As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/04/13  Safeguard Business Systems Inc    424B3                  1:1.2M                                   Merrill Corp-MD/FA
          Deluxe Corp
          Hostopia.com Inc.
          Safeguard Holdings, Inc.
          Deluxe Manufacturing Operations, Inc.
          Deluxe Small Business Sales, Inc.
          Deluxe Financial Services, Inc.
          Deluxe Enterprise Operations, Inc.
          Custom Direct LLC
          Custom Direct, Inc.
          Deluxe Business Operations, Inc.
          OrangeSoda, Inc.

Document/Exhibit                   Description                      Pages   Size 

 1: 424B3       Prospectus                                          HTML    885K 

Table of Contents

 

Table of contents

 

Industry data and forecasts	i
Forward-looking statements	ii
Summary	1
The exchange offer	6
The new notes	9
Summary historical financial and other data	12
Risk factors	14
Use of proceeds	22
Capitalization	23
Selected historical financial data	24
The exchange offer	26
Description of other indebtedness	35
Description of notes	41
Material U.S. federal income and estate tax consequences to non-U.S. holders	90
Plan of distribution	93
Legal matters	94
Experts	94
Where you can find additional information	95

 

This prospectus is part of a registration statement we filed with the Securities and Exchange Commission, or the SEC. We are submitting this prospectus to holders of old notes so that they can consider exchanging their old notes for new notes. You should rely only on the information contained or incorporated by reference in this prospectus and in the accompanying transmittal documents. We have not authorized any other person to provide you with any other information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information contained or incorporated by reference in this prospectus is accurate as of any date other than the date of the applicable document that contains that information. Our business, financial condition, results of operations and prospects may have changed since that date. We are not making an offer to sell nor are we soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Each broker-dealer that receives new notes for its own account in exchange for old notes acquired by the broker-dealer 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. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of new notes received in exchange for old notes. For a period of up to 180 days following the completion of the exchange offer, we will make this prospectus, as amended or supplemented, available to any such broker-dealer that requests copies of this prospectus in the letter of transmittal for use in connection with any such resale. See “Plan of distribution.”

 

This prospectus incorporates important business and financial information about us that is not included in or delivered with this prospectus. Such information is available without charge to holders of old notes upon written or oral request made to: Investor Relations, Deluxe Corporation, 3680 Victoria Street North, Shoreview, Minnesota 55126-2966, telephone: (651) 787-1068. To obtain timely delivery of any requested information, holders of old notes must make any request no later than April 25, 2013, five business days before the expiration date of the exchange offer, or, if we decide to extend the expiration date of the exchange offer, five business days before such extended expiration date.

 

Industry data and forecasts

 

This prospectus and the information incorporated herein by reference includes market and industry data and forecasts that we obtained from industry publications and surveys, reports by market research firms and other

 

