS Service and Repair, a company engaged in ground
water treatment and control. He has also held vice president and general
manager positions at Black & Decker Corporation, where he was employed for
twenty years.
53
WILLIAM J. MILAM joined the Company in 1971. Mr. Milam has been Vice
President, Sales and Product Management since 1991. Prior thereto, Mr. Milam
held various regional sales management positions.
DAVID J. RAYMONDA joined the Company in September 1982. Mr. Raymonda has
been Controller and Secretary of the Company since February 1989 and
Treasurer since September 1993.
HECTOR ALVAREZ is the Executive Vice President of Venalum and CVG
Bauxilum, C.A., two aluminum producers in Venezuela. Over the past 16 years,
Mr. Alvarez has held various senior management positions in the production
team at Venalum. He has served as a director of the Company since December
1996.
ELIZABETH VARLEY CAMP joined GGvA in 1986 and was a partner of GGvA from
1992 until July 1997. She has been a Vice President at Goldman, Sachs & Co.
since August 1997. She has served as a director of the Company since July
1987.
ELENA DE COSTAS has been the Vice President of Finance and Administration
of Venalum since 1995. From 1994 to 1995, she served as Manager of Finance
and Administration of Venalum. She has served as a director of the Company
since August 1997.
TODD GOODWIN has been a partner of GGvA since 1984 and has served as a
director of the Company since July 1987. He is a director of Schult Homes
Corporation, The Rival Company, Inc., Johns Manville Corporation and U.S.
Energy Systems, Inc.
EDWARD R. HEISER has served as director of the Company since 1991. Mr.
Heiser retired as President and Chief Executive Officer of the Company in
April 1996, a position which he had held since 1991.
LEWIS W. VAN AMERONGEN has been a partner of GGvA since 1970 and has
served as a director of the Company since July 1987. He is also a director of
Agrifos L.L.C. and Erickson Air-Cranes Co., LLC, two privately held
companies.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or
deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers during fiscal 1996 (collectively, the
"Named Officers") for services rendered in all capacities to the Company
during such fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- --------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#)
- --------------------------- --------- --------- --------------
Russell W. Kupiec
President and Chief
Executive Officer 187,500 175,000 1,300
W. Russell Asher
Senior Vice President and
Chief Financial Officer 130,000 110,000 1,000
Lynn F. Brown
Senior Vice President,
Sales and Marketing 130,000 50,000 500
William J. Milam
Vice President, Sales and
Product Management 106,562 25,000 --
Leo A. McCafferty
Vice President, Operations 87,500 65,000 --
54
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table provides information on grants of options made during
fiscal 1996 to the Named Officers.
OPTION GRANTS IN FISCAL 1996
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE(A) VALUE(B)
- ------------------ ------------ -------------- ----------- --------------- ------------
Russell W. Kupiec 1,300 18.6% $10.00 March 3, 2003 $61,555
W. Russell Asher . 1,000 14.3% $10.00 March 3, 2003 $47,350
Lynn F. Brown...... 500 7.1% $10.00 March 3, 2003 $23,675
- ------------
(a) The terms of the stock options granted in fiscal 1996 provided that 50%
of such options vested immediately and 25% of such options vested in
December 1996. Upon consummation of the Recapitalization, 100% of these
options will be fully vested.
(b) The Grant Date Value was determined using the enterprise value of the
Company, based upon third party offers to acquire the Company less the
amount of indebtedness outstanding at December 31, 1995 (including
accrued interest).
The following table provides information on the valuation of options held
by the Named Officers. None of the options held by the Named Officers was
exercised during fiscal 1996.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
-------------------------- --------------------------
NAME EXECISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------------------- --------------------------
Russell W. Kupiec .. 8,850/2,950 $619,500/$206,500
W. Russell Asher ... 5,250/1,750 $367,500/$122,500
Lynn F. Brown ...... 375/ 125 $ 26,250/$ 8,750
William J. Milam ... 4,500/1,500 $315,000/$105,000
Leo A. McCafferty .. -- --
PENSION BENEFITS
The following table shows the estimated annual retirement benefits payable
under the Company's pension plan to participating employees, including the
Named Officers, in the remuneration and years of service classifications
indicated. The Company maintains a tax-qualified defined benefit plan, which
covers most officers and salaried employees on a non-contributory basis. The
following table reflects benefits payable under the plan:
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------
REMUNERATION 10 15 20
- -------------- --------- --------- ---------
$100,000 ...... $15,360 $23,040 $30,720
$125,000 ...... $19,200 $28,800 $38,400
$150,000 ...... $23,040 $34,560 $46,080
$175,000 ...... $24,576 $36,864 $49,152
$200,000 ...... $24,576 $36,864 $49,152
(RESTUBBED TABLE CONTINUED FROM ABOVE)
YEARS OF SERVICE
------------------------------
REMUNERATION 25 30 35
- -------------- --------- --------- ---------
$100,000 ...... $38,400 $46,080 $53,760
$125,000 ...... $48,000 $57,600 $67,200
$150,000 ...... $57,600 $69,120 $80,640
$175,000 ...... $61,440 $73,728 $86,016
$200,000 ...... $61,440 $73,728 $86,016
Compensation used under the plan in calculating the annual normal
retirement benefit amounts reflected in the Pension Plan Table is the current
annual base salary. The normal retirement age for pension plan purposes is
age 65.
55
The respective years of service credited for pension purposes as of
December 31, 1996, and the estimated years of service at age 65 for each of
the Named Officers are as follows:
YEARS OF SERVICE YEARS OF SERVICE AT
AT DECEMBER 31, 1996 NORMAL RETIREMENT
-------------------- -------------------
Russell W. Kupiec . 5.76 21.31
W. Russell Asher . 3.00 13.60
Lynn F. Brown ..... 1.00 14.23
William J. Milam . 25.53 33.84
Leo A. McCafferty . 1.21 6.56
The Pension Plan Table reflects the annual benefit payable commencing on
the participant's 65th birthday in the form of an annuity for the
participant's life. The benefits reflected in the Pension Plan Table will be
offset by .486% of the participant's Covered Compensation, as defined by the
Internal Revenue Service, and any prior plan benefits.
EMPLOYMENT AGREEMENTS
Each of the Named Officers has an employment agreement with the Company.
Among other things, each agreement provides for a term of employment in a
specified executive position, a specified annual base salary and
participation in any additional incentive compensation or bonus programs of
the Company. The employment agreements with Messrs. Kupiec and Asher continue
until December 31, 1999 and annually thereafter unless otherwise terminated.
If either Mr. Kupiec or Mr. Asher is terminated other than for cause or
disability, the Company is obligated to continue paying the base salary
amount through the end of the contract term, subject to an offset for
earnings from other full-time employment, and to maintain benefits for such
executive through the end of the contract term. If certain Change in
Ownership (as defined in such agreements) events occur during the term of
these agreements, the term of employment is automatically extended for three
years from the date the executive is notified of the Change in Ownership. In
the event of a Change in Ownership, the executive is given the right to
terminate his agreement if he is dissatisfied with his salary and performance
review to be given approximately 18 months after the Change in Ownership. If,
after a Change in Ownership, the executive terminates his employment due to
such dissatisfaction or is discharged other than for cause or disability, the
Company's obligation to continue paying his base salary through the end of
the contract term is not subject to any offset and the Company is obligated
to maintain benefits for such executive through the end of the contract term.
The employment agreements with Messrs. Brown, Milam and McCafferty
continue until December 31, 1997, December 31, 1998, and December 31, 1997,
respectively, which are subject to automatic one year, two year, and one year
extensions, respectively, if certain Change in Ownership events occur. If any
of such executives is terminated other than for cause or disability, the
Company is obligated to continue paying the base salary amount through the
end of the contract term, subject to an offset for earnings from other
full-time employment, and to maintain benefits for such executive for six
months after such termination.
STOCK OPTION PLAN
In June 1997 the Company adopted the 1997 Stock Incentive Plan (the
"Plan") pursuant to which officers, directors and key employees of the
Company will be granted stock options to purchase shares of Common Stock. The
Plan is administered by either the Stock Option Committee (the "Committee")
of the Board of Directors or the Board of Directors (the "Board"). The
Committee or the Board will have the discretion to determine the exercise
price, the duration and other terms and conditions of such options. The
Committee or the Board will have the authority to interpret and construe the
Plan, and any interpretation or construction of the Plan by the Committee or
the Board will be final and conclusive. On July 7, 1997, 54,350 stock options
were granted pursuant to the Plan. Twenty-five percent of such options will
vest and become exercisable on each of the first through fourth anniversaries
of the date of grant.
56
PRINCIPAL STOCKHOLDERS
The Company is authorized to issue 1,100,000 shares of Common Stock, par
value $.01 per share ("Common Stock"), of which 975,000 shares shall be Class
A Common Stock and 125,000 shares shall be Class B Common Stock. As of July
31, 1997, 909,005 shares of Class A Common Stock and no shares of Class B
Common Stock were issued and outstanding.
The holders of Class A Common Stock are entitled to vote on all matters to
be voted upon by stockholders of the Company. Holders of Class B Common Stock
are entitled to vote to on all matters to be voted upon by stockholders of
the Company other than the election or removal of directors of the Company.
Shares of Class B Common Stock are convertible into the same number of shares
of Class A Common Stock.
The following table sets forth certain information as of July 31, 1997,
with respect to the shares of Common Stock of the Company beneficially owned
by each person or group that is known by the Company to be a beneficial owner
of more than 5% of the outstanding Common Stock and all directors and
executive officers of the Company.
BENEFICIAL OWNERSHIP
--------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF TOTAL
- ------------------------------------ -------------------- -------------
The Fulcrum III Limited Partnership(a)
600 Madison Avenue
New York, New York 10022 .................................. 333,380 36.68%
The Second Fulcrum III Limited Partnership(a)
600 Madison Avenue
New York, New York 10022................................... 226,620 24.93%
CVG Industria Venezolana de Aluminio C.A.
Zona Industrial Matanzas
Ciudad Guayana Apt 289312
Estado Bolivar, Venezuela.................................. 180,362.5 19.84%
Russell W. Kupiec........................................... 34,810 3.83%
W. Russell Asher............................................ 41,125 4.52%
Lynn F. Brown............................................... 2,937.5 *
William J. Milam............................................ 12,600 1.39%
David J. Raymonda........................................... 29,375 3.23%
Todd Goodwin(a)............................................. 560,000 61.61%
Edward R. Heiser............................................ 16,000 1.76%
Lewis W. van Amerongen(a)................................... 560,000 61.61%
All executive officers and directors as a group (12
persons)................................................... 696,847.5 76.66%
- ------------
* Denotes less than 1%.
(a) The Fulcrum III Limited Partnership and The Second Fulcrum III Limited
Partnership (collectively, "Fulcrum III") are limited partnerships of
which GGvA is the general partner. As such, GGvA exercises sole voting
and investment power with respect to the shares owned by Fulcrum III.
Messrs. Goodwin and van Amerongen, directors of the Company, are
partners in GGvA, with the shared power to direct the actions of GGvA,
and may be deemed to beneficially own the shares owned by Fulcrum III
by virtue of their status and rights as such partners. GGvA has
informed the Company that all of the shares owned by Fulcrum III will
be transferred to a new partnership of which GGvA will be the sole
general partner. In connection with that transfer, GGvA offered to
purchase from the existing limited partners of Fulcrum III their
interests in the capital stock of the Company owned by Fulcrum III.
Certain limited partners accepted such offer and, as a result, the
interest of GGvA in the new partnership owning the capital stock of the
Company will increase to approximately 83% of the interests in the
capital stock of the Company owned by the new partnership. See "The
Recapitalization."
57
AGREEMENTS WITH STOCKHOLDERS
In connection with the acquisition of the Company in 1987, the Company
entered into a Stock Purchase Agreement with Fulcrum III. Subject to certain
conditions, Fulcrum III has certain demand and "piggyback" rights to have its
shares of Class A Common Stock registered under the Securities Act. The
Company has agreed to pay the costs and expenses associated with two such
registrations, except for discounts and commissions.
In 1988, the Company entered into a Stock Purchase Agreement with Venalum
(the "Venalum Stock Agreement"). The Venalum Stock Agreement provides that,
upon certain issuances by the Company of equity securities, Venalum will have
rights to maintain its percentage equity interest in the Company's capital
stock by purchasing a portion of such equity securities. Subject to certain
conditions, Venalum has certain "piggyback" rights to have its shares of
Class A Common Stock registered under the Securities Act. The Company has
agreed to pay the costs and expenses associated with two such registrations,
except for discounts and commissions.
In connection with Venalum's acquisition of Class A Common Stock, the
Company entered into a Shareholders' Agreement (the "Shareholders Agreement")
with Fulcrum III and Venalum. The Shareholders Agreement provides that if
Fulcrum III transfers shares of Class A Common Stock under certain
circumstances, Venalum may participate in such transfer. Pursuant to the
Shareholders Agreement, the Company agreed to nominate for election to the
Board of Directors two persons designated by Venalum, Fulcrum III agreed to
vote its shares of Class A Common Stock so that the two persons designated by
Venalum shall be elected to the Board of Directors, and Venalum agreed to
vote its shares of Class A Common Stock in favor of the Company's slate of
nominees for election to the Board of Directors.
58
CERTAIN TRANSACTIONS
The Company is a party to an agreement with Venalum pursuant to which
Venalum supplies primary aluminum to the Company. This contract accounts for
approximately 60-65% of the aluminum purchased by the Company from outside
suppliers. Pursuant to the Venalum Agreement, the Company purchased $54.4
million, $68.3 million and $96.0 million of primary aluminum from Venalum in
1994, 1995 and 1996, respectively. Prices are based on the MWTP from the
prior month. The Company believes that the terms of the Venalum Agreement are
no less favorable to the Company than would be obtained in an arms' length
transaction. The Venalum Agreement commenced in 1988 and has been renewed on
numerous occasions. The Venalum Agreement is scheduled to expire in December
1997, but may be renewed based upon negotiations between the Company and
Venalum. There can be no assurance that the Venalum Agreement will be
extended.
In 1987, the Company entered into an agreement with GGvA, pursuant to
which GGvA provides financial advisory and other services to the Company. For
such services, GGvA was paid an annual retainer of $0.25 million in 1994,
1995 and 1996, plus reimbursement for its out-of-pocket expenses. GGvA has
received a fee of $0.5 million for financial advisory services in connection
with the Recapitalization.
GGvA has informed the Company that all of the shares owned by Fulcrum III
will be transferred to a new partnership of which GGvA will be the sole
general partner. In connection with that transfer, GGvA offered to purchase
from the existing limited partners of Fulcrum III their interests in the
capital stock of the Company owned by Fulcrum III. Certain limited partners
accepted such offer, and as a result, the interest of GGvA in the new
partnership owning the capital stock of the Company will increase to
approximately 83% of the interests in the capital stock of the Company owned
by the new partnership. See "The Recapitalization."
59
DESCRIPTION OF NEW CREDIT FACILITY
In connection with the issuance of the Old Notes, the Company entered into
the New Credit Facility with Credit Agricole Indosuez (formerly known as
Banque Indosuez) ("Indosuez") and certain banks and financial institutions as
lenders (collectively, the "Lenders") providing for a $15 million five-year
revolving credit facility.
The New Credit Facility will mature on June 30, 2002 and will bear
interest at a rate per annum equal (at the Company's option) to (i) the
London Inter-Bank Offered Rate plus 2.25% or (ii) an alternative rate equal
to the sum of 1.00% plus the greater of (a) the federal funds rate plus 0.5%
or (b) Indosuez's prime rate. The New Credit Facility will have a $5 million
sublimit for letters of credit. The New Credit Facility is available (subject
to borrowing base availability) for working capital and general corporate
purposes.
The obligations of the Company under the New Credit Facility are secured
by perfected first priority security interests in accounts receivable,
inventory and other like assets. The obligations of the Company under the New
Credit Facility will be guaranteed by each subsequently acquired or organized
domestic or foreign subsidiary of the Company, and in such case, will be
secured by a first priority pledge of all the capital stock of each such
subsidiary.
Revolving credit loans under the New Credit Facility will be subject to
maintenance by the Company of a borrowing base, which will equal the sum of
specified fixed percentages of eligible accounts receivable and eligible
inventory.
