<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. _________)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
KEVCO, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing is calculated and state how it was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
(5) Total fee paid:
- -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- -------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- -------------------------------------------------------------------------------
(3) Filing Party:
- -------------------------------------------------------------------------------
(4) Date Filed:
- -------------------------------------------------------------------------------
<PAGE> 2
KEVCO, INC.
1300 SOUTH UNIVERSITY DRIVE, SUITE 200
FORT WORTH, TEXAS 76107-5734
NOVEMBER 2, 1999
Dear Shareholder:
You are cordially invited to attend the annual meeting of shareholders of
Kevco, Inc. to be held at 10:00 a.m., local time, on November 22, 1999, at the
Marriott Courtyard, 3150 Riverfront Drive, Fort Worth, Texas 76107.
The matters expected to be acted upon at the meeting are described in the
accompanying notice of annual meeting of shareholders and proxy statement. The
board believes that a favorable vote on each of these matters is in your best
interests and unanimously recommends a vote "FOR" each such matter.
Your vote is important, whether or not you plan to attend the meeting.
Accordingly, please take a moment now to complete, sign, date and return your
proxy in the enclosed envelope.
I look forward to seeing you at the meeting.
Very truly yours,
/s/ JAMES A. JOHNSON
JAMES A. JOHNSON
Executive Vice President and
Secretary
<PAGE> 3
KEVCO, INC.
1300 SOUTH UNIVERSITY DRIVE, SUITE 200
FORT WORTH, TEXAS 76107-5734
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 22, 1999
The annual meeting of shareholders of Kevco, Inc. will be held at 10:00
a.m., local time, on November 22, 1999, at the Marriott Courtyard, 3150
Riverfront Drive, Fort Worth, Texas 76107. The items of business are:
PROPOSAL 1: Election of directors;
PROPOSAL 2: Adoption of an amendment to the articles of incorporation
authorizing:
- an increase in the total number of authorized shares of
capital stock from 100,000,000 to 150,000,000; and
- an undesignated class of preferred stock, par value $0.01
per share, two series of preferred stock, and a class of
noncommon stock, par value $0.01 per share;
PROPOSAL 3: Adoption of the 1999 stock option plan; and
PROPOSAL 4: Transaction of such other business as may properly come
before the meeting.
Only shareholders of record at the close of business on October 29, 1999
are entitled to notice of and to vote at the meeting and any adjournment
thereof. A list of shareholders entitled to vote at the meeting will be
available for inspection by any shareholder, for any purpose relevant to the
meeting, during the meeting and during normal business hours for 10 days prior
to the meeting at our principal office. The terms "we," "our" and "company,"
when used throughout this notice and the accompanying proxy statement, refer to
Kevco, Inc.
The board believes that a favorable vote on each of these matters is in
your best interests and unanimously recommends a vote "FOR" each matter. Your
vote is very important regardless of the number of shares you own.
WE URGE YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU DECIDE TO ATTEND THE MEETING, YOU MAY, IF SO DESIRED, REVOKE THE PROXY AND
VOTE YOUR SHARES IN PERSON.
/s/ JAMES A. JOHNSON
JAMES A. JOHNSON
Executive Vice President and
Secretary
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................... 1
Location.................................................. 1
Record Date; Stock Entitled to Vote....................... 1
Quorum; Abstentions....................................... 1
Voting; Required Votes.................................... 1
Voting by Proxy; Revocation of Proxies.................... 1
Other Business............................................ 2
Solicitation of Proxies................................... 2
No Dissenters' or Appraisal Rights........................ 2
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS..................... 3
Meetings and Committees of the Board of Directors......... 5
Compensation of Directors................................. 5
Security Ownership of Certain Beneficial Owners........... 6
EXECUTIVE OFFICERS.......................................... 7
Security Ownership of Management.......................... 8
Report of the Compensation Committee on Executive
Compensation........................................... 9
Compensation Committee Interlocks and Insider
Participation.......................................... 10
Summary Compensation Table................................ 10
Year-End Option Values.................................... 11
Employment Agreements..................................... 11
Certain Relationships and Related Transactions............ 11
Stock Performance Chart................................... 13
Section 16(a) Beneficial Ownership Reporting Compliance... 13
PROPOSAL NO. 2 -- CHARTER AMENDMENT......................... 14
Introduction.............................................. 14
Reasons for the Charter Amendment......................... 14
Effect of the Charter Amendment........................... 16
Description of the Preferred Stock........................ 17
Description of the Nonvoting Common Stock................. 19
Interests of Certain Persons in the Matter to be Acted
Upon................................................... 20
Recommendation of Board of Directors...................... 20
PROPOSAL NO. 3 -- 1999 STOCK OPTION PLAN.................... 21
Summary of the Plan....................................... 21
Certain Federal Income Tax Consequences................... 23
Recommendation of the Board of Directors.................. 25
SHAREHOLDER PROPOSALS....................................... 26
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 26
ADDITIONAL INFORMATION...................................... 26
ANNUAL REPORT............................................... 26
EXHIBIT A -- CHARTER AMENDMENT
EXHIBIT B -- 1999 STOCK OPTION PLAN
</TABLE>
i
<PAGE> 5
KEVCO, INC.