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Summary   This summary provides an overview of our business and the key aspects of the exchange offer. This summary is not complete and does not contain all of the information that you should consider before making an investment decision. You should carefully read all of the information contained or incorporated by reference in this prospectus, including the “Risk factors” section contained herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated herein by reference, and the consolidated financial statements and related notes incorporated herein by reference, before making an investment decision. Some of the statements in this summary constitute forward-looking statements. See “Forward-looking statements.” Unless otherwise noted or indicated by context, and except as expressly set forth in the section entitled “Description of notes,” in this prospectus the terms “we,” “us,” “our,” “the Company,” “our Company” and “Deluxe” refer to Deluxe Corporation and its direct and indirect subsidiaries.   Vision   Our vision is to be the best at helping small businesses and financial institutions grow. Through our various businesses and brands, we help small businesses and financial institutions better grow, operate and protect their businesses. We employ a multi-channel strategy to provide a suite of life-cycle driven solutions to our customers, with a focus on providing simple, easy-to-use, innovative solutions that fulfill customer needs.   Company overview   Deluxe is organized into three reportable business segments that combine to make us a valuable partner for small businesses and financial institutions as well as one of the top check producers in North America. Our three business segments are Small Business Services, Financial Services and Direct Checks.   Small Business Services. Small Business Services offers a suite of personalized products and services that help small businesses grow, operate and protect their businesses. This segment sells business checks, forms and accessories (for example, billing forms, work orders, purchase orders, invoices, labels and retail packaging supplies) as well as marketing solutions and other services including web design and hosting, fraud protection, payroll, logo design, search engine optimization and marketing and digital printing services designed to fulfill the sales and marketing needs of small businesses, as well as such promotional products as business cards, greeting cards, brochures and apparel. We sell these products and services through multiple channels, including direct response advertising, referrals from financial institutions and telecommunications clients, distributors and local dealers, in North America and portions of South America and Europe. For the year ended December 31, 2012, revenue for Small Business Services was $961.6 million, operating income for Small Business Services was $160.4 million and Small Business Services’ revenue accounted for 63% of our total revenue.   Financial Services. Financial Services offers products and services for financial institutions, including comprehensive check programs, fraud prevention and monitoring services, customer acquisition, marketing communications and profitability analytics. We also offer enhanced services such as customized reporting, file management and expedited account conversion support. For the year ended December 31, 2012, revenue for Financial Services was $341.1 million, operating income for Financial Services was $77.7 million and Financial Services’ revenue accounted for 23% of our total revenue.   Direct Checks. Direct Checks is the nation’s leading direct-to-consumer check supplier and sells personal and business checks and check-related products and services. For the year ended December 31, 2012, revenue for Direct Checks was $212.2 million, operating income for Direct Checks was $63.9 million and Direct Checks’ revenue accounted for 14% of our total revenue.   Our common stock is publicly traded on the New York Stock Exchange under the symbol “DLX.”

 

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Competitive strengths   We believe that our Company has the following competitive strengths:   Market leader. We are a leading printer of checks, as measured by total revenue and the number of checks produced, as well as a provider of printed products and services for small businesses, consumers and financial institutions. We have a strong, long-standing reputation for quality and service across our expansive customer base. Our customer base includes approximately four million small business customers, 5,700 financial institution clients and eight million direct-to-consumer customers, which we believe represents the largest base in the direct-to consumer checks marketplace. We leverage our leadership position and our strong relationships to sell a range of other products and services to our three customer types: small businesses; financial institutions; and consumers. In addition to our product and service offerings, we believe that our portfolio of brands creates a competitive advantage in winning new customer accounts, as well as in retaining existing customers.   Diversified business with broad product and service offerings. We continue to diversify our business through our three business segments. We use direct marketing, a North American sales force, financial institution and telecommunication client referrals, the internet and independent distributors and dealers to provide our customers a wide range of customized products and services. We produce checks, forms and related products, and we also offer a growing suite of marketing solutions and other services. For example, our Small Business Services segment offers services such as web design, hosting and other services, logo design, search engine optimization and marketing, fraud protection services, payroll services and digital printing services designed to fulfill the sales and marketing needs of small businesses as well as promotional products such as business cards, greeting cards, brochures and apparel. Financial Services offers various customer fraud protection, customer acquisition programs and risk management and profitability offerings. Direct Checks provides package insert programs and fraud protection programs. Over the past several years we have increased our focus on growing non-check revenue. In 2012, our revenue from non-check products and services was 41% of consolidated revenue.   Proven ability to reduce costs. We have been pursuing cost reduction and business simplification initiatives, including: reducing shared services infrastructure costs; streamlining our call center and fulfillment activities; eliminating system and work stream redundancies; and strengthening our ability to quickly develop new products and services and bring them to market. We have reduced stock-keeping units, standardized products and services and improved the sourcing of third-party goods and services.   As a result of all of these efforts, we realized net cost savings of approximately $50 million during 2012, as compared to our 2011 results of operations, generated primarily by our sales and marketing, fulfillment and information technology organizations. Approximately 65% of these savings impacted selling, general and administrative expense, with the remaining 35% affecting cost of revenue.   Leader in technology-based services and solutions. We continue to invest in several key initiatives that will allow us to achieve our strategies and further position us as a provider of higher growth, technology-enabled solutions. Some of our key initiatives include continuing to improve our e-commerce capabilities, implementing a unified integrated platform for our various web based offerings, improving our customer analytics, focusing on key customer segments and improving our merchandising. Additionally, our improved solutions leverage differentiated, technology-led check offers, driven by investments in fully automated flat delivery packaging, digital printing and on-line portals and dashboards.   Effective and efficient manufacturing and fulfillment. We continue to focus on improving the customer experience by providing excellent service and quality, reducing costs and increasing productivity. We accomplish this by embedding lean operating principles in all processes while emphasizing a culture of continuous improvement. Under this approach, employees work together to produce products, rather than working on individual tasks in a linear fashion. Because employees assume more ownership of the end product, the results are improved productivity and lower costs.   Strong and consistent cash flow generation. Improved operating results combined with modest capital expenditure requirements and efficient use of working capital have led to strong and consistent cash flow generation over the