The Company will be required to make mandatory prepayments of loans under
the New Credit Facility, subject to certain exceptions, with 100% of the net
proceeds received from (i) the sale or disposition of all or any part of the
assets of the Company or any of its subsidiaries (other than sales of
inventory in the ordinary course of business), (ii) the incurrence of any
indebtedness for borrowed money or the issuance of debt or equity securities
by the Company, (iii) at the discretion of Indosuez, insurance recoveries
other than recoveries of less than a threshold amount to be determined that
are promptly applied toward repair or replacement of the damaged property,
and (iv) the reversion of pension plan assets or tax refunds.
The Company will be required to pay the Lenders under the New Credit
Facility, on a quarterly basis, a commitment fee equal to 0.375% per annum on
the undrawn portion of the revolving credit facility. The Company will also
be required to pay administration fees, to be computed on an annual basis and
paid quarterly.
The New Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, prepay other indebtedness or amend certain other
debt instruments, pay dividends or make distributions (other than the
Recapitalization), create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage
in mergers or consolidations, issue capital stock, make capital expenditures
or engage in certain transactions with affiliates and otherwise restrict
certain corporate activities. In addition, the Company is required to comply
with the following financial ratios and tests: a minimum tangible net worth
equal to ($33.0) million for 1997, ($30.5) million for 1998, ($30.0) million
for 1999, ($29.0) million for 2000, ($27.0) million for 2001 and ($25.0)
million for 2002; a minimum interest coverage ratio of 1.60 to 1.00; a
maximum leverage ratio of 5.75 to 1.00; a minimum current ratio of 1.50 to
1.00; and a minimum fixed charge coverage ratio of 1.10 to 1.00.
The New Credit Facility contains customary events of default, including
defaults relating to payments, breach of representations and warranties,
covenants, cross-defaults and cross-acceleration to certain other
indebtedness, certain events of bankruptcy and insolvency, actual or asserted
invalidity of security and change of control.
60
DESCRIPTION OF NEW NOTES
The New Notes offered hereby will be issued under an Indenture to be dated
as of May 28, 1997 (the "Indenture") between the Company and State Street
Bank and Trust Company (formerly known as Fleet National Bank), as trustee
(the "Trustee"), a copy of the form of which will be made available to
prospective purchasers of the New Notes upon request to the Company.
References to "(Section)" mean the applicable Section of the Indenture.
The following summaries of the material provisions of the Indenture do not
purport to be complete, and where reference is made to particular provisions
of the Indenture, such provisions, including the definitions of certain
terms, are qualified in their entirety by reference to all of the provisions
of the Indenture and those terms made a part of the Indenture by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). For
definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions."
GENERAL
The New Notes will mature on June 1, 2005, will be limited to $105,000,000
aggregate principal amount, and will be unsecured senior obligations of the
Company. Each New Note will bear interest at the rate set forth on the cover
page hereof from May 28, 1997 or from the most recent interest payment date
to which interest has been paid, payable semiannually on June 1 and December
1 in each year, commencing December 1, 1997, to the Person in whose name the
New Note (or any predecessor Note) is registered at the close of business on
the May 15 or November 15 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. (Sections 202, 301 and 307).
Pursuant to the Registration Rights Agreement, the Company has agreed for
the benefit of the holders of the Old Notes, at the Company's cost, either
(i) to effect a registered Exchange Offer under the Securities Act to
exchange the Old Notes for New Notes, which will have terms identical in all
material respects to the Old Notes (except that the New Notes will not
contain terms with respect to transfer restrictions) or (ii) in the event
that any changes in law or applicable interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer, or if any
holder of the New Notes is prohibited by applicable law or Commission policy
from participating in the Exchange Offer or is not able to receive freely
tradeable Old Notes and as a result the Exchange Offer is not declared
effective within 130 days after the original issue of the Old Notes or the
Exchange Offer is not consummated for all of the Old Notes within 165 days
after the original issue of the Old Notes, or upon the request of the Initial
Purchaser, to register the Old Notes for resale under the Securities Act
through a shelf registration statement (the "Shelf Registration Statement").
In the event that either (a) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 45th calendar day following the
date of original issue of the Old Notes, (b) the Exchange Offer Registration
Statement has not been declared effective on or prior to the 130th calendar
day following the date of the original issue of the Old Notes, (c) the
Exchange Offer is not consummated, or if an Exchange Offer has not been
consummated, a Shelf Registration Statement is not declared effective, in
either case, on or prior to the 165th calendar day following the date of
original issue of the Old Notes or (d) if an Exchange Offer has been
consummated, any required Shelf Registration Statement is not declared
effective on or prior to the later of (i) the 165th calendar day following
the date of original issue of the Old Notes or (ii) the 90th calendar day
following the date the Company becomes obligated to file a Shelf Registration
Statement (each such event referred to in clauses (a) through (d) above, a
"Registration Default"), the interest rate borne by the Old Notes shall be
increased by one-quarter of one percent per annum upon the occurrence of each
Registration Default, which rate will increase by one quarter of one percent
each 90-day period that such additional interest continues to accrue under
any such circumstance, with an aggregate maximum increase in the interest
rate equal to one percent (1%) per annum. Following the cure of all
Registration Defaults the accrual of additional interest will cease and the
interest rate will revert to the original rate.
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes will be exchangeable and transferable, at the
office or agency of the Company in The City of New York
61
maintained for such purposes (which initially will be the corporate trust
office of the Trustee); provided, however, that payment of interest may be
made at the option of the Company by check mailed to the Person entitled
thereto as shown on the security register. (Sections 301, 305 and 1002) The
New Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. (Section 302) No
service charge will be made for any registration of transfer, exchange or
redemption of New Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith. (Section
305)
Settlement for the New Notes will be made in same day funds. All payments
of principal and interest will be made by the Company in same day funds. The
New Notes will trade in the Same-Day Funds Settlement System of The
Depositary Trust Company (the "Depositary" or "DTC") until maturity, and
secondary market trading activity for the New Notes will therefore settle in
same day funds.
When issued, the New Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of
the trading market for the Notes. See "Risk Factors -- Absence of Public
Market for the New Notes."
OPTIONAL REDEMPTION
The New Notes will be subject to redemption at any time on or after June
1, 2001, at the option of the Company, in whole or in part, on not less than
30 nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple thereof at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning
June 1 of the years indicated below:
REDEMPTION
YEAR PRICE
---- -----------
2001 .................. 105.063%
2002 .................. 103.375%
2003 .................. 101.688%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due
on an interest payment date).
In addition, at any time prior to June 1, 2000, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings to redeem
up to an aggregate of 33 1/3% of the aggregate principal amount of New Notes
originally issued under the Indenture at a redemption price equal to 110 1/8%
of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the redemption date; provided that at least $65 million
of the principal amount of New Notes remains outstanding immediately after
the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 60
days after the closing of the related Public Equity Offering and must
consummate such redemption within 90 days of the closing of the Public Equity
Offering.
If less than all of the New Notes are to be redeemed, the Trustee shall
select the New Notes or portions thereof to be redeemed pro rata, by lot or
by any other method the Trustee shall deem fair and reasonable. (Sections
203, 1101, 1103 and 1104)
SINKING FUND
The New Notes will not be entitled to the benefit of any sinking fund.
PURCHASE OF NEW NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of New
Notes shall have the right to require that the Company purchase such holder's
New Notes in whole or in part in integral multiples of $1,000, at a purchase
price (the "Change of Control Purchase Price") in cash in an amount equal to
62
101% of the principal amount of such New Notes, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date"), pursuant to the offer described below (the "Change of Control Offer")
and in accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of New Notes, by first-class mail, postage prepaid, at his address
appearing in the security register, stating, among other things, that a
Change of Control has occurred and the date of such event, the circumstances
and relevant facts regarding such Change of Control (including, but not
limited to, information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control); the
purchase price and the purchase date which shall be fixed by the Company on a
business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act; that any New Note not tendered will
continue to accrue interest; that, unless the Company defaults in the payment
of the Change of Control Purchase Price, any New Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after
the Change of Control Purchase Date; and certain other procedures that a
holder of New Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance. (Section 1015)
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the New Notes that might be delivered by holders of
the New Notes seeking to accept the Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the
Change of Control Purchase Price when due will give the Trustee and the
holders of the New Notes the rights described under "Events of Default."
The term "all or substantially all" as used in the definition of "Change
of Control" has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As
a consequence, in the event the holders of the New Notes elected to exercise
their rights under the Indenture and the Company elected to contest such
election, there could be no assurance as to how a court interpreting New York
law would interpret the phrase.
The existence of a holder's right to require the Company to repurchase
such holder's New Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws
or regulations in connection with a Change of Control Offer.
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 the New Notes validly tendered and not withdrawn
under such Change of Control Offer.
Optional Redemption Upon Change of Control. The New Notes will be
redeemable, at the option of the Company, in whole or in part at any time
within 180 days after a Change of Control upon not less than 30 nor more than
60 days' prior notice to each holder of New Notes to be redeemed, at a
redemption price equal to the sum of (i) the then outstanding principal
amount thereof plus (ii) accrued and unpaid interest, if any, to the
redemption date plus (iii) the Applicable Premium.
"Applicable Premium" with respect to the New Notes is defined as the
greater of (i) 1.0% of the then outstanding principal amount of such New
Notes and (ii) the excess of (A) the present value of the required interest
and principal payments due on such New Notes, computed using a discount rate
equal to the Treasury Rate plus the Applicable Spread, over (B) the then
outstanding principal amount of such New Notes.
"Applicable Spread" is defined as 75 basis points.
63
"Treasury Rate" is defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled by 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 redemption of the New Notes following a
Change of Control (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 New Notes;
provided, that if the Average Life to Stated Maturity of the New 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
New 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.
RANKING
The New Notes will be unsecured senior obligations of the Company, and the
Indebtedness represented by the New Notes and the payment of principal of,
premium, if any, and interest on the New Notes will rank pari passu in right
of payment with all other existing and future senior indebtedness of the
Company and senior in right of payment to all existing and future
Subordinated Indebtedness of the Company. The New Notes will be effectively
subordinated to secured Indebtedness of the Company as to the assets securing
such Indebtedness, including any Indebtedness under the New Credit Facility.
As of March 30, 1997, on a pro forma basis, after giving effect to the
Recapitalization, the Company would have had no Indebtedness outstanding
other than the New Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any
of its Subsidiaries to, create, issue, incur, assume, guarantee or otherwise
in any manner become directly or indirectly liable for the payment of or
otherwise incur (collectively, "incur"), any Indebtedness (including any
Acquired Indebtedness but excluding Permitted Indebtedness), unless such
Indebtedness is incurred by the Company or any Guarantor or constitutes
Acquired Indebtedness of a Subsidiary and, in each case, the Company's
Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters
for which financial statements are available immediately preceding the
incurrence of such Indebtedness taken as one period (and after giving pro
forma effect to (i) the incurrence of such Indebtedness and (if applicable)
the application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of
such proceeds occurred, on the first day of such applicable period; (ii) the
incurrence, repayment or retirement of any other Indebtedness by the Company
and its Subsidiaries since the first day of such applicable period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
applicable period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such applicable
period); (iii) in the case of Acquired Indebtedness or any acquisition
occurring at the time of the incurrence of such Indebtedness, the related
acquisition, assuming such acquisition had been consummated on the first day
of such applicable period; and (iv) any acquisition or disposition by the
Company and its Subsidiaries of any company or any business or any assets out
of the ordinary course of business, whether by merger, stock purchase or sale
or asset purchase or sale, or any related repayment of Indebtedness, in each
case since the first day of such applicable period, assuming such acquisition
or disposition had been consummated on the first day of such applicable
period) is at least equal to or greater than 2.00:1. (Section 1008)
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or
in options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
64
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than (a) to the Company or any of its
Wholly Owned Subsidiaries or (b) to all holders of Capital Stock of such
Subsidiary on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other
than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted
Payment, if other than cash, as determined by the board of directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution), unless (1) immediately before and immediately after giving
effect to such proposed Restricted Payment on a pro forma basis, no Default
or Event of Default shall have occurred and be continuing and such Restricted
Payment shall not be an event which is, or after notice or lapse of time or
both, would be, an "event of default" under the terms of any Indebtedness of
the Company or its Subsidiaries; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness;" and (3) after giving effect to the proposed Restricted
Payment, the aggregate amount of all such Restricted Payments declared or
made after the date of the Indenture, does not exceed the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on the first day of the
fiscal quarter beginning after the date of the Indenture and ending on the
last day of the Company's last fiscal quarter ending prior to the date of
the Restricted Payment (or, if such aggregate cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company either (x) as capital contributions in the form
of common equity to the Company or (y) from the issuance or sale (other
than to any of its Subsidiaries) of Qualified Capital Stock of the Company
or any options, warrants or rights to purchase such Qualified Capital
Stock of the Company (except, in each case, to the extent such proceeds
are used to purchase, redeem or otherwise retire Capital Stock or
Subordinated Indebtedness as set forth below in clause (ii) or (iii) of
paragraph (b) below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon
the exercise of any options, warrants or rights to purchase Qualified
Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent
such debt securities or Redeemable Capital Stock were issued after the
date of the Indenture, the aggregate of Net Cash Proceeds from their
original issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the date of the Indenture, an
amount equal to the lesser of the return of capital with respect to such
Investment and the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(viii) below, so long as there is no Default or Event of Default continuing,
the foregoing provisions shall not prohibit the following actions (each of
clauses (i) through (viii) being referred to as a "Permitted Payment"):
65
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a "Permitted Payment" for
purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in
lieu of the issuance of fractional shares or scrip), or out of the Net
Cash Proceeds of a substantially concurrent issuance and sale for cash
(other than to a Subsidiary) of, other shares of Qualified Capital Stock
of the Company; provided that the Net Cash Proceeds from the issuance of
such shares of Qualified Capital Stock are excluded from clause (3)(B) of
paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness or
Redeemable Capital Stock in exchange for, or in an amount not in excess of
the Net Cash Proceeds of, a substantially concurrent issuance and sale for
cash (other than to any Subsidiary of the Company) of any Qualified
Capital Stock of the Company, provided that the Net Cash Proceeds from the
issuance of such shares of Qualified Capital Stock are excluded from
clause (3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due
and payable upon a declaration of acceleration thereof, then such lesser
amount as of the date of determination), plus the lesser of (I) the stated
amount of any premium or other payment required to be paid in connection
with such a refinancing pursuant to the terms of the Indebtedness being
refinanced or (II) the amount of premium or other payment actually paid at
such time to refinance the Indebtedness, plus, in either case, the amount
of expenses of the Company incurred in connection with such refinancing;
(2) has an Average Life to Stated Maturity greater than the remaining
Average Life to Stated Maturity of the New Notes; (3) has a Stated
Maturity for its final scheduled principal payment later than the Stated
Maturity for the final scheduled principal payment of the New Notes; and
(4) is expressly subordinated in right of payment to the New Notes at
least to the same extent as the Subordinated Indebtedness to be
refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through
the substantially concurrent issuance of new Redeemable Capital Stock of
the Company, provided that any such new Redeemable Capital Stock (1) shall
have an aggregate liquidation preference that does not exceed the
aggregate liquidation preference of the amount so refinanced; (2) has an
Average Life to Stated Maturity greater than the remaining Average Life to
Stated Maturity of the New Notes; and (3) has a Stated Maturity later than
the Stated Maturity for the final scheduled principal payment of the New
Notes;
(vi) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Subsidiaries from employees,
former employees, directors or former directors of the Company or any of
its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the
Recapitalization, the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of
Directors under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such common stock; provided,
however, that the aggregate amount of such repurchases in any calendar
year shall not exceed (a) $2.5 million in connection with repurchases made
in connection with the Recapitalization and (b) $1 million in any calendar
year with respect to repurchases not made in connection with the
Recapitalization;
66
(vii) payments made to repurchase the Existing Subordinated Notes using
funds deposited in the Escrow Account, pursuant to the Recapitalization;
and
(viii) payments made to repurchase Capital Stock of the Company or as
dividends on Capital Stock made within six months of the date of the
Indenture in an amount not to exceed the sum of (x) the Net Cash Proceeds
received by the Company from the sale of the New Notes and (y) borrowings
under the New Credit Facility of up to $2 million made within 30 days of
the date of the Indenture, less any amounts previously used by the Company
(a) to repurchase Capital Stock of the Company, (b) to pay dividends on
Capital Stock of the Company, (c) to repay Indebtedness of the Company, or
(d) to settle or repurchase existing stock options, or (e) as payments to
holders of stock options to enable such holders to pay taxes, in each
case, from and including the date of the Indenture; provided that such
payments may not be made so long as Indebtedness outstanding prior to the
date of the Indenture remains outstanding. (Section 1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with
or for the benefit of any Affiliate of the Company (other than the Company or
a Wholly Owned Subsidiary) unless such transaction or series of related
transactions is entered into in good faith and in writing and (a) such
transaction or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those
that would be available in a comparable transaction in arm's-length dealings
with an unrelated third party, (b) with respect to any transaction or series
of related transactions involving aggregate value in excess of $500,000, the
Company delivers an officers' certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (a) above,
and (c) with respect to any transaction or series of related transactions
involving aggregate value in excess of $1 million, either (A) such
transaction or series of related transactions has been approved by a majority
of the Disinterested Directors of the Company, or in the event there is only
one Disinterested Director, by such Disinterested Director, or (B) the
Company delivers to the Trustee a written opinion of an investment banking
firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that
the transactions or series of related transactions is fair to the Company or
such Subsidiary from a financial point of view; provided, however, that this
provision shall not apply to (i) any transaction with an officer or director
of the Company entered into in the ordinary course of business (including
compensation and employee benefit arrangements with any officer, director or
employee of the Company, including under any stock option or stock incentive
plans), (ii) any transaction with CVG Industria Venezolana de Aluminio C.A.