PROXY STATEMENT
------------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 22, 1999
------------------------
GENERAL INFORMATION
LOCATION
We will hold the 1999 annual meeting of shareholders at 10:00 a.m., local
time, on November 22, 1999, at the Marriott Courtyard, 3150 Riverfront Drive,
Fort Worth, Texas 76107. This proxy statement and the accompanying form of proxy
are being mailed beginning on or about November 2, 1999, to shareholders
entitled to vote. The Kevco 1998 Annual Report, which includes financial
statements, is being mailed with this proxy statement. Kindly notify James A.
Johnson, our Executive Vice President and Secretary, at the same address if you
did not receive a report, and a copy will be sent to you.
RECORD DATE; STOCK ENTITLED TO VOTE
The record date for determining the shareholders entitled to notice of and
to vote at the meeting was the close of business on October 29, 1999. On the
record date, there were approximately 9,563,487 shares of our common stock, par
value $0.01 per share, issued and outstanding. Common stock is currently our
only class of outstanding voting securities.
QUORUM; ABSTENTIONS
The presence, in person or by proxy, at the meeting of holders of at least
a majority of the issued and outstanding shares of common stock is necessary to
constitute a quorum for the transaction of business. Each share represented at
the meeting in person or by proxy will be counted toward a quorum. Abstentions
and broker "non-votes" will be counted as present for the purposes of
determining whether a quorum is present but will not be counted as votes cast in
favor of the proposals. A broker "non-vote" occurs when a nominee holding common
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner.
VOTING; REQUIRED VOTES
A holder of common stock on the record date will be entitled to cast one
vote for each share of common stock registered in his or her name on each matter
that is properly presented to the shareholders for a vote at the meeting. In
order to be elected a director, a nominee must receive a plurality of the votes
of the holders of common stock entitled to vote at the meeting. "Plurality"
means that the nominees who receive the largest number of votes cast are elected
as directors. The affirmative vote of the holders of at least a majority of the
shares entitled to vote at the meeting is required to approve and adopt the
amendment and the plan.
VOTING BY PROXY; REVOCATION OF PROXIES
Shares of common stock that are entitled to vote and are represented by a
proxy properly signed and received at or prior to the meeting, unless
subsequently properly revoked, will be voted in accordance with the instructions
indicated on such proxy. If a proxy is signed and returned without indicating
any voting instructions, the shares of common stock represented by such proxy
will be voted "FOR" each nominee and "FOR" the amendment and the plan.
1
<PAGE> 6
Any proxy given pursuant to this solicitation may be revoked by the person
giving such proxy at any time before the shares represented by such proxy are
voted at the meeting by:
- attending, and voting in person at, the meeting,
- giving notice of revocation of the proxy at the meeting, or
- delivering to our secretary a written notice of revocation or a duly
executed proxy relating to the same shares bearing a date later than the
proxy previously executed.
All written notices of revocation and other communications concerning
revocation of proxies should be addressed as follows: Kevco, Inc., 1300 South
University Drive, Suite 200, Fort Worth, Texas 76107-5734, Attention: James A.
Johnson, Executive Vice President and Secretary, and must be received before the
taking of votes at the meeting.
OTHER BUSINESS
The board is not currently aware of any other business to be acted upon at
the meeting. If, however, other matters are properly brought before the meeting,
the persons appointed as proxies may vote or act thereon in accordance with
their best judgment, unless authority to do so is withheld in the proxy.