 

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past several years. Our broad financial institution customer base enters into contracts which generally range in duration from three to six years, allowing us a more consistent revenue stream. Cash flow from operating activities of continuing operations was $244 million, $235 million and $213 million for 2012, 2011 and 2010, respectively. Capital expenditures for the same periods were $35 million, $36 million and $44 million, respectively.   Well positioned to grow. We have delivered three consecutive years of revenue growth, for the first time since 1996. During recent years, we executed our cost reduction actions and identified additional opportunities to improve our cost structure. In addition, we believe we took appropriate steps to position ourselves for sustainable growth, including accelerating our brand awareness and positioning initiatives, investing in technology for new marketing solutions and service offerings, enhancing our internet capabilities, improving customer segmentation and adding new small business customers to whom we can cross sell other products and services. We invested in acquisitions that we believe offer higher growth marketing solutions and other services, extend our direct-to-consumer offerings, improve our operating cash flow and bring analytics-driven deposit acquisition marketing programs to our financial institution clients. We believe that we are well-positioned to continue delivering revenue growth and strong margins.   Strong management team. Lee Schram, our Chief Executive Officer, and his experienced executive leadership team bring a focused sense of urgency to Deluxe and have been driving transformation. Additionally, we have invested in our brand and created stronger technology and digital expertise by adding sales and technology leaders from our business services acquisitions plus several proven key leaders in e-commerce, search engine optimization and marketing and web-to-print.   Strategy   Our business strategy is focused on the following initiatives:   Small Business Services. Our focus within Small Business Services is to grow revenue and increase operating income by continuing to implement the following strategies:   ·                  Acquire new customers by leveraging customer referrals that we receive from our Financial Services segment’s financial institution clients and our telecommunications clients, as well as from other marketing initiatives, including internet and direct mail solicitations;   ·                  Expand sales of higher growth marketing solutions and other services;   ·                  Increase our share of the amount small businesses spend on the types of products and services in our portfolio through increased brand awareness and improved customer segmentation and analytics; and   ·                  Continue to optimize our cost and expense structure.   We expect higher growth marketing solutions and other services will represent an increasing portion of our revenue going forward.   Financial Services. Our strategies within Financial Services are as follows:   ·                  Optimize core check revenue streams and acquire new clients;   ·                  Expand sales of higher growth marketing solutions and other services that differentiate us from the competition; and   ·                  Continue to optimize our cost and expense structure.   In our efforts to expand beyond check-related products, we deliver several marketing solutions and other service offerings, including:

 