("Venalum") in accordance with the terms of a Venalum Purchase and Sale
Agreement (other than in connection with the entering into of any such
agreement or any amendments, renewal, supplement or modification thereof); or
(iii) payments made to Gibbons, Goodwin, van Amerongen for financial advisory
and other services in an amount not to exceed $500,000 in any calendar year.
(Section 1010)
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of
any kind upon any property or assets (including any intercompany notes) of
the Company or any Subsidiary owned on the date of the Indenture or acquired
after the date of the Indenture, or any income or profits therefrom, unless
the New Notes are directly secured equally and ratably with (or, in the case
of Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the New Notes shall have with respect to such Subordinated
Indebtedness) the obligation or liability secured by such Lien except for any
Permitted Liens. (Section 1011)
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, consummate an
Asset Sale unless (i) at least 85% of the consideration from such Asset Sale
is received in cash and (ii) the Company or such Subsidiary receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets subject to such Asset Sale (as
determined by the board of directors of the Company and evidenced in a board
resolution); provided
67
that in the case of an Asset Swap constituting an Asset Sale, the Company or
any such Subsidiaries shall only be required to receive in cash an amount
equal to at least 85% of the proceeds of the Asset Sale which do not consist
of like kind assets acquired in the Asset Swap.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Indebtedness under the New
Credit Facility then outstanding as required by the terms thereof, or the
Company determines not to apply such Net Cash Proceeds to the permanent
prepayment of such Indebtedness under the New Credit Facility, or if no such
Indebtedness under the New Credit Facility is then outstanding, then the
Company or a Subsidiary may, within 270 days of the Asset Sale, invest the
Net Cash Proceeds in properties and other assets that (as determined by the
board of directors of the Company) replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that will be
used in the businesses of the Company or its Subsidiaries existing on the
date of the Indenture or in businesses reasonably related thereto. The amount
of such Net Cash Proceeds not used or invested within 270 days of the Asset
Sale as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $7.5 million or
more, the Company will apply the Excess Proceeds to the repayment of the New
Notes and any other Pari Passu Indebtedness outstanding with similar
provisions requiring the Company to make an offer to purchase such
Indebtedness with the proceeds from any Asset Sale as follows: (A) the
Company will make an offer to purchase (an "Offer") from all holders of the
New Notes in accordance with the procedures set forth in the Indenture in the
maximum principal amount (expressed as a multiple of $1,000) of New Notes
that may be purchased out of an amount (the "Note Amount") equal to the
product of such Excess Proceeds multiplied by a fraction, the numerator of
which is the outstanding principal amount of the New Notes, and the
denominator of which is the sum of the outstanding principal amount of the
New Notes and such Pari Passu Indebtedness (subject to proration in the event
such amount is less than the aggregate Offered Price (as defined herein) of
all New Notes tendered) and (B) to the extent required by such Pari Passu
Indebtedness to permanently reduce the principal amount of such Pari Passu
Indebtedness, the Company will make an offer to purchase or otherwise
repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an
amount (the "Pari Passu Debt Amount") equal to the excess of the Excess
Proceeds over the Note Amount; provided that in no event will the Company be
required to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the
principal amount of such Pari Passu Indebtedness plus the amount of any
premium required to be paid to repurchase such Pari Passu Indebtedness. The
offer price for the New Notes will be payable in cash in an amount equal to
100% of the principal amount of the New Notes plus accrued and unpaid
interest, if any, to the date (the "Offer Date") such Offer is consummated
(the "Offered Price"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate Offered Price of the New Notes
tendered pursuant to the Offer is less than the Note Amount relating thereto
or the aggregate amount of Pari Passu Indebtedness that is purchased in a
Pari Passu Offer is less than the Pari Passu Debt Amount, the Company will
use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of New Notes and Pari Passu Indebtedness
surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the New Notes to be purchased on a pro rata basis. Upon
the completion of the purchase of all the New Notes tendered pursuant to an
Offer and the completion of a Pari Passu Offer, the amount of Excess
Proceeds, if any, shall be reset at zero.
(d) When the aggregate amount of Excess Proceeds exceeds $7.5 million,
such Excess Proceeds will, prior to any purchase of New Notes described in
paragraph (c) above, be set aside by the Company in a separate account
pending (i) deposit with the depository or a paying agent of the amount
required to purchase the New Notes tendered in an Offer or Pari Passu
Indebtedness tendered in a Pari Passu Offer, (ii) delivery by the Company of
the Offered Price to the holders of the New Notes tendered in an Offer or
Pari Passu Indebtedness tendered in a Pari Passu Offer and (iii) the
completion of the purchase of all the New Notes tendered pursuant to the
Offer and the completion of the Pari Passu Offer. Such Excess Proceeds may be
invested in Temporary Cash Investments, provided that the maturity date of
any such investment made after the amount of Excess Proceeds exceeds $7.5
million shall not be later than the
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Offer Date. The Company shall be entitled to any interest or dividends
accrued, earned or paid on such Temporary Cash Investments; provided that the
Company shall not withdraw such interest from the separate account if an
Event of Default has occurred and is continuing.
(e) If the Company becomes obligated to make an Offer pursuant to clause
(c) above, the New Notes and the Pari Passu Indebtedness shall be purchased
by the Company, at the option of the holders thereof, in whole or in part in
integral multiples of $1,000, on a date that is not earlier than 30 days and
not later than 60 days from the date the notice of the Offer is given to
holders, or such later date as may be necessary for the Company to comply
with the requirements under the Exchange Act.
(f) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable
securities laws or regulations in connection with an Offer. (Section 1012)
(g) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Pari Passu Indebtedness) that would materially impair the
ability of the Company to make an Offer to purchase the New Notes or, if such
Offer is made, to pay for the New Notes tendered for purchase. (Section 1012)
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company
will not permit any Subsidiary, directly or indirectly, to guarantee, assume
or in any other manner become liable with respect to any Pari Passu
Indebtedness or Subordinated Indebtedness of the Company unless such
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a Guarantee of the New Notes on the same terms as
the guarantee of such Indebtedness except that (A) such guarantee need not be
secured unless required pursuant to "--Limitation on Liens" and (B) if such
Indebtedness is by its terms expressly subordinated to the New Notes, any
such assumption, guarantee or other liability of such Subsidiary with respect
to such Indebtedness shall be subordinated to such Subsidiary's Guarantee of
the New Notes at least to the same extent as such Indebtedness is
subordinated to the New Notes.
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
New Notes shall provide by its terms that it (and all Liens securing the
same) shall be automatically and unconditionally released and discharged upon
any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially
all the assets of, such Subsidiary, which transaction is in compliance with
the terms of the Indenture and pursuant to which transaction such Subsidiary
is released from all guarantees, if any, by it of other Indebtedness of the
Company or any Subsidiaries. (Section 1013)
Restriction on Transfer of Assets. The Company will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for sales, conveyances, transfers or other dispositions
(a) made in the ordinary course of business or (b) to any Subsidiary if such
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a Guarantee of the payment of the New Notes by
such Subsidiary on a senior basis. For purposes of this provision, any sale,
conveyance, transfer, lease or other disposition of property or assets,
having a Fair Market Value in excess of (a) $1,000,000 for any sale,
conveyance, transfer or disposition or series of related sales, conveyances,
transfers, leases and dispositions and (b) $5,000,000 in the aggregate for
all such sales, conveyances, transfers, leases or dispositions in any fiscal
year of the Company, shall not be considered "in the ordinary course of
business." (Section 1014)
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Subsidiary of the Company to, directly or indirectly,
enter into any sale and leaseback transaction with respect to any property or
assets (whether now owned or hereafter acquired), except for a sale and
leaseback transaction not exceeding 365 days, unless (i) the sale or transfer
of such property or assets to be leased is treated as an Asset Sale and
complies with the "--Limitation on Sale of Assets" covenant and (ii) the
Company or such Subsidiary would be entitled under the "--Limitation on
Indebtedness" covenant to incur any Indebtedness (with the lease obligations
being treated as Indebtedness for purposes of ascertaining compliance with
this covenant) in respect of such sale and leaseback transaction. (Section
1016)
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Limitation on Subsidiary Capital Stock. The Company will not permit (a)
any Subsidiary of the Company to issue any Capital Stock, except for (i)
Capital Stock issued or sold to, held by or transferred to the Company or a
Wholly Owned Subsidiary, and (ii) Capital Stock issued by a Person prior to
the time (A) such Person becomes a Subsidiary, (B) such Person merges with or
into a Subsidiary or (C) a Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) or (b) any Person (other than the Company or a Wholly Owned Subsidiary)
to acquire Capital Stock of any Subsidiary from the Company or any
Subsidiary, except, in the case of clause (a) or (b), upon the acquisition of
all the outstanding Capital Stock of such Subsidiary in accordance with the
terms of the Indenture. (Section 1017)
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create any consensual encumbrance or
restriction on the ability of any Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to
the Company or any other Subsidiary, (iii) make any Investment in the Company
or any other Subsidiary or (iv) transfer any of its properties or assets to
the Company or any other Subsidiary, except for: (a) any encumbrance or
restriction pursuant to any agreement in effect on the date of the Indenture
and listed on a schedule to the Indenture; (b) any encumbrance or
restriction, with respect to a Subsidiary that is not a Subsidiary of the
Company on the date of the Indenture, in existence at the time such Person
becomes a Subsidiary of the Company and not incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary; and (c) any
encumbrance or restriction existing under any agreement that extends, renews,
refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (a) and (b), or in this clause (c),
provided that the terms and conditions of any such encumbrances or
restrictions are no more restrictive in any material respect than those under
or pursuant to the agreement evidencing the Indebtedness so extended,
renewed, refinanced or replaced. (Section 1018)
Limitations on Unrestricted Subsidiaries. The Company will not make, and
will not permit its Subsidiaries to make, any Investment in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such
Investments would exceed the amount of Restricted Payments then permitted to
be made pursuant to the "--Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to
this covenant (i) will be treated as a Restricted Payment in calculating the
amount of Restricted Payments made by the Company and (ii) may be made in
cash or property. (Section 1019)
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 165th calendar day following the
date of original issue of the Old Notes, whether or not the Company is
subject to Section 13(a) or 15(d) of the Exchange Act, the Company will, to
the extent permitted under the Exchange Act, file with the Commission the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Sections 13(a) or
15(d) if the Company were so subject, such documents to be filed with the
Commission on or prior to the date (the "Required Filing Date") by which the
Company would have been required so to file such documents if the Company
were so subject. The Company will also in any event (x) within 15 days of
each Required Filing Date (whether or not the Exchange Offer has occurred or
165 days has passed since the issuance of the Old Notes) (i) transmit by mail
to all holders, as their names and addresses appear in the security register,
without cost to such holders and (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Sections 13(a) or
15(d) of the Exchange Act if the Company were subject to either of such
Sections and (y) if filing such documents by the Company with the Commission
is not permitted under the Exchange Act, promptly upon written request,
supply copies of such documents to any prospective holder at the Company's
cost. If any Guarantor's financial statements would be required to be
included in the financial statements filed or delivered pursuant to the
Indenture if the Company were subject to Section 13(a) or 15(d) of the
Exchange Act, the Company shall include such Guarantor's financial statements
in any filing or delivery pursuant to the Indenture. (Section 1020)
70
Additional Covenants. The Indenture also contains covenants with respect
to the following matters: (i) payment of principal, premium and interest;
(ii) maintenance of an office or agency in The City of New York; (iii)
arrangements regarding the handling of money held in trust; (iv) maintenance
of corporate existence; (v) payment of taxes and other claims; (vi)
maintenance of properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in a sale,
assignment, conveyance, transfer, lease or disposition of all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis to any other Person or group of
affiliated Persons, unless at the time and after giving effect thereto (i)
either (a) the Company will be the continuing corporation in the case of a
consolidation or merger involving the Company or (b) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, conveyance,
transfer, lease or disposition all or substantially all of the properties and
assets of the Company and its Subsidiaries on a Consolidated basis (the
"Surviving Entity") will be a corporation duly organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form reasonably satisfactory to the Trustee, all the
obligations of the Company under the New Notes and the Indenture, as the case
may be, and the New Notes and the Indenture will remain in full force and
effect as so supplemented; (ii) immediately before and immediately after
giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Company or any of its
Subsidiaries which becomes the obligation of the Company or any of its
Subsidiaries as a result of such transaction as having been incurred at the
time of such transaction), no Default or Event of Default will have occurred
and be continuing; (iii) immediately before and immediately after giving
effect to such transaction on a pro forma basis (on the assumption that the
transaction occurred on the first day of the four-quarter period for which
financial statements are available ending immediately prior to the
consummation of such transaction with the appropriate adjustments with
respect to the transaction being included in such pro forma calculation), the
Company (or the Surviving Entity if the Company is not the continuing obligor
under the Indenture) could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the provisions of "--Certain Covenants --
Limitation on Indebtedness"; (iv) at the time of the transaction each
Guarantor, if any, unless it is the other party to the transactions described
above, will have by supplemental indenture confirmed that its Guarantee shall
apply to such Person's obligations under the Indenture and the New Notes; (v)
at the time of the transaction if any of the property or assets of the
Company or any of its Subsidiaries would thereupon become subject to any
Lien, the provisions of "--Certain Covenants -- Limitation on Liens" are
complied with; and (vi) at the time of the transaction the Company or the
Surviving Entity will have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, transfer,
lease or other transaction and the supplemental indenture in respect thereof
comply with the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with. (Section 801)
Each Guarantor, if any, will not, in a single transaction or through a
series of related transactions, consolidate with or merge with or into any
other Person (other than the Company or any Guarantor) or sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of
its properties and assets on a Consolidated basis to any Person or group of
affiliated Persons (other than the Company or any Guarantor) or permit any of
its Subsidiaries to enter into any such transaction or series of related
transactions if such transaction or series of related transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of the
Guarantor and its Subsidiaries on a Consolidated basis to any other Person or
group of affiliated
71
Persons (other than the Company or any Guarantor), unless at the time and
after giving effect thereto (i) either (a) the Guarantor will be the
continuing corporation in the case of a consolidation or merger involving the
Guarantor or (b) the Person (if other than the Guarantor) formed by such
consolidation or into which such Guarantor is merged or the Person which
acquires by sale, assignment, conveyance, transfer, lease or disposition all
or substantially all of the properties and assets of the Guarantor and its
Subsidiaries on a Consolidated basis (the "Surviving Guarantor Entity") will
be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and
such Person expressly assumes, by a supplemental indenture, in a form
reasonably satisfactory to the Trustee, all the obligations of such Guarantor
under its Guarantee of the New Notes and the Indenture and such Guarantee
will remain in full force and effect; (ii) immediately before and immediately
after giving effect to such transaction on a pro forma basis, no Default or
Event of Default will have occurred and be continuing; and (iii) at the time
of the transaction such Guarantor or the Surviving Guarantor Entity will have
delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an
opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture and that
all conditions precedent therein provided for relating to such transaction
have been complied with; provided, however, that this paragraph shall not
apply to any Guarantor whose Guarantee of the New Notes is unconditionally
released and discharged in accordance with paragraph (b) under the provisions
of "--Certain Covenants -- Limitation on Issuances of Guarantees of
Indebtedness." (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the two immediately preceding
paragraphs in which the Company or any Guarantor, as the case may be, is not
the continuing corporation, the successor Person formed or remaining shall
succeed to, and be substituted for, and may exercise every right and power
of, the Company, and the Company or any Guarantor, as the case may be, would
be discharged from all obligations and covenants under the Indenture and the
New Notes or its Guarantee, as the case may be. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any New
Note when it becomes due and payable, and such default shall continue for
a period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any New Note at its Maturity (upon acceleration,
optional or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture
or any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (i), (ii)
or in clause (b), (c) or (d) of this clause (iii)) and such default or
breach shall continue for a period of 30 days after written notice has
been given, by certified mail, (x) to the Company by the Trustee or (y) to
the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding New Notes; (b) there shall be a
default in the performance or breach of the provisions described in
"--Consolidation, Merger, Sale of Assets;" (c) the Company shall have
failed to make or consummate an Offer in accordance with the provisions of
"--Certain Covenants -- Limitation on Sale of Assets;" or (d) the Company
shall have failed to make or consummate a Change of Control Offer in
accordance with the provisions of "--Purchase of New Notes Upon a Change
of Control;"
(iv) (a) any default in the payment of the principal, premium, if any, or
interest on any Indebtedness shall have occurred under any of the
agreements, indentures or instruments under which the Company, any
Guarantor or any Subsidiary then has outstanding Indebtedness in excess of
$5 million when the same shall become due and payable in full and such
default shall have continued after any applicable grace period and shall
not have been cured or waived and, if not
72
already matured at its final maturity in accordance with its terms, the
holder of such Indebtedness shall have the right to accelerate such
Indebtedness or (b) an event of default as defined in any of the
agreements, indentures or instruments described in clause (a) of this
clause (iv) shall have occurred and the Indebtedness thereunder, if not
already matured at its final maturity in accordance with its terms, shall
have been accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be,