SOLICITATION OF PROXIES
We will bear all proxy solicitation costs. In addition to solicitation by
mail, we may solicit proxies by telephone, facsimile transmission, personally or
otherwise through our officers and directors and a small number of our regular
employees, none of whom will be specially compensated. We may also make
arrangements with brokerage houses, banks, and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of shares of common stock held of record by such persons, and we may
reimburse them for their related out-of-pocket expenses.
NO DISSENTERS' OR APPRAISAL RIGHTS
You will not be entitled to any right of appraisal or similar rights of
dissenters with respect to any of the proposals.
2
<PAGE> 7
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
The board is divided into three classes and consists of six directors with
each class consisting of two directors, with the term of one class expiring each
year and with the directors of each class, upon election, holding a three-year
term. Each director serves until the annual meeting of shareholders in the year
in which his term expires or until his successor is elected and qualified.
On July 14, 1999, we entered into a securities purchase agreement with
Wingate Partners II, L.P. (Wingate). Under the terms of this agreement, both
Wingate and Jerry E. Kimmel, our former CEO, are each entitled to designate two
members to our board. The agreement also requires Wingate to use its
commercially reasonable efforts to ensure the appointment and election of at
least two independent directors to our board for a period of five years from
closing.
Following the closing of the transaction on July 26, 1999, the following
designees were appointed or, in the case of Mr. Kimmel's designees, retained as
directors:
<TABLE>
<S> <C>
Wingate's designees: Frederick B. Hegi, Jr.
James A. Johnson
Mr. Kimmel's designees: Jerry E. Kimmel
Richard Nevins
Independent directors: William L. Estes
Peter B. McKee
</TABLE>
Messrs. Estes and McKee, are in the class whose term of office expires in
1999. The board has nominated Messrs. Estes and McKee for reelection as
directors at the meeting, to serve for a three-year term expiring at our annual
meeting of shareholders in 2002 or until their successors are elected and
qualified.
Each nominee has indicated his willingness to serve on the board if
elected; however, in case either nominee shall become unavailable for election
to the board for any reason, you can vote your proxy for a substitute nominee or
nominees. Proxies cannot be voted for more than two nominees. The following sets
forth information, as of the date of this proxy statement, as to the nominees
and each director whose term of office will continue after the meeting,
including their ages, present principal occupations, other business experience
during the last five years, membership on committees of the board and
directorships in other publicly-held companies.
<TABLE>
<CAPTION>
YEAR TERM
AS DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- -----------
<S> <C> <C> <C>
Nominees for a three-year term ending in
2002:
William L. Estes......................... 52 Director 1999
Peter B. McKee........................... 61 Director 1999
Continuing Directors:
Frederick B. Hegi, Jr.................... 55 President, Chief Executive Officer 2000
and Chairman of the Board
Jerry E. Kimmel.......................... 62 Vice Chairman of the Board 2000
James A. Johnson......................... 45 Executive Vice President, Secretary 2001
and Director
Richard Nevins........................... 52 Director 2001
</TABLE>
Frederick B. Hegi, Jr. has served as Chairman of the Board since July 26,
1999. Mr. Hegi also currently serves as Chairman of the executive committee. He
is a general partner of various Wingate entities, including the indirect general
partner of Wingate Partners II, L.P. Mr. Hegi also is the Chairman of United
Stationers, Inc., a wholesale distributor of paper products and office supplies;
Chairman of Loomis, Fargo & Co., an armored car service company; Chairman of
Tahoka First Bancorp, Inc., a bank holding company; Chairman of Cedar Creek
Bancshares, Inc., a bank holding company; a director of Pro Parts Xpress, Inc.,
a wholesale distributor of automotive parts; a director of Lone Star
Technologies, Inc., a manufacturer of tubular products;
3
<PAGE> 8
and a director of Texas Capital Bancshares, Inc., a bank holding company. Mr.
Hegi received his B.B.A. from Southern Methodist University, his M.B.A. from
Harvard Business School and his Ph.D. from the University of Texas.
James A. Johnson has served as a director since July 26, 1999. Mr. Johnson
also currently serves on both the compensation committee and the executive
committee. He is a general partner of various Wingate entities, including the
indirect general partner of Wingate Partners II, L.P. Mr. Johnson joined Wingate
Partners, L.P. in 1990. Mr. Johnson currently serves as a director or Pro Parts
Xpress and of United Stationers. Mr. Johnson received his B.S. in industrial
engineering from Stanford University and his M.B.A. from the Stanford Graduate
School of Business.