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·                  Marketing solutions—a variety of strategic and tactical marketing solutions which help financial institutions acquire new customers, deepen existing customer relationships and retain customers, including Cornerstone SolutionsSM, analytics-driven direct marketing programs, and SwitchAgentSM, a proprietary service allowing consumers to easily switch from one financial institution to another.   ·                  Banker’s Dashboard®—online financial management tools that provide financial institutions with a comprehensive daily view of their financial picture.   ·                  DeluxeProvent®—a comprehensive suite of identity protection services.   ·                  Deluxe Detect®—a new account applicant screening tool.   Direct Checks. Our strategies within Direct Checks are as follows:   ·                  Maximize the lifetime value of customers by selling new features, accessories and products;   ·                  Continue to optimize our cost and expense structure; and   ·                  Optimize cash flow.   We continue to actively market our products and services through targeted advertising, including a continued focus on the internet channel. Additionally, we continue to explore avenues to increase sales to existing customers. One example is our EZShield® offering, a check protection service that provides reimbursement to consumers for losses resulting from forged signatures or endorsements and altered checks.   Industry overview   Checks. According to a Federal Reserve study released in December 2010, the most recent information available, approximately 27.5 billion checks were written in 2009. According to this study, checks are no longer the largest single non-cash payment method in the United States, being surpassed by the debit card. Checks written account for approximately 25% of all non-cash payment transactions, which is a reduction from the Federal Reserve study released in December 2007 when checks accounted for approximately 35% of all non-cash payment transactions. The Federal Reserve estimates that checks written declined approximately 6.1% per year between 2006 and 2009. We expect that the number of checks written will continue to decline in the long-term. However, we cannot predict the rate at which this decline will continue. In addition, we believe that turmoil in the financial services industry between 2009 and 2011 had a negative impact on our check volumes, as some of our clients experienced higher than normal customer attrition. However, our Financial Services check order decline rates did return to pre-recessionary levels in 2012.   Small business customers. The Small Business Administration’s Office of Advocacy defines a small business as an independent business having fewer than 500 employees. In 2010, the most recent information available,  it was estimated that there were approximately 27.9 million small businesses in the United States. This represented approximately 99.7% of all U.S. employer firms. According to the same survey, small businesses employ almost half of all private sector employees and generated 64% of net new jobs created over the past 18 years. According to the Small Business Branch of Industry Canada, there are just over one million small businesses in Canada with employees, and 98% of businesses in Canada have fewer than 100 employees.   The small business market is impacted by general economic conditions and the rate of small business formations. The index of small business optimism published by the National Federation of Independent Business was 93.9 in January 2012 and ended the year at 88.0, the second lowest index since March 2010, and 70% of small business owners characterized the current period as a bad time to expand. The National Federation of Independent Business’ December 2012 report also showed that 45% of business owners believe conditions will be worse in six months, while only 11% expect an improvement. Forward labor market indicators are also weak, and small business owners’ view of the future does not foresee much improvement in economic growth. On a positive note, according to the Small Business Administration’s Office of Advocacy, there was a slight increase in the number of small businesses

 

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		·      tender your old notes by sending the certificates for your old notes, in proper form for transfer, a properly completed and duly executed letter of transmittal with the required signature guarantee and all other documents required by the letter of transmittal to U.S. Bank National Association, as exchange agent, at the address set forth in this prospectus, and such old notes must be received by the exchange agent prior to the expiration of the exchange offer; or   ·      tender your old notes by using the book-entry transfer procedures described in “The exchange offer—Procedures for tendering old notes—Book-entry delivery procedures” and transmitting a properly completed and duly executed letter of transmittal with the required signature guarantee, or an agent’s message instead of the letter of transmittal, to the exchange agent. In order for a book-entry transfer to constitute a valid tender of your old notes in the exchange offer, U.S. Bank National Association, as registrar and exchange agent, must receive a confirmation of book-entry transfer of your old notes into the exchange agent’s account at The Depository Trust Company prior to the expiration of the exchange offer.
Guaranteed delivery procedures		If you are a registered holder of old notes and wish to tender your old notes in the exchange offer, but your old notes are not immediately available, time will not permit your old notes or other required documents to be received by the exchange agent before the expiration of the exchange offer or the procedures for book-entry transfer cannot be completed prior to the expiration of the exchange offer, then you may tender your old notes by following the procedures described below under “The exchange offer—Procedures for tendering old notes—Guaranteed delivery.”
Special procedures for beneficial owners		If you are a beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes in the exchange offer, you should promptly contact the person in whose name your old notes are registered and instruct that person to tender on your behalf the old notes prior to the expiration of the exchange offer.   If you wish to tender in the exchange offer on your own behalf, prior to completing and executing the letter of transmittal and delivering the certificates for your old notes, you must either make appropriate arrangements to register ownership of your old notes in your name or obtain a properly completed bond power from the person in whose name your old notes are registered.
Withdrawal; non-acceptance		You may withdraw any old notes tendered in the exchange offer at any time prior to 5:00 p.m., New York City time, on May 2, 2013 by sending the exchange agent written notice of withdrawal. Any old notes tendered on or prior to the expiration date of the exchange offer that are not validly withdrawn on or prior to the expiration date of the exchange offer may not be withdrawn. If we decide for any reason not to accept any old notes tendered for exchange or to withdraw the exchange offer, the old notes will be returned to the registered holder at our expense promptly after the expiration or termination of the exchange offer. In the case of old notes