in full force and effect and enforceable in accordance with its terms,
except to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments, orders or decrees for the payment of money in
excess of $2 million, either individually or in the aggregate, shall be
rendered against the Company, any Guarantor or any Subsidiary or any of
their respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such
judgment, order or decree or (b) there shall have been a period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(vii) any holder or holders of at least $2 million in aggregate principal
amount of Indebtedness of the Company, any Guarantor or any Subsidiary
after a default under such Indebtedness shall notify the Trustee of the
intended sale or disposition of any assets of the Company, any Guarantor
or any Subsidiary that have been pledged to or for the benefit of such
holder or holders to secure such Indebtedness or shall commence
proceedings, or take any action (including by way of set-off), to retain
in satisfaction of such Indebtedness or to collect on, seize, dispose of
or apply in satisfaction of Indebtedness, assets of the Company, any
Guarantor or any Subsidiary (including funds on deposit or held pursuant
to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the
Company, any Guarantor or any Significant Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or (b) a decree or
order adjudging the Company, any Guarantor or any Significant Subsidiary
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company, any Guarantor or any
Significant Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company, any Guarantor or
any Significant Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue to be in
effect, or any such other decree or order shall be unstayed and in effect,
for a period of 60 consecutive days; or
(ix) (a) the Company, any Guarantor or any Significant Subsidiary
commences a voluntary case or proceeding under any applicable Bankruptcy
Law or any other case or proceeding to be adjudicated bankrupt or
insolvent, (b) the Company, any Guarantor or any Significant Subsidiary
consents to the entry of a decree or order for relief in respect of the
Company, such Guarantor or such Significant Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding against
it, (c) the Company, any Guarantor or any Significant Subsidiary files a
petition or answer or consent seeking reorganization or relief under any
applicable federal or state law, (d) the Company, any Guarantor or any
Significant Subsidiary (I) consents to the filing of such petition or the
appointment of, or taking possession by, a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company, any Guarantor or such Significant Subsidiary or of any
substantial part of their respective properties, (II) makes an assignment
for the benefit of creditors or (III) admits in writing its inability to
pay its debts generally as they become due or (e) the Company, any
Guarantor or any Significant Subsidiary takes any corporate action in
furtherance of any such actions in this paragraph (ix). (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the New Notes then outstanding may, and the Trustee at
the request of such
73
holders shall, declare all unpaid principal of, premium, if any, and accrued
interest on all New Notes to be due and payable, by a notice in writing to
the Company (and to the Trustee if given by the holders of the New Notes) and
upon any such declaration, such principal, premium, if any, and interest
shall become due and payable immediately. If an Event of Default specified in
clause (viii) or (ix) of the prior paragraph occurs with respect to the
Company and is continuing, then all the New Notes shall ipso facto become and
be due and payable immediately in an amount equal to the principal amount of
the New Notes, together with accrued and unpaid interest, if any, to the date
the New Notes become due and payable, without any declaration or other act on
the part of the Trustee or any holder. Thereupon, the Trustee may, at its
discretion, proceed to protect and enforce the rights of the holders of New
Notes by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of New Notes outstanding by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if (a) the Company has paid or deposited with the
Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, (ii) all overdue
interest on all New Notes then outstanding, (iii) the principal of and
premium, if any, on any New Notes then outstanding which have become due
otherwise than by such declaration of acceleration and interest thereon at
the rate borne by the New Notes and (iv) to the extent that payment of such
interest is lawful, interest upon overdue interest at the rate borne by the
New Notes; and (b) all Events of Default, other than the non-payment of
principal of the New Notes which have become due solely by such declaration
of acceleration, have been cured or waived as provided in the Indenture. No
such rescission shall affect any subsequent default or impair any right
consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of
the New Notes outstanding may on behalf of the holders of all outstanding New
Notes waive any past default under the Indenture and its consequences, except
a default in the payment of the principal of, premium, if any, or interest on
any New Note or in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each New Note affected by such modification or amendment. (Section 513)
The Company is also required to notify the Trustee within five business
days of the occurrence of any Default. The Company is required to deliver to
the Trustee, on or before a date not more than 60 days after the end of each
fiscal quarter and not more than 120 days after the end of each fiscal year,
a written statement as to compliance with the Indenture, including whether or
not any Default has occurred. (Section 1021) The Trustee is under no
obligation to exercise any of the rights or powers vested in it by the
Indenture at the request or direction of any of the holders of the New Notes
unless such holders offer to the Trustee security or indemnity satisfactory
to the Trustee against the costs, expenses and liabilities which might be
incurred thereby. (Section 603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions, provided that if it
acquires any conflicting interest it must eliminate such conflict upon the
occurrence of an Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the New
Notes discharged with respect to the outstanding New Notes ("defeasance").
Such defeasance means that the Company, any such Guarantor and any other
obligor under the Indenture shall be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding New Notes, except for (i)
the rights of holders of such outstanding New Notes to receive payments in
respect of the principal of, premium, if any, and interest on such New Notes
when such payments are due, (ii) the Company's obligations with respect to
the New Notes concerning issuing temporary New Notes, registration of New
Notes, mutilated, destroyed, lost or stolen New Notes,
74
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 (iv) the 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 and any Guarantor 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 an Event of Default with respect to the New
Notes. In the event covenant defeasance occurs, certain events (not including
non-payment, bankruptcy and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
New Notes. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the New Notes cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants or a nationally
recognized investment banking firm, to pay and discharge the principal of,
premium, if any, and interest on the outstanding New Notes on the Stated
Maturity (or on any date after June 1, 2001 (such date being referred to as
the "Defeasance Redemption Date"), if at or prior to electing either
defeasance or covenant defeasance, the Company has delivered to the Trustee
an irrevocable notice to redeem all of the outstanding New Notes on the
Defeasance Redemption Date); (ii) in the case of defeasance, the Company
shall have delivered to the Trustee an opinion of independent counsel in the
United States stating 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 independent counsel in the United States shall confirm that, the
holders of the outstanding New Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such 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 defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding New 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 (other than a Default or Event of Default under the Indenture
resulting from the borrowing of funds to be applied to such deposit) shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) or (ix) under the first paragraph under "--Events of Default"
are concerned, at any time during the period ending on the 91st day after the
date of deposit; (v) such defeasance or covenant defeasance shall not cause
the Trustee for the New Notes to have a conflicting interest as defined in
the Indenture and for purposes of the Trust Indenture Act with respect to any
securities of the Company or any Guarantor; (vi) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
Default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Subsidiary is a party or by which it
is bound; (vii) such defeasance or covenant defeasance shall not result in
the trust arising from such deposit constituting an investment company within
the meaning of the Investment Company Act of 1940, as amended, unless such
trust shall be registered under such Act or exempt from registration
thereunder; (viii) the Company will have delivered to the Trustee an opinion
of independent counsel in the United States 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; (ix) the Company shall have delivered
to the Trustee an officers' certificate stating that the deposit was not made
by the Company with the intent of preferring the holders of the New Notes or
any Guarantee over the other creditors of the Company or any Guarantor with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company, any Guarantor or others; (x) no event or condition shall exist that
would prevent the Company from making payments of the principal of, premium,
if any, and interest on the New Notes on the date of such deposit or at any
time ending on the 91st day after the date of such deposit; and (xi) the
Company will have delivered to the Trustee an officers' certificate and an
opinion of independent counsel, each stating that all conditions precedent
provided for relating to either the defeasance or the covenant defeasance, as
the case may be, have been complied with. (Section 404)
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
New Notes as expressly provided for in the Indenture) as to all outstanding
New Notes under the Indenture when (a) either (i) all such New Notes
theretofore authenticated and delivered (except lost, stolen or destroyed New
Notes which have been replaced or paid or New Notes whose payment has been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust as provided
for in the Indenture) have been delivered to the Trustee for cancellation or
(ii) all New Notes not theretofore delivered to the Trustee for cancellation
(x) have become due and payable, (y) will become due and payable at their
Stated Maturity within one year, or (z) are to be called for redemption
within one year under arrangements reasonably satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company; and the Company or any Guarantor has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust
an amount in United States dollars sufficient to pay and discharge the entire
indebtedness on the New Notes not theretofore delivered to the Trustee for
cancellation, including principal of, premium, if any, and accrued interest
at such Maturity, Stated Maturity or redemption date; (b) the Company or any
Guarantor has paid or caused to be paid all other sums payable under the
Indenture by the Company and any Guarantor; and (c) the Company has delivered
to the Trustee an officers' certificate and an opinion of independent counsel
each stating that (i) all conditions precedent under the Indenture relating
to the satisfaction and discharge of such Indenture have been complied with
and (ii) such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the Indenture or any other
material agreement or instrument to which the Company, any Guarantor or any
Subsidiary is a party or by which the Company, any Guarantor or any
Subsidiary is bound. (Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal amount of the New Notes then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding New Note affected
thereby: (i) change the Stated Maturity of the principal of, or any
installment of interest on, or change to an earlier date any redemption date
of, or waive a default in the payment of the principal or interest on, any
such New Note or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or change the
coin or currency in which the principal of any such New Note or any premium
or the interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the redemption date); (ii) amend,
change or modify the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control in accordance
with "--Purchase of New Notes Upon a Change of Control," including, in each
case, amending, changing or modifying any definitions relating thereto; (iii)
reduce the percentage in principal amount of such outstanding New Notes, the
consent of whose holders is required for any such supplemental indenture, or
the consent of whose holders is required for any waiver or compliance with
certain provisions of the Indenture; (iv) modify any of the provisions
relating to supplemental indentures requiring the consent of holders or
relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase the percentage of such outstanding New Notes
required for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of
each such New Note affected thereby; (v) except as otherwise permitted under
"-- Consolidation, Merger, Sale of Assets," consent to the assignment or
transfer by the Company or any Guarantor of any of its rights and obligations
under the Indenture; or (vi) amend or modify any of the provisions of the
Indenture in any manner which subordinates the New Notes issued thereunder in
right of payment to any other Indebtedness of the Company or which
subordinates any Guarantee in right of payment to any other Indebtedness of
the Guarantor issuing any such Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
New Notes, the Company, any Guarantor, any other obligor under the Securities
and the Trustee may modify or amend the
76
Indenture: (a) to evidence the succession of another Person to the Company or
a Guarantor or any other obligor under the Securities, and the assumption by
any such successor of the covenants of the Company or such Guarantor or
obligor in the Indenture and in the New Notes and in any Guarantee in
accordance with "-- Consolidation, Merger, Sale of Assets"; (b) to add to the
covenants of the Company, any Guarantor or any other obligor upon the New
Notes for the benefit of the holders of the New Notes or to surrender any
right or power conferred upon the Company or any Guarantor or any other
obligor upon the New Notes, as applicable, in the Indenture, in the New Notes
or in any Guarantee; (c) to cure any ambiguity, or to correct or supplement
any provision in the Indenture, the New Notes or any Guarantee which may be
defective or inconsistent with any other provision in the Indenture, the New
Notes or any Guarantee or make any other provisions with respect to matters
or questions arising under the Indenture, the New Notes or any Guarantee;
provided that, in each case, such provisions shall not adversely affect the
interest of the holders of the New Notes; (d) to comply with the requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act; (e) to add a Guarantor under the
Indenture; (f) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture; or (g) to mortgage, pledge,
hypothecate or grant a security interest in favor of the Trustee for the
benefit of the holders of the New Notes as additional security for the
payment and performance of the Company's and any Guarantor's obligations
under the Indenture, in any property, or assets, including any of which are
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted to the Trustee pursuant to the Indenture
or otherwise. (Section 901)
The holders of a majority in aggregate principal amount of the New Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1022)
GOVERNING LAW
The Indenture, the New Notes and any Guarantee will be governed by, and
construed in accordance with, the laws of the State of New York, without
giving effect to the conflicts of law principles thereof.
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 as Trustee with such conflict or resign as Trustee.
(Sections 608 and 610)
The holders of a majority in principal amount of the then outstanding New
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
occurs (which has not been 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 New Notes unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense. (Section 603)
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition, as the case may be. Acquired Indebtedness
shall be deemed to be incurred on the date of the related acquisition of
assets from any Person or the date the acquired Person becomes a Subsidiary,
as the case may be.
"Affiliate" means, with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any
77
other Person that owns, directly or indirectly, 5% or more of such specified
Person's Capital Stock or any officer or director of any such specified
Person or other Person or, with respect to any natural Person, any person
having a relationship with such Person by blood, marriage or adoption not
more remote than first cousin; or (iii) any other Person 5% or more of the
Voting Stock of which is beneficially owned or held directly or indirectly by
such specified Person. For the purposes of this definition, "control" when
used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a
"transfer"), directly or indirectly, in one or a series of related
transactions, of: (i) any Capital Stock of any Subsidiary; (ii) all or
substantially all of the properties and assets of any division or line of
business of the Company or its Subsidiaries; or (iii) any other properties or
assets of the Company or any Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall
not include any transfer of properties and assets (A) that is governed by the
provisions described under "--Consolidation, Merger, Sale of Assets," (B)
that is by the Company to any Guarantor, or by any Subsidiary to the Company
or any Wholly Owned Subsidiary in accordance with the terms of the Indenture,
(C) that is of obsolete equipment in the ordinary course of business, (D)
that represents sales of aluminum as raw material as part of the Company's
inventory management procedures in the ordinary course of business, (E) the
Fair Market Value of which in the aggregate does not exceed $1 million in any
transaction or series of related transactions or (F) the disposition of the
Escrow Account in order to repurchase the Existing Subordinated Notes.
"Asset Swap" means a disposition by the Company or any Subsidiary of any
aluminum production plant or facility or extrusion, casting, painting,
anodizing or fabrication assets of an aluminum production plant or facility
for an aluminum production plant or facility or extrusion, casting, painting,
anodizing or fabrication assets of an aluminum production plant or facility
(or the Capital Stock of a Person owning extrusion, casting, painting,
anodizing or fabrication assets or an aluminum production plant or facility);
provided that the Board of Directors of the Company shall have approved such
disposition and exchange and determined the Fair Market Value of the assets
subject to such transaction as evidenced by a board resolution or such Fair
Market Value has been determined by a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction
contemplated thereby.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease
of real or personal property which, in accordance with GAAP, has been
recorded as a capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests whether now outstanding or issued
after the date of the Indenture.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
78
Act, except that a Person shall be deemed to have beneficial ownership of all
shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total outstanding Voting Stock of the
Company, provided, that the Permitted Holders "beneficially own" (as so
defined) a lesser percentage of such Voting Stock than such other "person" or
"group" and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the board of
directors of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the board of
directors of the Company (together with any new directors whose election to
such board or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for
any reason to constitute a majority of such board of directors then in
office; (iii) the Company consolidates with or merges with or into any Person
or conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with the
Company in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of the Company is not changed or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation of
the Company or where (A) the outstanding Voting Stock of the Company is
changed into or exchanged for (x) Voting Stock of the surviving corporation
which is not Redeemable Capital Stock or (y) cash, securities and other
property (other than Capital Stock of the surviving corporation) in an amount
which could be paid by the Company as a Restricted Payment as described under
"--Certain Covenants -- Limitation on Restricted Payments" (and such amount
shall be treated as a Restricted Payment subject to the provisions in the
Indenture described under "--Certain Covenants -- Limitation on Restricted
Payments") and (B) no "person" or "group," other than Permitted Holders, owns
immediately after such transaction, directly or indirectly, more than the
greater of (i) 35% of the total outstanding Voting Stock of the surviving
corporation and (ii) the percentage of the outstanding Voting Stock of the
surviving corporation owned, directly or indirectly, by Permitted Holders
immediately after such transaction); or (iv) the Company is liquidated or
dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under
"--Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations
in commodity prices.