Jerry E. Kimmel is our founder and has spent his entire career in this
industry. Mr. Kimmel has served as Vice Chairman of the Board since July 1999
and has served as a director since 1993. Mr. Kimmel also currently serves on the
executive committee. From 1978 to July 1999, Mr. Kimmel served as President of
Kevco. Mr. Kimmel also served as Chairman of the Board and Chief Executive
Officer of the company from 1993 until July 1999. In 1992, Mr. Kimmel was
inducted into the MH/RV Hall of Fame. Mr. Kimmel served as the Chairman of the
Board of Governors of the Manufactured Housing Institute (MHI), a leading
manufactured housing trade group, in 1983 and 1984, and has served in various
other MHI board capacities.
William L. Estes has served as a director of the company since September
21, 1999. Mr. Estes is currently a member of the audit committee and Chairman of
the compensation committee. Mr. Estes is also currently President and Chief
Executive Officer of Consolidated Container Holdings (CCC), a $700 million
manufacturer and marketer of rigid plastic containers to the dairy, beverage,
food, household chemical, automotive and industrial chemical sectors. Prior to
joining CCC, Mr. Estes served as President and Chief Executive Officer of Suiza
Packaging, a predecessor company to CCC. From November 1996 to February 1998,
Mr. Estes served as President and Chief Operating Officer of McKesson
Corporation's McKesson-Carrollton operations. From January 1994 to November
1996, Mr. Estes served in various capacities with FoxMeyer Corporation, a
pharmaceutical distributor, most recently as President and Chief Operating
Officer. FoxMeyer filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on August 27, 1996. Earlier Mr. Estes spent eight years with Pepsico,
primarily in key operating positions within its Frito Lay subsidiary. Mr. Estes
received his B.A. in mechanical engineering from the University of Illinois and
his M.B.A. from the Wharton School of Business.
Peter B. McKee has served as a director of the company since September 21,
1999. Mr. McKee is currently a member of the compensation committee and Chairman
of the audit committee. From May 1996 to June 1999, Mr. McKee served as the
Senior Vice President and Chief Financial Officer of Allegiance Corporation, a
$4.5 billion health care products supplier. From January 1994 to May 1996, Mr.
McKee served as the Senior Vice President and Chief Financial Officer of
FoxMeyer Corporation and was previously Chief Financial Officer of Swift
Independent, a $4 billion meat processing and distribution company. FoxMeyer
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on August 27,
1996. Mr. McKee currently serves as a director of CurranCare, a healthcare
consulting company. Mr. McKee received his B.S. in business administration from
Northwestern University. Mr. McKee also attended the New York University
Graduate School of Business.
Richard Nevins has served as a director of the company since November 1996.
Mr. Nevins also currently serves on both the audit committee and the
compensation committee. Since July 1998, Mr. Nevins has served as Managing
Director of Jefferies & Company, Inc., an investment banking firm. From 1992 to
July 1998, Mr. Nevins served as President of Richard Nevins & Associates, a
financial advisory firm. Mr. Nevins served as a director of Fruehauf Trailer
Corporation from 1995 until October 1996. On October 7, 1996, Fruehauf filed for
relief under Chapter 11. During 1996, Mr. Nevins served as acting Chief
Operating Officer and Chief Restructuring Officer for Sun World International, a
California agricultural firm. From 1995 to 1996, Mr. Nevins served as a director
of Ampex Corporation and from 1993 to 1995 he served as a director of The Actava
Group (now Metromedia International Group). Mr. Nevins received his B.A. in
Economics from the University of California, Riverside and his M.B.A. from
Stanford Graduate School of Business.
4
<PAGE> 9
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
<TABLE>
<CAPTION>
AUDIT COMPENSATION EXECUTIVE
NAME BOARD COMMITTEE COMMITTEE COMMITTEE
- ---- ----- --------- ------------ ---------
<S> <C> <C> <C> <C>
Frederick B. Hegi, Jr. ............................. X* X*
James A. Johnson.................................... X X X
Jerry E. Kimmel..................................... X X
William L. Estes.................................... X X X*
Peter B. McKee...................................... X X* X
Richard Nevins...................................... X X X
</TABLE>
- ---------------
*Chairman
Our business is managed under the direction of the board. The board meets
on a regularly scheduled basis to review significant developments affecting us
and to act on matters requiring its approval. It also holds special meetings
when an important matter requires action by the board between scheduled
meetings. During 1998, the board met eight times and acted by unanimous written
consent seven times. During 1998, each member of the board participated in all
board and applicable meetings held during the period for which he was a
director.