 

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		tendered by book-entry transfer into the exchange agent’s account at The Depository Trust Company, any withdrawn or unaccepted old notes will be credited to the tendering holder’s account at The Depository Trust Company. For further information regarding the withdrawal of tendered old notes, please see “The exchange offer—Withdrawal of tenders.”
Resales of new notes		Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, we believe that the new notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act so long as certain conditions are met. See “The exchange offer—Purpose and effects of the exchange offer” for more information regarding resales.
Consequences of not exchanging your old notes		If you do not exchange your old notes in the exchange offer, you will no longer be able to require us to register your old notes under the Securities Act pursuant to the registration rights agreement except in the limited circumstances provided under the registration rights agreement. In addition, you will not be able to resell, offer to resell or otherwise transfer your old notes unless we have registered the old notes under the Securities Act, or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, or as otherwise required under certain limited circumstances pursuant to the terms of the registration rights agreement, we do not currently anticipate that we will register the old notes under the Securities Act.   For more information regarding the consequences of not tendering your old notes, please see “The exchange offer—Consequences of failure to exchange.”
U.S. federal income and estate tax considerations		The exchange of old notes for new notes in the exchange offer will not be a taxable exchange for U.S. federal income and estate tax purposes. Please see “Material U.S. federal income and estate tax considerations for non-U.S. holders” for more information.
Use of proceeds		The exchange offer is being made solely to satisfy certain of our and the guarantors’ obligations under the registration rights agreement, and we will not receive any cash proceeds from the issuance of the new notes. See “Use of proceeds.”
Fees and expenses		We will pay all of our expenses incident to the exchange offer.
Additional documentation; further information; assistance		Any questions or requests for assistance or additional documentation regarding the exchange offer may be directed to the exchange agent. Beneficial owners may also contact their custodian for assistance concerning the exchange offer.

 

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		“Description of notes—Note guarantees.”   For the 12 months ended December 31, 2012, our non-guarantor subsidiaries:   ·      accounted for $271.2 million, or 17.9%, of our revenues; and   ·      accounted for $18.8 million, or 11.1%, of our net income.   As of December 31, 2012, our non-guarantor subsidiaries:   ·      had $142.9 million of total assets, representing 10.1% of our total assets; and   ·      had $58.9 million of total liabilities, including trade payables, representing 6.0% of our total liabilities.   Amounts are presented after giving effect to intercompany eliminations.
Ranking		The notes:   ·      are our senior unsecured obligations;   ·      rank equally with all our existing and future senior unsecured debt;   ·      are effectively subordinated to all our existing and future secured debt, to the extent of the value of the collateral securing such debt;   ·      are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the notes; and   ·      are senior to all of our existing and future unsecured senior subordinated or subordinated debt.   As of December 31, 2012:   ·      our and the guarantors’ consolidated outstanding indebtedness was approximately $652.6 million, none of which was secured, and we had additional commitments of approximately $191.5 million available to us under our revolving credit facility (after giving effect to approximately $8.5 million of outstanding letters of credit);   ·      we had approximately $652.6 million of senior unsecured indebtedness;   ·      we had no unsecured senior subordinated or subordinated indebtedness; and   ·      our subsidiaries that do not guarantee the notes had approximately $58.9 million of liabilities (excluding intercompany liabilities).
Covenants		The indenture governing the notes, among other things, limits our ability and the ability of our restricted subsidiaries to:
		·      incur, assume or guarantee additional indebtedness;   ·      issue redeemable stock and preferred stock;   ·      pay dividends or distributions or redeem or repurchase capital stock;   ·      prepay, redeem or repurchase debt that is junior in right of payment

 