"Company" means Wells Aluminum Corporation, a corporation incorporated
under the laws of Maryland, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss),
Consolidated Interest Expense, Consolidated Income Tax Expense and
Consolidated Non-cash Charges deducted in computing Consolidated Net Income
(Loss) in each case, for such period, of such Person and its Subsidiaries on
a Consolidated basis, all determined in accordance with GAAP to (b) the
Consolidated Interest Expense for such period; provided that (i) in making
such computation, the Consolidated Interest Expense attributable to interest
on any Indebtedness computed on a pro forma basis and (A) bearing a floating
interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) which
was not outstanding during the period for which the computation is being made
but which bears, at the option of such Person, a fixed or floating rate of
interest, shall be computed by applying at the option of such Person either
the fixed or floating rate and (ii) in making such computation, the
Consolidated Interest Expense of such Person attributable to interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period.
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"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated Subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
Subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity
Price Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Subsidiaries during such period and (ii) all capitalized
interest of such Person and its Subsidiaries plus (c) the interest expense
under any Guaranteed Debt of such Person and any Subsidiary to the extent not
included under clause (a)(iv) above, plus (d) the aggregate amount for such
period of cash or non-cash dividends on any Redeemable Capital Stock or
Preferred Stock of the Company and its Subsidiaries, in each case as
determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Subsidiaries for
such period on a Consolidated basis as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income (or loss), by
excluding, without duplication, (i) all extraordinary gains or losses, net of
taxes, (less all fees and expenses relating thereto), (ii) the portion of net
income (or loss) of such Person and its Subsidiaries on a Consolidated basis
allocable to minority interests in unconsolidated Persons to the extent that
cash dividends or distributions have not actually been received by such
Person or one of its Consolidated Subsidiaries, (iii) net income (or loss) of
any Person combined with such Person or any of its Subsidiaries on a "pooling
of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized upon the
termination of any employee pension benefit plan, (v) net gains (or losses),
net of taxes, (less all fees and expenses relating thereto) in respect of
dispositions of assets other than in the ordinary course of business, (vi)
the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is not
at the time permitted, 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 Subsidiary or its
stockholders, (vii) any restoration to income of any contingency reserve, net
of taxes, except to the extent provision for such reserve was made out of
income accrued at any time following the date of the Indenture, (viii) any
gain, net of taxes, arising from the extinguishment, under GAAP, of any
Indebtedness of such Person or (ix) any gain or loss, net of taxes, arising
from non-cash charges or income relating to the valuation of inventory on a
LIFO basis.
"Consolidated Non-cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such
Person and its subsidiaries on a Consolidated basis for such period, as
determined in accordance with GAAP (excluding (i) any non-cash charge which
requires an accrual or reserve for cash charges for any future period and
(ii) all non-cash charges incurred in connection with the valuation of
inventory on a LIFO basis).
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of such Person and each of its subsidiaries if and to the extent
the accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
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"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the board of directors of the Company
who does not have any material direct or indirect financial interest in or
with respect to such transaction or series of related transactions (other
than as a result of such directors' Investment in the Company).
"Escrow Account" means the escrow account established pursuant to the
Escrow Agreement dated the date of the Indenture between the Company and
State Street Bank and Trust Company (formerly known as Fleet National Bank),
as Escrow Agent.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute.
"Existing Credit Facility" means the Credit Agreement, dated as of
December 21, 1994, among the Company and Credit Agricole Indosuez (formerly
known as Banque Indosuez, New York Branch), as Agent and the Lending
Institutions listed therein, as amended.
"Existing Subordinated Notes" means the 14.125% Senior Subordinated Notes
due 2001 originally issued pursuant to the Exchange and Amendment Agreement,
dated December 21, 1994 among the Company and each of the Purchasers listed
on the Schedule of Purchasers thereon, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value shall be
determined by the board of directors of the Company acting in good faith and
shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's
Indenture Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of
Indebtedness below guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell
services, primarily for the purpose of enabling the debtor to make payment of
such Indebtedness or to assure the holder of such Indebtedness against loss,
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring
that such property be received or such services be rendered), (iv) to
maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor
or (v) otherwise to assure a creditor against loss; provided that the term
"guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Guarantor" means any Subsidiary which is a guarantor of the New Notes,
including any Person that is required after the date of the Indenture to
execute a guarantee of the New Notes pursuant to the "Limitations on Liens"
covenant or the "Limitation on Issuances of Guarantees of Indebtedness"
covenant until a successor replaces such party pursuant to the applicable
provisions of the Indenture and, thereafter, shall mean such successor.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and
other accrued current liabilities arising in the ordinary course of business,
(ii) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments, (iii) all indebtedness created or arising under
any conditional sale or other title retention agreement with respect to
property acquired by such Person (even if the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
81
Persons and all dividends of other Persons, the payment of which is secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, in which case the amount of such
Indebtedness shall be deemed to be the lesser of (a) the amount of such
Indebtedness and (b) the Fair Market Value of the property that secures such
Indebtedness; (vii) all Guaranteed Debt of such Person, (viii) all Redeemable
Capital Stock issued by such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends,
and (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types referred to
in clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant
to the Indenture, and if such price is based upon, or measured by, the Fair
Market Value of such Redeemable Capital Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the New Notes including any Guarantor,
to pay principal of, premium, if any, and interest when due and payable, and
all other amounts due or to become due under or in connection with the
Indenture, the New Notes and the performance of all other obligations to the
Trustee and the holders under the Indenture and the New Notes, according to
the respective terms thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan (including guarantees), or other extension of credit or
capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase, acquisition or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued or owned
by any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, charge, pledge, lien
(statutory or otherwise), privilege, security interest, assignment, deposit,
arrangement, easement, hypothecation, claim, preference, priority or other
encumbrance upon or with respect to any property of any kind (including any
conditional sale, capital lease or other title retention agreement, any
leases in the nature thereof, and any agreement to give any security
interest), real or personal, movable or immovable, now owned or hereafter
acquired.
"Maturity" means, when used with respect to the New Notes, the date on
which the principal of the New Notes becomes due and payable as therein
provided or as provided in the Indenture, whether at Stated Maturity, the
Offer Date or the redemption date and whether by declaration of acceleration,
Offer in respect of Excess Proceeds, Change of Control Offer in respect of a
Change of Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset
Sales) in the form of cash or Temporary Cash Investments including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed of for, cash or Temporary Cash
Investments (except to the extent that such obligations are financed or sold
with recourse to the Company or any Subsidiary) net of (i) brokerage
commissions and other reasonable fees and expenses (including fees and
expenses of counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii)
payments made to retire Indebtedness where payment of such Indebtedness is
secured by the assets or properties the subject of such Asset Sale, (iv)
amounts required to be paid to any Person (other than the Company or any
Subsidiary) owning a beneficial interest in the assets subject to the Asset
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Sale and (v) appropriate amounts to be provided by the Company or any
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the Trustee and (b) with
respect to any issuance or sale of Capital Stock or options, warrants or
rights to purchase Capital Stock, or debt securities or Capital Stock that
have been converted into or exchanged for Capital Stock as referred to under
"--Certain Covenants -- Limitation on Restricted Payments," the proceeds of
such issuance or sale in the form of cash or Temporary Cash Investments
including payments in respect of deferred payment obligations when received
in the form of, or stock or other assets when disposed of for, cash or
Temporary Cash Investments (except to the extent that such obligations are
financed or sold with recourse to the Company or any Subsidiary), net of
attorney's fees, accountant's fees and brokerage, consultation, underwriting
and other fees and expenses actually incurred in connection with such
issuance or sale and net of taxes paid or payable as a result thereof.
"New Credit Facility" means the Amended and Restated Credit Agreement
dated as of May 28, 1997 by and among the Company, certain financial
institutions and Credit Agricole Indosuez (formerly known as Banque
Indosuez), as agent, providing for an aggregate $15 million revolving credit
facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and/or related documents may be amended, restated, supplemented,
renewed, replaced or otherwise modified from time to time whether or not with
the same agent, trustee, lenders or holders, and, subject to the provisos to
the next sentence, irrespective of any changes in the terms and conditions
thereof. Without limiting the generality of the foregoing, the term "New
Credit Facility" shall include any amendment, amendment and restatement,
renewal, extension, restructuring, supplement or modification to the New
Credit Facility and all refundings, refinancings and replacements of the New
Credit Facility, including any agreement (i) extending the maturity of any
Indebtedness incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and issuers
include the Company and its successors and assigns, (iii) increasing the
amount of Indebtedness incurred thereunder or available to be borrowed
thereunder, provided that on the date such Indebtedness is incurred it would
not exceed the amount permitted to be incurred by clause (i) of the
definition of Permitted Indebtedness or (iv) otherwise altering the terms and
conditions thereof; provided further that in the case of clauses (i) through
(iv), any such agreement is not prohibited by the terms of the Indenture.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company which
ranks pari passu in right of payment to the New Notes and (b) with respect to
any Guarantee, Indebtedness which ranks pari passu in right of payment to
such Guarantee.
"Permitted Holders" means (i) Gibbons, Goodwin, van Amerongen ("GGvA"),
(ii) Edward W. Gibbons, Todd Goodwin, Lewis W. van Amerongen and Elizabeth
Varley Camp (the "GGvA Partners"), (iii) trusts created for the benefit of
any of the GGvA Partners or the spouse, issue, parents or other relatives of
any such GGvA Partner, (iv) entities controlled by any of such GGvA Partners,
and (v) in the event of the death of any of the GGvA Partners, the heirs or
testamentary legatees of such GGvA Partner.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company (and guarantees thereof by Subsidiaries)
under the New Credit Facility in an aggregate principal amount at any one
time outstanding not to exceed $15 million under any such credit facility
or in respect of letters of credit thereunder minus the amount by which
any commitments thereunder are permanently reduced;
(ii) Indebtedness of the Company pursuant to the New Notes and
Indebtedness of any Guarantor pursuant to a Guarantee of the New Notes;
(iii) Indebtedness of the Company or any Subsidiary outstanding on the
date of the Indenture and listed on a schedule thereto;
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(iv) Indebtedness of the Company owing to a Subsidiary; provided that any
Indebtedness of the Company owing to a Subsidiary is made pursuant to an
intercompany note in the form attached to the Indenture and is
subordinated in right of payment from and after such time as the New Notes
shall become due and payable (whether at Stated Maturity, acceleration or
otherwise) to the payment and performance of the Company's obligations
under the New Notes; provided, further, that any disposition, pledge or
transfer of any such Indebtedness to a Person (other than a disposition,
pledge or transfer to a Subsidiary) shall be deemed to be an incurrence of
such Indebtedness by the Company not permitted by this clause (iv);
(v) Indebtedness of a Wholly Owned Subsidiary owing to the Company or
another Wholly Owned Subsidiary; provided that any such Indebtedness is
made pursuant to an intercompany note in the form attached to the
Indenture; provided, further, that (a) any disposition, pledge or transfer
of any such Indebtedness to a Person (other than the Company or a Wholly
Owned Subsidiary) shall be deemed to be an incurrence of such Indebtedness
by the obligor not permitted by this clause (v), and (b) any transaction
pursuant to which any Wholly Owned Subsidiary, which has Indebtedness
owing to the Company or any other Wholly Owned Subsidiary, ceases to be a
Wholly Owned Subsidiary shall be deemed to be the incurrence of
Indebtedness by such Wholly Owned Subsidiary that is not permitted by this
clause (v);
(vi) guarantees of any Subsidiary made in accordance with the provisions
of "--Certain Covenants -- Limitation on Issuances of Guarantees of
Indebtedness;"
(vii) obligations of the Company entered into in the ordinary course of
business (a) pursuant to Interest Rate Agreements designed to protect the
Company or any Subsidiary against fluctuations in interest rates in
respect of Indebtedness of the Company or any Subsidiary as long as such
obligations do not exceed the aggregate principal amount of such
Indebtedness then outstanding, (b) under any Currency Hedging
Arrangements, which if related to Indebtedness do not increase the amount
of such Indebtedness other than as a result of foreign exchange
fluctuations, or (c) under any Commodity Price Protection Agreements,
which if related to Indebtedness do not increase the amount of such
Indebtedness other than as a result of foreign exchange fluctuations;
(viii) Indebtedness of the Company represented by Capital Lease
Obligations or Purchase Money Obligations or other Indebtedness incurred
or assumed in connection with the acquisition or development of real or
personal, movable or immovable, property in each case incurred for the
purpose of financing or refinancing all or any part of the purchase price
or cost of construction or improvement of property used in the business of
the Company, in an aggregate principal amount pursuant to this clause
(viii) not to exceed $5 million outstanding at any time; provided that the
principal amount of any Indebtedness permitted under this clause (viii)
did not in each case at the time of incurrence exceed the Fair Market
Value, as determined by the Board of Directors of the Company in good
faith, of the acquired or constructed asset or improvement so financed;
(ix) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness described
in clauses (ii) and (iii) of this definition of "Permitted Indebtedness,"
including any successive refinancings so long as the borrower under such
refinancing is the Company or, if not the Company, the same as the
borrower of the Indebtedness being refinanced and the aggregate principal
amount of Indebtedness represented thereby is not increased by such
refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing and (A) in the case
of any refinancing of Indebtedness that is Subordinated Indebtedness, such
new Indebtedness is made subordinated to the New Notes at least to the
same extent as the Indebtedness being refinanced and (B) in the case of
Pari Passu Indebtedness or Subordinated Indebtedness, as the case may be,
such refinancing does not reduce the Average Life to Stated Maturity or
the Stated Maturity of such Indebtedness; and
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(x) Indebtedness of the Company and its Subsidiaries in addition to that
described in clauses (i) through (ix) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long
as the aggregate principal amount of all such Indebtedness shall not
exceed $7.5 million outstanding at any one time in the aggregate.