The board has three standing committees: the audit committee, the
compensation committee and the executive committee. The functions of these
committees, their current members, and the number of meetings held during fiscal
1998 are described below.
Audit Committee. The audit committee was established to review the
professional services and independence of our independent auditors and our
accounts, procedures and internal controls. The audit committee recommends to
the board the appointment of the firm selected to be our independent public
accountants and monitors the performance of such firm; reviews and approves the
scope of the annual audit; reviews and evaluates with the independent public
accountants our annual audit and annual consolidated financial statements;
reviews with management the status of internal accounting controls; evaluates
problem areas having a potential financial impact on us that may be brought to
its attention by management, the independent public accountants or the board;
and evaluates all our public financial reporting documents. The audit committee
met three times in 1998.
Compensation Committee. The function of the compensation committee is to
set the annual salaries, bonuses, option awards, and the overall compensation
program for our officers and key employees. The compensation committee met once
and acted by unanimous written consent once in 1998.
Executive Committee. The executive committee meets as necessary when the
board is not in session to exercise general control and supervision in all
matters pertaining to the interests of the company, subject at all times to the
direction of the board. The executive committee also serves as the nominating
committee for the purpose of identifying, evaluating and recommending potential
candidates for election to the board. The executive committee was formed on
October 1, 1999 and has not yet convened a meeting.
COMPENSATION OF DIRECTORS
During fiscal 1998, directors who were employees of the company did not
receive additional compensation for serving as directors. Each director who was
not an employee of the company received a fee of $1,000 for attendance at each
board meeting and $500 for attendance at each board committee meeting (unless
held on the same day as a board meeting). All directors were reimbursed for
out-of-pocket expenses incurred in attending meetings of the board or committees
thereof, and for other out-of-pocket expenses incurred in their capacity as
directors. In addition to these amounts, beginning fiscal 1999 each director
(excluding Messrs. Hegi and Johnson and Kimmel, who is compensated under the
terms of his consulting agreement described below under the caption "Employment
Agreements") will receive $20,000 annually for service on the board, prorated
for length of service.
5
<PAGE> 10
On July 26, 1999, we entered into a four-year consulting agreement with
Jerry E. Kimmel providing for the payment of $210,000 annually for general
consulting services. As of the same date we entered into monitoring and
oversight and financial advisory agreements with Wingate Management Limited,
L.L.C. (Wingate LLC), an affiliate of Wingate. Under the monitoring and
oversight agreement, we are required to pay Wingate LLC $41,667.00 per month for
the first 24 months and thereafter an annual fee of $200,000 plus 2.4% of our
pre-tax income for the provision of certain management services to the company.
The financial advisory agreement requires us to pay Wingate LLC a cash fee
ranging from 1% to 1.5% of the value of any "extraordinary transaction" we enter
into. As defined by the financial advisory agreement, "extraordinary
transactions" include any proposals for a tender offer, acquisition, sale,
merger, exchange offer, recapitalization, restructuring or other similar
transaction involving the company. Messrs. Hegi and Johnson are principals of
Wingate LLC.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the common stock by each person known by us to be the beneficial
owner of more than five percent of the common stock as of the date of this proxy
statement, calculated in accordance with rule 13d-3 under the Securities
Exchange Act of 1933, as amended. Unless otherwise indicated, all persons listed
in the table below have sole voting and investment power in respect of all
shares shown as beneficially owned by them. However, as indicated by the notes
following the table, certain shares are deemed to be beneficially owned by more
than one person or entity as a result of the attribution of ownership among
affiliated persons and entities. This table does not include shares of common
stock that may be purchased pursuant to options not exercisable within 60 days
of the date of this proxy statement.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- ----------------------- ----------------
<S> <C> <C>
The Kevco Partners Investment Trust (KPI Trust)............ 5,790,909(1) 45.8%
c/o First Union Trust Company, N.A.
One Rodney Square, Suite 102
920 King Street
Wilmington, Delaware 19801
Attention: Edward L. Truitt, Jr.