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		to the notes;   ·      make loans and investments;   ·      incur liens;   ·      restrict dividends, loans or asset transfers from our subsidiaries;   ·      sell or otherwise dispose of assets, including capital stock of subsidiaries;   ·      consolidate or merge with or into, or sell substantially all of our assets to, another person; and   ·      enter into transactions with affiliates.   These covenants are subject to a number of important exceptions and qualifications. In addition, if the notes receive an investment grade rating from at least two nationally recognized credit rating agencies, the covenants listed above will be replaced with less restrictive covenants. For more details, see “Description of notes.”
Absence of public market for the new notes		The new notes generally will be freely transferable but will also be a new issue of securities for which there is currently no established trading market. We do not intend to apply for a listing of the new notes on any securities exchange or an automated dealer quotation system. Accordingly, there can be no assurance as to the development or liquidity of any market for the new notes. The initial purchasers have advised us that they currently intend to make a market in the new notes. However, they are not obligated to do so, and any market making with respect to the new notes may be discontinued without notice.
Risk factors		You should carefully consider all of the information contained or incorporated by reference in this prospectus and, in particular, you should evaluate the specific factors under “Risk factors” beginning on page 14 and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated herein by reference.

 

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Risk factors

 

Before participating in the exchange offer, you should carefully consider the various risks of an investment in the new notes, including those described below and those described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated by reference into this prospectus, together with all of the other information included in, or incorporated by reference into, this prospectus. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business, financial condition or results of operations. These risks also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Forward-looking statements.”

 

Risks relating to the notes

 

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry or prevent us from meeting our obligations under the notes.

 

As of December 31, 2012, our total indebtedness was approximately $652.6 million as shown on the following chart:

 

(In millions)
5.125% Senior Notes due 2014		$	256.8
7.00% Senior Notes due 2019		200.0
6.000% Senior Notes due 2020		195.8
Total		$	652.6

 

Our level of indebtedness could have important consequences for you, including the following:

 

·                  it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, debt service requirements, acquisitions or general corporate or other purposes;

 

·                  a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures and future business opportunities;

 

·                  the debt service requirements of our other indebtedness could make it more difficult for us to satisfy our financial obligations, including those related to the notes;

 

·                  certain of our borrowings, including borrowings under our revolving credit facility, are at variable rates of interest, exposing us to the risk of increased interest rates;

 

·                  it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt;

 

·                  it may increase our cost of borrowing; and

 

·                  we may be vulnerable to a downturn in general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our growth.

 

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We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations, including the notes, depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. See “Forward-looking statements” contained herein and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cash flows and liquidity” in our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated herein by reference.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, including the notes. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our revolving credit facility, the indentures that govern our 5.125% Senior Notes due 2014 and our 7.00% Senior Notes due 2019, or the existing notes, or the indenture that governs the notes. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our revolving credit facility, the indenture that governs our 7.00% Senior Notes due 2019 and the indenture that governs the notes restrict our ability to dispose of our assets and to use the proceeds from any such disposition. We may not be able to consummate such dispositions or to obtain the realized proceeds of such dispositions, or such proceeds may not be adequate to meet any debt service obligations then due. See “Description of other indebtedness” and “Description of notes.”

 

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

·                  our debt holders could declare all outstanding principal and interest to be due and payable;

 

·                  the lenders under our revolving credit facility could terminate their commitments to lend us money and could foreclose against the assets securing their borrowings; and

 

·                  we could be forced into bankruptcy or liquidation, which could result in you losing your investment in the notes.

 

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under the notes.

 

Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility, the indentures that govern the existing notes and the indenture that governs the notes do not fully prohibit us or our subsidiaries from doing so. As of December 31, 2012, letters of credit outstanding under our revolving credit facility were approximately $8.5 million and net available borrowings under our revolving credit facility were approximately $191.5 million. If we incur any additional indebtedness that ranks equally with the notes, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify. See “Description of other indebtedness” and “Description of notes.”

 

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Restrictive covenants in our revolving credit facility, the indentures that govern the existing notes and the indenture that governs the notes may adversely affect our operations.