"Permitted Investment" means (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of such Investment, (a) becomes a
Wholly Owned Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the
Company or a Subsidiary described under clauses (iv), (v) and (vi) of the
definition of "Permitted Indebtedness"; (iii) Investments in any of the New
Notes; (iv) Temporary Cash Investments; (v) Investments acquired by the
Company or any Subsidiary in connection with an Asset Sale permitted under
"--Certain Covenants -- Limitation on Sale of Assets" to the extent such
Investments are non-cash proceeds as permitted under such covenant; (vi)
Investments in existence on the date of the Indenture; (vii) guarantees of
Indebtedness of a Wholly Owned Subsidiary given by the Company or another
Wholly Owned Subsidiary and guarantees of Indebtedness of the Company given
by any Subsidiary, in each case, in accordance with the terms of the
Indenture; (viii) advances to employees or officers of the Company in the
ordinary course of business so long as the aggregate amount of such advances
shall not exceed $250,000 outstanding at any one time; and (ix) any other
Investments in the aggregate amount of $2.5 million at any one time
outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's Board of
Directors) at the time of Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture (other than Liens
securing the New Credit Facility which is covered by clause (b) below);
(b) any Lien on the Company's or any Subsidiary's accounts receivable and
inventory which secures the New Credit Facility and any pledge of Capital
Stock of any Subsidiary of the Company which secures the New Credit Facility,
provided such Subsidiary provides a guarantee of the New Notes on a senior
basis in a form reasonably acceptable to the Trustee;
(c) any Lien arising by reason of (1) any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have expired;
(2) taxes not yet delinquent or which are being contested in good faith; (3)
security for payment of workers' compensation or other insurance; (4) good
faith deposits in connection with tenders, leases, or contracts (other than
contracts for the payment of money); (5) zoning restrictions, easements,
licenses, reservations, title defects, rights of others for rights of way,
utilities, sewers, electric lines, telephone or telegraph lines, and other
similar purposes, provisions, covenants, conditions, waivers, restrictions on
the use of property or minor irregularities of title (and with respect to
leasehold interests, mortgages, obligations, liens and other encumbrances
incurred, created, assumed or permitted to exist and arising by, through or
under a landlord or owner of the leased property, with or without consent of
the lessee), none of which materially impairs the use of any parcel of
property material to the operation of the business of the Company or any
Subsidiary or the value of such property for the purpose of such business;
(6) deposits to secure public or statutory obligations, or in lieu of surety
or appeal bonds; or (7) operation of law in favor of mechanics, materialmen,
laborers, employees or suppliers, incurred in the ordinary course of business
for sums which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Subsidiary;
(e) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business
of the Company or any Subsidiary;
85
(f) any Lien securing Indebtedness permitted to be incurred under Interest
Rate Agreements or otherwise incurred to hedge interest rate risk;
(g) any Lien securing Capitalized Lease Obligations or Purchase Money
Obligations incurred in accordance with clause (viii) of the definition
Permitted Indebtedness and which are incurred or assumed in connection with
the acquisition, development or construction of real or personal, moveable or
immovable property within 90 days of such incurrence or assumption; provided
that such Liens only extend to such acquired, developed or constructed
property; and
(h) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (g) so long
as no additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over the Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering with gross
proceeds to the Company of at least $25 million pursuant to a registration
statement that has been declared effective by the Commission (other than a
registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and
accessions thereto, which are purchased by the Company at any time after the
New Notes are issued; provided that (i) the security agreement or conditional
sales or other title retention contract pursuant to which the Lien on such
assets is created (collectively a "Purchase Money Security Agreement") shall
be entered into within 90 days after the purchase or substantial completion
of the construction of such assets and shall at all times be confined solely
to the assets so purchased or acquired, any additions and accessions thereto
and any proceeds therefrom, (ii) at no time shall the aggregate principal
amount of the outstanding Indebtedness secured thereby be increased, except
in connection with the purchase of additions and accessions thereto and
except in respect of fees and other obligations in respect of such
Indebtedness and (iii) (A) the aggregate outstanding principal amount of
Indebtedness secured thereby (determined on a per asset basis in the case of
any additions and accessions) shall not at the time such Purchase Money
Security Agreement is entered into exceed 100% of the purchase price to the
Company of the assets subject thereto or (B) the Indebtedness secured thereby
shall be with recourse solely to the assets so purchased or acquired, any
additions and accessions thereto and any proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Recapitalization" shall have the meaning ascribed to such term in the
Prospectus.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the Stated Maturity of the
principal of the New Notes or is redeemable at the option of the holder
thereof at any time prior to such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to such Stated Maturity at
the option of the holder thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Significant Subsidiary" means, at any particular time, any Subsidiary
that, together with the Subsidiaries of such Subsidiary, (i) for the most
recent fiscal year of the Company accounted for more than
86
10% of the Consolidated revenues of the Company and its Subsidiaries or (ii)
at the end of such fiscal year, was the owner (beneficial or otherwise) of
more than 10% of the Consolidated assets of the Company and its Subsidiaries,
all as calculated in accordance with GAAP and as shown on the Consolidated
financial statements of the Company and its Subsidiaries.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such
installment of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor subordinated in right of payment to the New Notes or the Guarantee
of such Guarantor, as the case may be.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or
more other Subsidiaries; provided that any Unrestricted Subsidiary shall not
be deemed a Subsidiary under the New Notes.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit, maturing not more than
one year after the date of acquisition, issued by, or time deposit of, a
commercial banking institution that is a member of the Federal Reserve System
and that has combined capital and surplus and undivided profits of not less
than $250 million, whose debt has a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1"
(or higher) according to Standard & Poor's Corporation ("S&P") or any
successor rating agency, (iii) commercial paper, maturing not more than one
year after the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of the Company) organized and existing under the laws
of the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P, (iv) any money market deposit accounts
issued or offered by a domestic commercial bank having capital and surplus in
excess of $250 million; provided that the short term debt of such commercial
bank has a rating, at the time of Investment, of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P, (v) repurchase obligations
for underlying securities of the type described in clause (i) above entered
into with any financial institution designated as a "Primary Dealer" by the
Federal Reserve Bank of New York or any commercial banking institution that
satisfies the criteria set forth in clause (ii) of this definition of
"Temporary Cash Investments" as a counterparty, and (vi) any security,
maturing not more than six months after the date of acquisition, issued or
fully guaranteed by any state, commonwealth or territory of the United States
of America, or by any political subdivision or taxing authority thereof, and
rated at least "A" by S&P or "A" by Moody's; provided that the Company shall
not invest any amount held in the Escrow Account in any investment set forth
in clauses (v) and (vi) above.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended,
or any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Subsidiaries provides credit support for Indebtedness of such Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly,
with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness, (c) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary shall not violate the
provisions of the "--Certain Covenants -- Limitation on Unrestricted
Subsidiaries" covenant and such Unrestricted Subsidiary is not party to any
agreement, contract, arrangement or understanding at such time with the
Company or any Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
the Company or such
87
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company or, in the event such condition is not
satisfied, the value of such agreement, contract, arrangement or
understanding to such Subsidiary shall be deemed a Restricted Investment; and
(v) such Unrestricted Subsidiary does not own any Capital Stock in any
Subsidiary of the Company which is not simultaneously being designated an
Unrestricted Subsidiary. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by filing with the Trustee a
board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of
designation in an amount equal to the greater of (1) the net book value of
such Investment or (2) the fair market value of such Investment as determined
in good faith by the Company's Board of Directors. The Board of Directors of
the Company may designate any Unrestricted Subsidiary as a Subsidiary;
provided that (i) immediately after giving effect to such designation, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the restrictions under "--Certain Covenants --
Limitation on Indebtedness" and (ii) all Indebtedness of such Subsidiary
shall be deemed to be incurred on the date such Subsidiary becomes a
Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary (i) as to which neither
the Company nor any Subsidiary is directly or indirectly liable (by virtue of
the Company or any such Subsidiary being the primary obligor on, guarantor
of, or otherwise liable in any respect to, such Indebtedness), except
Guaranteed Debt of the Company or any Subsidiary to any Affiliate, in which
case (unless the incurrence of such Guaranteed Debt resulted in a Restricted
Payment at the time of incurrence) the Company shall be deemed to have made a
Restricted Payment equal to the principal amount of any such Indebtedness to
the extent guaranteed at the time such Affiliate is designated an
Unrestricted Subsidiary and (ii) which, upon the occurrence of a default with
respect thereto, does not result in, or permit any holder of any Indebtedness
of the Company or any Restricted Subsidiary to declare, a default on such
Indebtedness of the Company or any Restricted Subsidiary or cause the payment
thereof to be accelerated or payable prior to its Stated Maturity.
"Venalum Purchase and Sale Agreement" means the Purchase and Sale
Agreement dated as of November 1, 1994, by and between Venalum and the
Company relating to the purchase and sale of aluminum and aluminum products,
as such agreement may be amended, renewed, supplemented or otherwise modified
or any new agreement between the parties entered into from time to time
(including, without limitation, any successive renewals, extensions,
supplementations or other modifications of the foregoing).
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of a corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which is owned by the Company or another Wholly Owned Subsidiary (other than
directors' qualifying shares).
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form. Except as described in the next paragraph, the New Notes
initially will be represented by a single, permanent global New Note, in
definitive, fully registered form without interest coupons (the "Global
Note") and will be deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. or such other nominee as DTC may
designate.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance
88
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Upon the issuance of the Global Note, DTC or its custodian will credit, on
its internal system, the respective principal amount of the individual
beneficial interests represented by such Global Note to the accounts of
persons who have accounts with DTC. Such accounts initially will be
designated by or on behalf of the Initial Purchasers. Ownership of beneficial
interests in the Global Note will be limited to persons who have accounts
with DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and
the transfer of that ownership will be effected only though, records
maintained by DTC or its nominee (with respect to interests of participants)
and the records of participants (with respect to interests of persons other
than participants). QIBs may hold their interests in the Global Note directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the New Notes represented by such Global Note
for all purposes under the Indenture and the New Notes. No beneficial owners
of an interest in the Global Note will be able to transfer that interest
except in accordance with DTC's applicable procedures in addition to those
provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest in respect of the Global Note
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of
such Global Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests
in such Global Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfer between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificated Notes (as defined below) for any reason, including to sell New
Notes to persons in states which require such delivery of such New Notes or
to pledge such New Notes, such holder must transfer its interest in the
Global Note in accordance with the normal procedures of DTC and the
procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more
participants to whose account the DTC interests in the Global Note are
credited and only in respect of such portion of the aggregate principal
amount of New Notes as to which such participant or participants has or have
given such direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for Certificated Notes, which it
will distribute to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
89
Subject to certain conditions and in certain circumstances, any person
having a beneficial interest in the Global Note may, upon request to the
Trustee, exchange such beneficial interest for New Notes in fully registered
definitive form without interest coupons ("Certificated Notes"). Upon any
such issuance, the Trustee is required to register such Certificated Notes in
the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). In addition, if DTC is at any time unwilling
or unable to continue as a depositary for the Global Note and a successor
depositary is not appointed by the Company within 90 days, the Company will
issue Certificated Notes in exchange for the Global Note.
90
PLAN OF DISTRIBUTION
Based on interpretations by the staff of 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 an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
such Eligible 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 the
Eligible 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 holds Old Notes which were acquired for its own
account as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company or an affiliate of
the Company), may exchange the Old Notes for New Notes in the Exchange Offer.
However, such broker-dealer may be deemed an "underwriter" within the meaning
of the Securities Act and, therefore, must deliver a prospectus in connection
with any resales of the New Notes received by such broker-dealer in the
Exchange Offer. This prospectus delivery requirement may be satisfied by
delivery of this Prospectus, as it may be amended or supplemented from time
to time. The Company has agreed that it will provide sufficient copies of the
latest version of the Prospectus to broker-dealers promptly upon request to
facilitate such resales.
The Company will not receive any proceeds from any sale of the New Notes
by broker-dealers. New Notes received by broker-dealers for their own
accounts pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices at the time of
resale, at prices related to such prevailing market prices or negotiated
prices. Any such resales may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter' within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
By acceptance of the Exchange Offer, each broker-dealer and Holder that
receives New Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer
of New Notes, and each broker-dealer and Holder agrees that upon receipt of
any notice from the Company of the existence of any fact or the happening of
any event that makes any statement of a material fact in the Prospectus, or
any amendment or supplement hereto, or any document incorporated herein by
reference untrue or requires the making of any additions or changes in the
Prospectus (the "Notice"), such broker-dealer or Holder will forthwith
discontinue the disposition of the New Notes until such broker-dealer or
Holder (i) receives copies of a supplemental prospectus or (ii) is advised in
writing by the Company that the use of the Prospectus may be resumed and has
received copies of any additional or supplemental filings that are
incorporated herein by reference. Upon the Company's request and at its
expense, each Holder will deliver to the Company all copies, other than
permanent file copies in such Holder's possession, of the Prospectus covering
such New Notes that was current at the time of receipt of such Notice.
91
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, New York, New York. Through
a limited partnership interest in Fulcrum III, certain partners of Kramer,
Levin, Naftalis & Frankel have an indirect equity interest in approximately
870 shares of Class A Common Stock of the Company.
EXPERTS
The financial statements and schedule of the Company as of December 31,
1996 and 1995 and for each of the three years in the period ended December
31, 1996 included in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
92
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors ...................................................... F-2
Balance Sheets as of December 31, 1996 and 1995 ..................................... F-3
Statements of Operations for the years ended December 31, 1996, 1995, and 1994 ..... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995,
and 1994 ........................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 ..... F-6
Notes to Financial Statements ....................................................... F-7
Balance Sheet as of June 29, 1997 (Unaudited)........................................ F-17
Statements of Operations for the six months ended June 29, 1997 and June 30, 1996
(Unaudited) ........................................................................ F-18
Statements of Cash Flows for the six months ended June 29, 1997 and June 30, 1996
(Unaudited) ........................................................................ F-19
Notes to Financial Statements........................................................ F-20
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Wells Aluminum Corporation
We have audited the balance sheets of Wells Aluminum Corporation (the
"Corporation") as of December 31, 1996 and 1995, and the related statements
of operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index as Item 21(b). These
financial statements and schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wells Aluminum
Corporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 9 to the Financial Statements, the Corporation
changed its method of accounting for postretirement benefits other than
pensions in 1995.
Ernst & Young LLP
February 14, 1997
Baltimore, Maryland
F-2
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31
---------------------
1996 1995
---------- ---------
ASSETS
Current assets:
Cash.................................................................. $ 277 $ 342
Accounts receivable, principally trade, less allowance for doubtful
accounts of $1,170 and $925 ......................................... 22,279 24,641
Inventories .......................................................... 19,838 19,972
Other current assets ................................................. 938 494
---------- ----------
Total current assets................................................. 43,332 45,449
Property, plant and equipment, at cost less accumulated depreciation .. 26,723 26,489
Debt issuance costs, net of accumulated amortization of $1,365 and
$870.................................................................. 2,104 2,599
Goodwill, net of accumulated amortization of $11,286 and $10,098 ..... 35,738 36,926
Other intangible assets ............................................... 829 798
---------- ----------
Total assets ........................................................ $108,726 $112,261
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................... $ 13 $ 20
Accounts payable, principally trade .................................. 19,577 20,699
Accrued expenses ..................................................... 5,567 5,375
---------- ----------
Total current liabilities ........................................... 25,157 26,094
Long-term debt, less current portion .................................. 40,078 51,663
Deferred income taxes ................................................. 5,750 5,847
Deferred benefit plan obligations ..................................... 3,269 3,411
---------- ----------
Total liabilities.................................................... 74,254 87,015
========== ==========
Stockholders' equity:
Common stock, Class A, par value $.01 per share; 975,000 shares
authorized, 778,062.5 and 775,062.5 shares issued and outstanding
for the respective year ............................................. 8 8
Common stock, Class B, par value $.01 per share; 125,000 shares
authorized and issued ............................................... 1 1
Additional paid-in capital ........................................... 24,390 24,360
Accumulated earnings ................................................. 10,565 1,722
Additional minimum pension liability ................................. (492) (845)
---------- ----------
Total stockholders' equity .......................................... 34,472 25,246
---------- ----------
Total liabilities and stockholders' equity .......................... $108,726 $112,261
========== ==========
See accompanying notes.
F-3
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS
(In thousands)
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
Net sales .......................................... $228,161 $232,555 $197,991
Cost of sales ...................................... 191,206 194,414 168,810
---------- ---------- ----------
Gross profit ....................................... 36,955 38,141 29,181
Selling, general and administrative expenses ...... 15,877 16,211 14,536
---------- ---------- ----------
Operating profit ................................... 21,078 21,930 14,645
Interest expense ................................... 5,176 7,087 8,443
---------- ---------- ----------
Earnings before income taxes and extraordinary
item............................................... 15,902 14,843 6,202
Income taxes ....................................... 7,059 6,262 3,016
---------- ---------- ----------
Earnings before extraordinary item ................. 8,843 8,581 3,186
Extraordinary loss on refinancing of debt (less
applicable income taxes of $698) .................. -- -- (1,092)
---------- ---------- ----------
Net earnings........................................ $ 8,843 $ 8,581 $ 2,094
========== ========== ==========
See accompanying notes.
F-4
WELLS ALUMINUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ADDITIONAL
COMMON COMMON ADDITIONAL ACCUMULATED MINIMUM
STOCK, STOCK, PAID-IN EARNINGS PENSION
CLASS A CLASS B CAPITAL (DEFICIT) LIABILITY
--------- --------- ------------ ------------- ------------
Balance at December 31, 1993 $ 8 $ 1 $24,347 $(8,953) $(465)
Net earnings for 1994 ....... -- -- -- 2,094 --
Change in additional minimum
pension liability .......... -- -- -- -- 110
--------- --------- ------------ ------------- ------------
Balance at December 31, 1994 8 1 24,347 (6,859) (355)
Net earnings for 1995 ....... -- -- -- 8,581 --
Change in additional minimum
pension liability .......... -- -- -- -- (490)
Exercise of options ......... -- -- 13 -- --
--------- --------- ------------ ------------- ------------
Balance at December 31, 1995 8 1 24,360 1,722 (845)
Net earnings for 1996 ....... -- -- -- 8,843 --
Change in additional minimum
pension liability .......... -- -- -- -- 353
Exercise of options ......... -- -- 30 -- --
--------- --------- ------------ ------------- ------------
Balance at December 31, 1996 . $ 8 $ 1 $24,390 $10,565 $(492)
========= ========= ============ ============= ============
See accompanying notes.
F-5
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES
Net earnings ............................................. $ 8,843 $ 8,581 $ 2,094
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ......................... 4,034 4,576 4,929
Deferred income taxes ................................. (704) (191) 598
Extraordinary loss on refinancing of debt ............. -- -- 1,092
Changes in operating assets and liabilities:
Accounts receivable, net ............................. 2,362 1,748 (10,245)
Inventories .......................................... 134 4,693 (5,960)
Accounts payable and accrued expenses ................ (930) (3,650) 10,634
Other assets and liabilities ......................... 348 1,663 (1,229)
---------- ---------- ----------
Net cash provided by operating activities ................ 14,087 17,420 1,913
---------- ---------- ----------
INVESTING ACTIVITIES
Additions to property, plant and equipment ............... (2,589) (1,054) (1,512)
---------- ---------- ----------
Net cash used in investing activities .................... (2,589) (1,054) (1,512)
---------- ---------- ----------
FINANCING ACTIVITIES
Principal payments on long-term debt ..................... (93,793) (89,231) (50,629)
Proceeds from long-term debt ............................. 82,200 71,850 54,513
Payments of debt issue costs ............................. -- (483) (2,518)
Proceeds from the exercise of stock options .............. 30 13 --
Premium paid on early retirement of debt ................. -- -- (1,055)
---------- ---------- ----------
Net cash provided by (used in) financing activities ..... (11,563) (17,851) 311
---------- ---------- ----------
Net increase (decrease) in cash .......................... (65) (1,485) 712
Cash at beginning of year ................................ 342 1,827 1,115
---------- ---------- ----------
Cash at end of year ...................................... $ 277 $ 342 $ 1,827
========== ========== ==========
See accompanying notes.
F-6
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Aluminum Corporation (the "Corporation") is a domestic manufacturer
of aluminum extruded and fabricated products for several diversified
industries including transportation, durable goods and construction.
STOCK-BASED COMPENSATION
The Corporation has elected to follow the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
for stock based compensation. Pro forma disclosures required under Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, are not significant.
INVENTORIES
The aluminum component of inventories, representing approximately 68% and
67% of total inventories at December 31, 1996 and 1995, respectively, is
stated at the lower of cost, using the last-in, first-out method (LIFO) or
market. The labor, overhead and supplies components of inventories are
carried at the lower of cost or market using the first-in, first-out method
(FIFO). The outside purchased parts component of inventory are carried at the
lower of cost or market using the weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Maintenance and repairs
are charged to operations when incurred, while expenditures having the effect
of extending the useful life of an asset are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets. Depreciation expense for the years ended December 31, 1996, 1995
and 1994 was $2,351,000, $2,818,000 and $3,267,000, respectively.
DEBT ISSUANCE COSTS
Costs incurred to obtain financing are capitalized and amortized using the
straight-line method over the term of the related financing.
GOODWILL
The excess of the purchase price of the Corporation over the fair value of
the net assets acquired was recorded as goodwill. Amortization is recorded on
the straight-line method over forty years. On a periodic basis, the
Corporation estimates its future undiscounted cash flows of the businesses to
which goodwill relates in order to ensure that the carrying value of such
goodwill has not been impaired.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Corporation sponsors several defined benefit pension plans covering
substantially all employees. The Corporation uses the "projected unit credit"
actuarial method for financial reporting purposes and the "entry age normal"
actuarial method for funding purposes.
The Corporation has historically provided postretirement medical insurance
and life insurance benefits (primarily for salaried employees). In 1995, the
Corporation adopted on a prospective basis Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, to account for the cost of postretirement benefits other than
pensions. This statement changes the prevalent practice of cash basis
accounting for postretirement benefits by requiring the accrual of such
benefits during the employees' years of service. Postretirement benefits in
1994 were recorded on a cash basis.
F-7
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996, 1995, and 1994, the Corporation
purchased aluminum from CVG Industria Venezolana de Aluminio C.A. (Venalum),
an owner of 180,362.5 shares of Class A common stock. The total amount
purchased from Venalum was $95,959,000, $68,277,000, and $54,375,000,
respectively. Amounts payable to Venalum at December 31, 1996 and 1995 were
$8,567,000, and $8,339,000, respectively.
CREDIT RISK
The Corporation is potentially subject to concentrations of credit risk
with accounts receivable, interest rate cap agreements and futures contracts.
Although the Corporation has a diverse customer base, 27% and 29% of the
accounts receivable balance was due in aggregate from five customers as of
December 31, 1996 and 1995, respectively. The Corporation performs ongoing
credit evaluations of customers and does not require collateral for accounts
receivable. The Corporation evaluates the creditworthiness of the
counterparties to the interest rate cap and the futures contracts and
considers nonperformance credit risk to be remote.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform with
the 1996 presentation.
CASH FLOW INFORMATION
Cash paid for interest amounted to $5,014,995, $6,148,000, and $10,023,000
for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid
for federal income taxes amounted to $6,659,152, $4,240,000, and $2,678,482
for the years ended December 31, 1996, 1995, and 1994, respectively.
FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Corporation enters into forward
sales contracts with certain customers for the sale of fixed quantities of
extruded aluminum at scheduled intervals whereby the cost of aluminum
component of the contract is fixed for the duration of the contract, based on
market price at the inception of the contract. In order to hedge its exposure
to aluminum price volatility under these forward sales contracts, the
Corporation enters into aluminum futures contracts to purchase aluminum,
based on scheduled deliveries under the forward sales contracts. Gains and
losses on futures contracts designated and effective as hedges of aluminum
price exposure are recorded as adjustments to the cost of inventory.
F-8
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
A summary of inventories at December 31 follows (in thousands):
1996 1995
--------- ---------
Average cost for aluminum and FIFO cost for other
components:
Raw materials ................................... $11,073 $13,430
Finished goods and work-in-process .............. 8,929 9,074
Supplies ........................................ 525 489
--------- ---------
20,527 22,993
Less LIFO reserve ................................ (689) (3,021)
--------- ---------
$19,838 $19,972
========= =========
In 1995, aluminum inventories were reduced. This reduction resulted in a
liquidation of LIFO inventories carried at lower costs prevailing in prior
years as compared with the cost of 1995 purchases. The effect of this
liquidation was to increase net earnings by $1,415,000 in 1995.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31 follows (in
thousands):
1996 1995
---------- ----------
Land .......................... $ 816 $ 816
Buildings ..................... 8,039 7,673
Machinery and equipment ...... 45,355 43,199
Construction in progress ..... 352 469
---------- ----------
54,562 52,157
Less accumulated depreciation (27,839) (25,668)
---------- ----------
$ 26,723 $ 26,489
========== ==========
4. LONG-TERM DEBT
A summary of long-term debt at December 31 follows (in thousands):
1996 1995
--------- ---------
Credit Agreement:
Revolving Loan Facility .......... $11,400 $11,900
Term A Loan ...................... 7,477 18,022
Term B Loan....................... 6,201 6,728
Subordinated notes:
14.125% Senior Subordinated Notes 15,000 15,000
Other ............................. 13 33
--------- ---------
40,091 51,683
Less current portion .............. (13) (20)
--------- ---------
$40,078 $51,663
========= =========
F-9
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT (Continued)
Aggregate maturities of long-term debt for each of the five years
succeeding December 31, 1996 are: $12,723 in 1997; $0 in 1998; $4,500,000 in
1999; $14,377,200 in 2000; and $21,200,500 in 2001. In 1995 and 1996, the
Corporation prepaid $14,522,800 of its Term A loan, and, therefore, is not
required to make any principal payments on that instrument until March 1999.
CREDIT AGREEMENT
In December of 1994, the Corporation entered into a $62,000,000 credit
agreement ("Credit Agreement") with Banque Indosuez, New York Branch
("Agent"), comprised of 1) a $22,000,000 working capital line of credit
("Revolving Loan Facility"), 2) a $33,000,000 term loan ("Term A Loan"), and
3) a $7,000,000 term loan ("Term B Loan"). The proceeds under the Credit
Agreement were used to refinance existing debt.
The Revolving Loan Facility terminates on December 31, 2000. Outstanding
balances under the Revolving Loan Facility are subject to interest at the
Corporation's option, at either 1.5% over the Agent's prime lending rate or
2.75% over LIBOR. On or after January 1, 1996, either rate is subject to a
reduction of .25% or .5% if the Corporation meets certain financial criteria
stated in the agreement. The Corporation met these financial criteria and as
such the interest rates were reduced by .25%. In addition, the Corporation
pays a commitment fee of 0.5% per annum on the average daily unused amount.
The Revolving Loan Facility includes available letters of credit of
$5,000,000 which have not been used by the Corporation. There are no
additional fees with respect to unused letters of credit.
The Term A Loan requires quarterly principal payments of $1,375,000,
through December 31, 2000 and is subject to interest at the Corporation's
option, at either 1.5% over the Agent's prime lending rate or 2.75% over
LIBOR. On or after January 1 1996, either rate is subject to a reduction of
.25% or .5% if the Corporation meets certain financial criteria stated in the
agreement. The Corporation met these financial criteria and as such the
interest rates were reduced by .25%.
The Term B Loan matures on March 31, 2001 and is subject to interest at
the Corporation's option, at either 2% over the Agent's prime lending rate or
3.25% over LIBOR. On or after January 1, 1996, either rate is subject to a
reduction of .25% or .5% if the Corporation meets certain financial criteria
stated in the agreement. The Corporation met these financial criteria and as
such the interest rates were reduced by .25%.
The Agreement contains numerous covenants, including: (a) a limitation on
the payment of dividends or the repurchase of common stock; (b) a restriction
on redemption or purchase of any indebtedness or the alteration of terms of
any indebtedness; (c) a restriction on the incurrence of future indebtedness,
capital expenditures, investments, liens, transactions with affiliates and
disposition of assets; and (d) the maintenance of specified financial ratios
and minimum net worth. The Corporation was in compliance with the covenants
at December 31, 1996.
The Corporation's obligations under the Agreement are secured by
substantially all of the Corporation's property, plant and equipment,
inventories, accounts receivable, contract rights and general intangibles.
SUBORDINATED NOTES
In 1987, the Corporation issued $35,500,000 of 13.375% Senior Subordinated
Notes with required mandatory redemptions of $8,875,000 on June 15, 1995 and
1996, and final maturity on July 15, 1997. These notes became redeemable at
the option of the Corporation effective July 15, 1993 at a price of 104.46%
of the principal amount redeemed, with the premium decreasing annually
thereafter to maturity. In connection with the Credit Agreement discussed
previously, these notes were redeemed in December
F-10
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT (Continued)
of 1994 at 102.97%. In connection with the early retirement of these notes,
the Corporation recorded an extraordinary loss of $1,092,000, comprised of
$1,055,000 call premium and $735,000 of unamortized costs related to the
original issuance of the notes, net of an income tax benefit of $698,000.
In 1987, the Corporation issued $15,000,000 of 14.125% Junior Subordinated
Notes with a required mandatory redemption of $7,500,000 on June 15, 1998 and
final maturity on July 15, 1999. In December of 1994, the Corporation entered
into an Exchange and Amendment Agreement whereby the original notes were
exchanged for $15,000,000 of 14.125% Senior Subordinated Notes maturing on
July 15, 2001. The notes are currently redeemable at the option of the
Corporation at a price of 102.875% of the principal amount redeemed, with the
premium decreasing annually to 100% at July 15, 1999 subject to the certain
restrictions in the Exchange and Amendment Agreement.
During 1995, the Corporation entered into a 7.50% interest rate cap
agreement which has the effect of limiting exposure to fluctuating interest
rates on its variable rate debt. The notional amount of the agreement as of
December 31, 1996 is $14,900,000 and the cap rate is based upon LIBOR.
5. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, Disclosures about Fair
Values of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values reported in
the balance sheets for cash, accounts receivable, accounts payable, long-term
debt and the interest rate cap approximate their fair values.
6. ACCRUED EXPENSES
A summary of accrued expenses at December 31 follows (in thousands):
1996 1995
-------- --------
Interest ............................... $1,011 $1,348
Salaries, wages and other compensation 2,474 2,227
Other .................................. 2,082 1,800
-------- --------
$5,567 $5,375
======== ========
7. INCOME TAXES
The significant components of the Corporation's deferred tax liabilities
and assets as of December 31 were as follows (in thousands):
1996 1995
-------- --------
Deferred tax liabilities:
Property, plant and equipment ...... $6,701 $6,869
Inventory ........................... 212 448
-------- --------
Total deferred tax liabilities ...... 6,913 7,317
Pension and benefit plan liabilities 952 1,021
Accrued liabilities ................. 135 88
Allowance for doubtful accounts .... 456 361
-------- --------
Total deferred tax assets ............ 1,543 1,470
-------- --------
Net deferred tax liabilities.......... $5,370 $5,847
======== ========
F-11
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (Continued)
There was no valuation allowance for any of the deferred tax assets.
A reconciliation of the statutory income tax to the income tax expense
included in the Statements of Operations for the years ended December 31 is
as follows (in thousands):
1996 1995 1994
--------- --------- ---------
Income tax expense (benefit) calculated at the
statutory federal income tax rate ..................... $5,566 $5,195 $2,109
Amortization of goodwill ............................... 416 416 404
State taxes net of federal benefits .................... 683 642 448
Prior years' income taxes .............................. 313 -- --
Other .................................................. 81 9 55
--------- --------- ---------
Income tax expense ..................................... 7,059 $6,262 $3,016
========= ========= =========
Current taxes .......................................... 7,763 $6,453 $2,418
Deferred taxes ......................................... (704) (191) 598
--------- --------- ---------
Income tax expense...................................... $7,059 $6,262 $3,016
========= ========= =========
8. LEASES
The Corporation leases various facilities and equipment under short-term
rental and operating lease agreements. Rent expense under these agreements
amounted to $1,496,133, $1,434,000, and $1,348,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Future minimum payments under
noncancellable operating leases as of December 31, 1996 are: $1,385,978 in
1997; $1,280,012 in 1998; $795,679 in 1999, $523,513 in 2000; $309,503 in
2001; and $631,090 thereafter.
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Corporation sponsors several defined benefit pension plans covering
substantially all salaried and hourly employees. The benefits for salaried
employees are based on years of service and compensation while benefits for
hourly employees are based on years of service. The Corporation's funding
policy is to contribute annually an amount at least equal to the minimum
annual contributions required by ERISA. The plans' assets are invested
primarily in money market and stock mutual funds.
F-12
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)
A summary of the actuarially computed benefit obligations and assets for
the Corporation's defined benefit pension plans as of December 31 follows (in
thousands):
1996 1996 1995
-------------- --------------- --------------
ACCUMULATED ASSETS EXCEED ACCUMULATED
BENEFIT ACCUMULATED BENEFIT
OBLIGATION BENEFIT OBLIGATION
EXCEEDS ASSETS OBLIGATION EXCEEDS ASSETS
-------------- --------------- --------------
Actuarial present value of benefit obligations:
Vested benefit obligation.......................... $ 5,652 $ 3,884 $ 9,815
============== =============== ==============
Accumulated benefit obligation .................... 6,620 4,292 11,026
============== =============== ==============
Projected benefit obligation ....................... 6,620 6,038 12,650
Plan assets at fair value .......................... 4,895 4,815 8,483
-------------- --------------- --------------
Plan assets less than projected benefit obligation (1,725) (1,223) (4,167)
Unrecognized prior service costs ................... 829 33 834
Unrecognized net gain/(loss) ....................... 807 (208) 1,737
Additional minimum pension liability ............... (1,636) -- (2,185)
-------------- --------------- --------------
Total accrued and deferred pension obligations ..... $(1,725) $ (1,398) $ (3,781)
============== =============== ==============
A summary of net pension cost for the years ended December 31 follows (in
thousands):
1996 1995 1994
--------- ------- --------
Service cost--benefits earned during the period.. $ 825 $ 690 $ 804
Interest cost on projected benefit obligation ... 884 824 812
Return on plan assets ............................ (758) (622) (559)
Net amortization and deferral .................... 195 105 137
--------- ------- --------
Net pension cost.................................. $1,146 $ 997 $1,194
========= ======= ========
A summary of the significant actuarial assumptions is as follows:
1996 1995 1994
------- ------- -------
Discount rates ............... 7.75% 7.25% 8.50%
Future compensation
increases.................... 4.50% 4.00% 6.00%
The actuary assumed an expected long-term rate of return on assets of 8.0%
for 1996, 1995 and 1994.