 

Our revolving credit facility, the indentures that govern the existing notes and the indenture that governs the notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. The agreements governing our indebtedness include covenants restricting our, and certain of our subsidiaries’, ability to, among other things:

 

·                  incur, assume or guarantee additional indebtedness;

 

·                  issue redeemable stock and preferred stock;

 

·                  pay dividends or distributions or redeem or repurchase our capital stock;

 

·                  prepay, redeem or repurchase debt that is junior in right of payment of the notes;

 

·                  make loans, investments and advances;

 

·                  incur liens;

 

·                  restrict dividends, loans or asset transfers from our subsidiaries;

 

·                  sell or otherwise dispose of assets, including capital stock of our subsidiaries;

 

·                  enter into sale and leaseback transactions;

 

·                  enter into swap agreements;

 

·                  consolidate or merge with or into, or sell substantially all of our assets to, another person; and

 

·                  enter into transactions with affiliates.

 

In addition, under our revolving credit facility, we are required to maintain certain leverage and interest coverage ratios. From and after April 1, 2014, our revolving credit facility also requires us to maintain a certain liquidity level under certain circumstances. Our ability to meet these ratios and this level can be affected by events beyond our control, and we cannot assure you that we will meet them.

 

As a result of the above, we may be:

 

·                  limited in how we grow or restructure our business;

 

·                  unable to raise additional debt or equity financing to operate during general economic or business downturns;

 

·                  unable to compete effectively or take advantage of new business opportunities; or

 

·                  unable to execute our business strategy.

 

In addition, a breach of any of the above covenants could result in a default under one or more of the agreements governing our indebtedness, including as a result of a cross default provision. Upon the occurrence of an event of default under our revolving credit facility, the lenders could elect to declare all amounts outstanding under our revolving credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our revolving credit facility could proceed against the collateral granted to them to secure that indebtedness. We and the guarantors under our revolving credit facility have

 

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In addition, a subsidiary that provides a guarantee of the notes will be automatically released from its guarantee upon the occurrence of certain events, including the following:

 

·                  the designation of that subsidiary as an unrestricted subsidiary;

 

·                  the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the notes by that subsidiary; or

 

·                  the sale or other disposition, including the sale of all or substantially all of the assets, of that subsidiary.

 

If the guarantee of any subsidiary is released, no holder of notes will have a claim as a creditor against that subsidiary, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary will be effectively senior to the claim of any holder of the notes. See “Description of notes—Note guarantees.”

 

We are a holding company and may not have access to sufficient cash to make payments on the notes.

 

We are a holding company with no direct operations. Our principal assets are the equity interests we hold in our operating subsidiaries. As a result, we are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our outstanding debt service and other obligations. Our subsidiaries are separate and distinct legal entities and, unless they are guarantors of the notes, will have no obligation, contingent or otherwise, to pay amounts due under the notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. In addition, our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness, including the notes, and any payment of dividends, distributions, loans or advances to us by our subsidiaries could be subject to restrictions on dividends or repatriation of earnings under applicable local law and monetary transfer restrictions in the jurisdictions in which our subsidiaries operate. Although the indenture that governs our 7.00% Senior Notes due 2019 and the indenture that governs the notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes.

 

If we default on our obligations to pay our indebtedness we may not be able to make payments on the notes.

 

Any default under the agreements governing our indebtedness, including a default under our revolving credit facility that is not waived by the required lenders or a default under any of the indentures that govern the existing notes, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in our revolving credit facility and our indentures), we could be in default under the terms of the agreements governing such indebtedness, including our revolving credit facility and our indentures. In the event of such default:

 

·                  the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;

 

·                  the lenders under our revolving credit facility could elect to terminate their commitments thereunder and cease making further loans and institute foreclosure proceedings against our assets; and

 

·                  we could be forced into bankruptcy or liquidation.

 

If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our revolving credit facility to avoid being in default. If we breach our covenants under our revolving credit facility

 

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·                  we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees;

 

·                  the issuance of the notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business;

 

·                  we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay such debts as they mature; or

 

·                  we or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor, if, in either case, after final judgment, the judgment is unsatisfied.

 

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A court would likely find that a guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent that the guarantor did not obtain a reasonably equivalent benefit directly or indirectly from the issuance of the notes.

 

We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the notes or the incurrence of the guarantees would not be further subordinated to our or any of our guarantors’ other debt. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness:

 

·                  the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all its assets;

 

·                  the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or

 

·                  it could not pay its debts as they become due.