In addition to the Corporation's defined benefit pension plans, the
Corporation offers postretirement medical insurance and life insurance
benefits (primarily salaried employees) to employees who retire under certain
eligibility requirements. Coverage is for the lifetime of the retiree and
spouse (if elected). Contribution requirements for current retirees is set at
a fixed percentage of expected claims costs, while contributions for future
retirees vary dependent upon years of service at retirement.
In 1995, the Corporation adopted prospectively Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The effect of adopting the new rules increased
1995 net periodic postretirement benefit cost for the above defined benefit
plans by approximately $488,612 and decreased net income by approximately
$298,053, respectively. Postretirement benefit cost for 1994 which
approximated $50,000 was recorded on a cash basis and has not been restated.
F-13
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (Continued)
The following table shows the plans' combined funded status reconciled
with the amounts recognized in the Corporation's balance sheet (in
thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- --------------
Accumulated postretirement benefit obligation:
Retirees ................................................. $(1,044) $(1,285)
Fully eligible active plan participants .................. (475) (557)
Other active plan participants ........................... (1,605) (1,591)
-------------- --------------
(3,124) (3,433)
Plan assets at fair value................................. -- --
Accumulated postretirement benefit obligation in excess
of plan assets .......................................... (3,124) (3,433)
Unrecognized transition obligation ....................... 2,588 2,732
Unrecognized net (gain) or loss .......................... (413) 212
-------------- --------------
Accrued postretirement benefit cost....................... $ (949) $ (489)
============== ==============
The portion of the accumulated postretirement benefit obligation related
to life insurance benefits is $798,543, and $599,297 for December 31, 1996
and 1995, respectively.
The Corporation funds its postretirement benefit obligation on a pay as
you go basis.
Net periodic postretirement benefit cost included the following components
(in thousands):
1996 1995
------ ------
Service cost ............................................. $186 $150
Interest cost ............................................ 220 240
Amortization of unrecognized transition obligation over
20 years ................................................ 144 144
Net periodic postretirement benefit cost ................. $550 $534
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) for the plans is
10% and is assumed to decrease gradually to 5% and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation for the plans as of December
31, 1996 by $468,228 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1996 by $109,886.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75 percent and 7.25 percent at
December 31, 1996 and 1995, respectively.
The actuary assumed that salaries would increase by 5% per year for 1996
and 1995.
10. STOCK OPTION PLAN
In November 1993, the Board of Directors of the Corporation approved a
stock option plan which authorizes up to 60,000 shares of common stock, Class
A, for the plan. The plan provides for the granting of options to officers
and other key employees at an exercise price not to exceed the fair market
value on the date of the grant as determined by the Board of Directors. Under
the terms of the plan, the maximum
F-14
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTION PLAN (Continued)
term for the options granted is ten years with the options vesting ratably
over a period of four years. The options granted are exercisable at a price
of $10 per share. The weighted-average contractual life of the options
outstanding as of December 31, 1996 approximates 7.4 years.
1996 1995 1994
--------- --------- --------
Options outstanding at January 1 .. 53,000 60,000 3,000
Options exercised .................. (3,000) (750) --
Options granted .................... 7,000 -- 57,000
Options canceled ................... -- (6,250) --
--------- --------- --------
Options outstanding at December 31 57,000 53,000 60,000
========= ========= ========
The Corporation recognized $250,000 in compensation expense relating to
the 7,000 options granted in 1996.
11. FUTURES CONTRACTS
The Corporation, in the normal course of business, enters into futures
contracts to manage the risk of fluctuations in the price of aluminum.
Fluctuations in the price of aluminum can have a significant impact upon the
operations of the Corporation. These instruments involve elements of credit
and market risk that are not reflected on the Corporation's balance sheet.
Entering into these contracts involves not only the risk of dealing with
counterparties and their ability to meet the terms of the contracts, but also
of movements in the market value of the futures contracts. The Corporation is
required to place amounts on deposit with brokers based on the market value
of certain contracts. These margin deposits bear interest based on the rate
of certain U.S. Treasury instruments and are to be refunded as the market
value changes or contracts are closed.
As of December 31, 1996 and 1995, the Corporation has contracts
outstanding with a notional principal amount of $11,125,000 and $12,100,000,
respectively, all of which the Corporation has used to hedge forward sales
contracts. The unrealized gain related to these contracts is approximately
$605,000 at December 31, 1996.
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Corporation has commitments to purchase 95.9
million pounds of aluminum through December 1997 from Venalum at current
market prices at the delivery date. Management expects that such quantity of
aluminum will be utilized in the normal course of operations during the term
of the agreements.
The Corporation has received notice of claims asserting potential
liability under various federal and state environmental laws. Management
believes substantially all such claims were discharged in a Chapter 11
bankruptcy filing by the former owner of the Corporation and relate to
matters existing prior to June 1987 which are covered by an indemnity
agreement with the former owner of the Corporation. The indemnity agreement
requires the former owner to pay all qualifying claims, as defined, in excess
of $500,000 if the aggregate amount of all claims exceeds $1,500,000.
The Corporation accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably
estimable. Based upon information that is currently available, management
does not expect that the resolution of environmental claims will have a
material adverse effect on the Corporation. However, given the inherent
uncertainties in evaluating environmental exposure, it is not possible to
predict the amount of future costs of environmental claims which may be
F-15
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (Continued)
subsequently determined. The Corporation has not anticipated any insurance
proceeds or third-party payments in determining its estimated liability for
environmental remediation.
The Corporation is also a party to a number of lawsuits and claims arising
out of the conduct of its business. Although the ultimate results of lawsuits
or other proceedings against the Corporation cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Corporation.
F-16
WELLS ALUMINUM CORPORATION
BALANCE SHEET
(unaudited)
(dollars in thousands)
JUNE 29,
1997
----------
ASSETS:
Current assets:
Cash and cash equivalents ..................................................... $ 19,788
Accounts receivable, principally trade, less allowance for doubtful accounts
of $1,066 .................................................................... 30,485
Inventories ................................................................... 21,508
Other current assets .......................................................... 690
----------
Total current assets ......................................................... 72,471
Property, plant and equipment, at cost less accumulated depreciation of $29,068 25,885
Debt issuance costs, net of accumulated amortization of $47 .................... 4,603
Goodwill and other intangibles, net of accumulated amortization of $11,880 .... 35,973
----------
Total assets.................................................................. $138,932
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable, principally trade ........................................... $ 22,157
Accrued expenses .............................................................. 7,329
----------
Total current liabilities .................................................... 29,486
Long-term debt, less current portion ........................................... 120,000
Deferred income taxes .......................................................... 5,563
Deferred benefit plan obligations .............................................. 3,551
----------
Total liabilities............................................................. 158,600
----------
Stockholders' equity:
Common stock, Class A, par value $0.01 per share;
975,000 shares authorized, 923,205 issued; Common stock, Class B, par value
$0.01 per share; 125,000 shares authorized, none issued ...................... 9
Additional paid-in capital .................................................... 1,215
Accumulated earnings .......................................................... (20,400)
Additional minimum pension liability .......................................... (492)
----------
Total stockholders' equity ................................................... (19,668)
----------
Total liabilities and stockholders' equity ................................... $138,932
==========
See accompanying notes.
F-17
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
---------- ----------
Net sales ..................................................... $120,038 $115,066
Cost of sales ................................................. 99,882 96,949
---------- ----------
Gross profit .................................................. 20,156 18,117
Selling, general and administrative expenses .................. 7,923 7,990
Compensation from settlement of employee stock options ........ 4,070 --
---------- ----------
Operating profit .............................................. 8,163 10,127
Interest expense .............................................. 3,094 2,727
---------- ----------
Earnings before income taxes and extraordinary item .......... 5,069 7,400
Income taxes .................................................. 2,237 3,285
---------- ----------
Earnings before extraordinary item ............................ 2,832 4,115
Extraordinary loss on refinancing of debt, net of income taxes 1,143 --
---------- ----------
Net earnings .................................................. $ 1,689 $ 4,115
========== ==========
See accompanying notes.
F-18
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
---------- ----------
Operating activities:
Net earnings......................................... $ 1,689 $ 4,115
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ...................... 2,101 2,008
Settlement of employee stock options ............... 1,263 --
Deferred income taxes............................... (131) (594)
Extraordinary loss on refinancing of debt ......... 1,143 --
Changes in operating assets and liabilities:
Accounts receivable, net .......................... (8,206) (3,622)
Inventories ....................................... (1,670) (1,226)
Accounts payable and accrued expenses ............. 4,186 5,874
Other assets and liabilities ...................... 1,204 325
---------- ----------
Net cash provided by operating activities............ 1,579 6,880
Investing activities:
Purchase of property, plant and equipment .......... (391) (1,373)
---------- ----------
Net cash used in investing activities................ (391) (1,373)
---------- ----------
Financing activities:
Principal payments on long-term debt ................ (54,789) (42,079)
Proceeds from long-term debt ........................ 134,700 37,000
Payment of debt issuance costs....................... (4,496) --
Proceeds from exercise of employee stock options ... -- 30
Payment of special cash dividend .................... (55,990) --
Repurchase of common stock........................... (1,102) --
---------- ----------
Net cash provided by (used in) financing activities 18,323 (5,049)
Net increase (decrease) in cash ..................... 19,511 458
Cash at beginning of year ........................... 277 342
---------- ----------
Cash at end of period................................ $ 19,788 $ 800
========== ==========
See accompanying notes.
F-19
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(unaudited)
(dollars in thousands)
1. GENERAL
Wells Aluminum Corporation (the "Corporation") is a domestic manufacturer
of aluminum extruded and fabricated products for several diverse industries
including construction, transportation, and durable goods.
2. BASIS OF PRESENTATION
The foregoing unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, these financial statements do not include
all of the disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these
statements include all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the results for the six
months ended June 29, 1997. Operating results for the interim periods of 1997
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in this Prospectus.
3. INVENTORIES
The aluminum component of inventories, representing 73% of total
inventories at June 29, 1997 is stated at the lower of cost or market, using
the last-in, first-out method (LIFO). The labor, overhead and supplies
components of inventories are carried at the lower of cost or market using
the first-in, first-out method (FIFO). The outside purchased parts component
of inventories is carried at the lower of cost or market using the weighted
average cost method.
The components of inventories are as follows:
JUNE 29,
1997
----------
Raw materials ...................... $14,463
Finished goods and work-in-progress 9,186
Supplies ........................... 484
----------
24,133
Less LIFO reserve................... (2,625)
----------
$21,508
==========
4. RELATED PARTY TRANSACTIONS
During the six months ended June 29, 1997 and June 30, 1996, the
Corporation purchased aluminum from CVG Industria Venezolana de Aluminio,
C.A. ("Venalum"), an owner of 180,360.5 shares of the Corporation's Class A
Common Stock, in amounts of $32.7 million and $35.3 million, respectively.
Amounts payable to Venalum at June 29, 1997 and December 31, 1996 were $12.6
million and $8.6 million, respectively.
5. RECAPITALIZATION
On May 5, 1997, 125,000 shares of Class B Common Stock were converted to
125,000 shares of Class A Common Stock, increasing the total shares of Class
A Common Stock outstanding to 903,062.5.
On May 28, 1997, the Corporation issued and sold $105.0 million principal
amount of 10.125% Series A Senior Notes (the "Old Notes") due 2005. In
connection with the consummation of the issuance and sale of the Old Notes,
the Corporation repaid existing indebtedness and entered into a New Credit
Facility, a secured working capital line of $15.0 million, which matures in
2002.
The offering of the Old Notes, the repayment of indebtedness under an
existing Bank Credit Facility, the retirement of 14.125% Senior Subordinated
Notes due 2001 (the "Subordinated Notes"), and the entering into of a New
Credit Facility were part of an overall recapitalization of the Corporation
(the "Recapitalization"). As part of the Recapitalization, the Corporation
used a substantial portion of the proceeds received from the issuance and
sale of the Old Notes to pay a special cash dividend to holders of its common
stock, settle existing employee stock options, and repurchase, or offer to
repurchase, shares of common stock held by certain stockholders.
F-20
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS --(continued)
5. RECAPITALIZATION (Continued)
In the six months ended June 29, 1997, the Corporation paid a special
cash dividend of $62.00 per share, or $56.0 million, to the holders of common
stock, paid or put in escrow an aggregate of $37.5 million related to the
retirement of debt, and paid $1.1 million for the repurchase and retirement
of 137,900 shares of common stock. The Corporation also incurred $4.1 million
of compensation expense and issued 158,042.5 shares of Class A Common Stock
related to the settlement of employee stock options. The compensation expense
represents the difference between fair market value and the exercise price on
the settlement of 57,000 employee stock options and $0.9 million of bonuses
paid to satisfy a portion of income taxes incurred by option holders as a
result of receiving shares of common stock.
At June 30, 1997, there were 923,205 shares of Class A Common Stock
outstanding.
6. INDEBTEDNESS
At June 29, 1997, indebtedness consisted of $105.0 million of Old Notes
and $15.0 million of Subordinated Notes. Proceeds from the issuance and sale
of the Old Notes to be used to repay the Subordinated Notes are being held in
an escrow account for repayment on July 15, 1997. At December 31, 1996,
indebtedness consisted of $25.1 million of loans under a Bank Credit Facility
and $15.0 million of Subordinated Notes.
7. FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Corporation enters into forward
sales contracts with certain customers for the sale of fixed quantities of
finished products at scheduled intervals. The aluminum cost component of the
forward sales contract is fixed for the duration of the contract, based on
forward market prices at the inception of the contract. In order to hedge its
exposure to aluminum price volatility under these forward sales contracts,
the Corporation enters into aluminum futures contracts (a financial hedge)
based on scheduled deliveries.
At June 29, 1997, the Corporation was party to $7.3 million of aluminum
futures contracts through nationally recognized brokerage firms and major
metal brokers. These aluminum futures contracts are for periods between July
1997 and November 1998, covering 10.0 million pounds of aluminum at prices
expected to be settled financially in cash as they reach their respective
settlement dates. The Corporation does not engage in any speculative trading
of futures contracts.
8. COMMITMENTS AND CONTINGENCIES
At June 29, 1997, the Corporation has commitments to purchase 48.0 million
pounds of aluminum through December 1997 from Venalum at current market
prices at the delivery date. Management expects that such quantity of
aluminum will be utilized in the normal course of operations during the term
of the agreement.
The Corporation has received notice of claims asserting potential
liability under various federal and state environmental laws. The Corporation
accrues for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimable. Based upon information
that is currently available, management does not expect that the resolution
of environmental claims will have a material adverse effect on the
Corporation. However, given the inherent uncertainties in evaluating
environmental exposure, it is not possible to predict the amount of future
costs of environmental claims which may be subsequently determined. The
Corporation has not anticipated any insurance proceeds or third-party
payments in determining its estimated liability for environmental
remediation.
The Corporation is also a party to a number of other lawsuits and claims
arising out of the conduct of its business. Although the ultimate results of
lawsuits and other proceedings against the Corporation cannot be predicted
with certainty, management does not expect that these matters will have a
material adverse effect on the Corporation and its operations.
9. SUBSEQUENT EVENT
As described in Note 6, the Corporation used the proceeds held in escrow
to repay $15.0 million of Subordinated Notes on July 15, 1997.
F-21
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------
TABLE OF CONTENTS
PAGE
--------
Available Information ...................... i
Prospectus Summary ......................... 1
Risk Factors................................ 13
The Exchange Offer.......................... 18
The Company................................. 26
The Recapitalization........................ 27
Capitalization.............................. 28
Selected Financial Data..................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 31
Business.................................... 39
Management.................................. 53
Principal Stockholders...................... 57
Certain Transactions........................ 59
Description of New Credit Facility.......... 60
Description of New Notes.................... 61
Plan of Distribution........................ 91
Legal Matters............................... 92
Experts..................................... 92
Index to Financial Statements .............. F-1
WELLS ALUMINUM
CORPORATION
OFFER TO EXCHANGE ITS 10 1/8%
SERIES B SENIOR NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR ANY AND ALL
OF ITS OUTSTANDING 10 1/8% SERIES A
SENIOR NOTES DUE 2005
PROSPECTUS