 

If a court were to find that the issuance of the notes or the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the relevant guarantor, or require the holders of the notes to repay any amounts received with respect to the notes or such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in the acceleration of such debt.

 

Although each guarantee entered into by a subsidiary contains a provision intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer or conveyance law or may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless. In addition, in a recent Florida bankruptcy case, these types of provisions were found to be unenforceable.

 

Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the notes to other claims against us under the principle of equitable subordination if such court determines that (1) the holders of the notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of the notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

 

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Your ability to transfer the new notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the new notes.

 

The new notes are a new issue of securities for which there is no established public market. We do not intend to have the new notes listed on any national securities exchange or to arrange for their quotation on any automated dealer quotation system. The initial purchasers have advised us that they intend to make a market in the new notes as permitted by applicable laws and regulations; however, the initial purchasers are not obligated to make a market in the new notes and, if commenced, they may discontinue their market making activities at any time without notice. In addition, such market making activities may be limited while the effectiveness of a shelf registration statement is pending. Therefore, we cannot assure you as to the development or liquidity of any trading market for the new notes. The liquidity of any market for the new notes will depend on a number of factors, including, without limitation:

 

·                  the number of holders of the new notes;

 

·                  our operating performance and financial condition;

 

·                  the market for similar securities;

 

·                  the interest of securities dealers in making a market in the new notes; and

 

·                  prevailing interest rates.

 

The market price for the new notes may be volatile.

 

Historically, the market for non-investment grade debt has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the notes. We cannot assure you that the market, if any, for the new notes will be free from similar disruptions or that any such disruptions may not adversely affect the liquidity in that market or the prices at which you may sell your new notes. In addition, subsequent to their issuance, the new notes may trade at a discount, depending upon prevailing interest rates, our operating performance and financial condition, the market for similar securities and other factors. Therefore, we cannot assure you that you will be able to sell your new notes at a particular time or that the price that you receive when you sell will be favorable.

 

A lowering or withdrawal of the credit ratings assigned to our debt securities by credit rating agencies may reduce the market value of the notes, increase our future borrowing costs and reduce our access to capital.

 

Our debt securities currently have non-investment grade credit ratings, and any credit rating assigned to our debt securities could be lowered or withdrawn entirely by a credit rating agency if, in that credit rating agency’s judgment, future circumstances relating to the basis of such credit rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in the credit ratings of our debt securities will generally affect the market value of the notes. Credit ratings are not recommendations to purchase, hold or sell the notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the notes.

 

Any future lowering of the credit ratings assigned to our debt securities would likely make it more difficult or expensive for us to obtain additional debt financing. If any credit rating initially assigned to the new notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your new notes without a substantial discount.

 

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Capitalization

 

The following table sets forth our capitalization as of December 31, 2012. You should read the following table in conjunction with the sections of this prospectus entitled “Selected historical financial data” and “Description of other indebtedness” and the consolidated financial statements and related notes, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated herein by reference.

 

(Dollars in thousands)		As of December 31, 2012
Cash and cash equivalents		$	45,435
Debt:
Amount drawn on revolving credit facility		—		(1)
5.125% Senior Notes due 2014		256,770		(2)
7.00% Senior Notes due 2019		200,000
6.000% Senior Notes due 2020		195,811		(3)
Total debt		$	652,581
Total shareholders’ equity		432,935
Total capitalization		$	1,085,516

 

(1)                   Consists of a $200.0 million secured revolving credit facility expiring in February 2017. The revolving credit facility provides for revolving credit loans, swing line loans of up to an aggregate amount of $15.0 million and letters of credit of up to an aggregate amount of $20.0 million. See “Description of other indebtedness—Revolving credit facility.” As of December 31, 2012, letters of credit outstanding under our revolving credit facility were approximately $8.5 million and net available borrowings under our revolving credit facility were approximately $191.5 million.

(2)                   Includes increase due to cumulative change in fair value of hedged debt of approximately $3.4 million as of December 31, 2012.

(3)                  Includes decrease due to cumulative change in fair value of hedged debt of approximately $4.2 million as of December 31, 2012.

 

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