Frederick B. Hegi, Jr. .................................... 5,790,909(2) 45.8%
750 North St. Paul Street, Suite 1200
Dallas, Texas 75201
Jerry E. Kimmel............................................ 3,744,760(3) 39.2%
1300 South University Drive, Suite 200
Fort Worth, Texas 76107
Brinson Partners, Inc. .................................... 557,000(4) 5.8%
209 South LaSalle
Chicago, Illinois 60604-1295
Wellington Management Company, L.L.P. ..................... 473,000(5) 5.0%
75 State Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
(1) Consists of 2,700,000 shares of common stock and 3,090,909 shares of common
stock issuable upon exchange of the Tranche A note. Further discussion
regarding the Tranche A note can be found below under the caption "Proposal
No. 2 -- Charter Amendment -- Reasons for the Charter Amendment." Based on a
statement on Schedule 13D filed with the Securities and Exchange Commission
(SEC) on August 4, 1999, the KPI Trust has shared voting power and
investment power in respect of all shares of common stock listed.
(2) Consists of 2,700,000 shares of common stock owned beneficially and of
record by the KPI Trust and 3,090,909 shares of common stock issuable upon
exchange of the Tranche A note. The KPI Trust is the beneficial and record
owner of the Tranche A note. Based on a statement on Schedule 13D filed with
the SEC on August 4, 1999, Mr. Hegi has shared voting power and investment
power in respect of all shares of common stock listed. Mr. Hegi is the sole
manager of the KPI Trust. Accordingly, Mr. Hegi may be deemed
6
<PAGE> 11
to own beneficially all of the shares of common stock owned beneficially and
of record by the KPI Trust. Mr. Hegi has stated in certain filings with the
SEC that he disclaims beneficial ownership of the shares listed.
(3) Excludes 626,386 shares of outstanding common stock and 15,299 shares of
common stock issuable upon exercise of options beneficially owned by Mr.
Kimmel's adult children and his brother. Mr. Kimmel disclaims beneficial
ownership of such shares.
(4) Based on a Schedule 13G filed with the SEC on February 16, 1999, Brinson
Partners, Inc. (BPI), the wholly-owned, indirect subsidiary of UBS AG, has
shared power to dispose or direct the disposition of and to vote or direct
the vote of 557,000 shares of common stock. BPI is an Investment Advisor
registered under Section 203 of the Investment Advisers Act of 1940. UBS AG
is classified as a bank as defined in Section 3(a)(6) of the Securities
Exchange Act of 1934. UBS AG reported indirect beneficial ownership of the
same holdings by reason of its ownership of BPI and UBS (USA), Inc., the
parent holding company of BPI. UBS AG's address is Bahnhofstrasse 45, 8021
Zurich, Switzerland.
(5) Based on a statement on Schedule 13G filed with the SEC on February 10,
1999, Wellington Management Company, L.L.P. (WMC) has shared power to
dispose or direct the disposition of 473,000 shares of common stock and
shared power to vote or to direct the vote of 263,000 shares. As part of
such Schedule 13G, WMC disclosed that its relevant subsidiary under Rule
13d-1(b)(1)(ii)(G) is Wellington Trust Company, N.A., a wholly-owned
subsidiary of WMC and a bank as defined in Section 3(a)(6) of the Securities
Exchange Act of 1934, which has the same business address as WMC.
EXECUTIVE OFFICERS
Our executive officers serve at the discretion of the board and are chosen
annually by the board. Set forth below are the names, ages and positions of our
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Frederick B. Hegi, Jr. .............. 55 President, Chief Executive Officer and Chairman of the
Board
James A. Johnson..................... 45 Executive Vice President, Secretary and Director
Clyde A. Reed, Jr.................... 64 Executive Vice President
Dan Russell Hardin................... 41 President -- Distribution Group
C. Lee Denham........................ 51 President -- Sunbelt Wood Components Group
</TABLE>
Information concerning the business experience of Messrs. Hegi and Johnson
is provided under "Proposal No. 1 -- Election of Directors" above.
Clyde A. Reed, Jr. has served as Executive Vice President of the company
since 1986. From 1991 to July 1999, Mr. Reed served as the Chief Operating
Officer of the company. Mr. Reed also served as a director of the company from
1996 until his resignation in January 1999.
Dan Russell Hardin has served as the President of the company's
Distribution Group since July 1999. From 1998 to July 1999, Mr. Hardin served as
Executive Vice President of the company. Mr. Hardin also served as the company's
Vice President of Sales from 1995 to 1998. Prior to joining the company, Mr.
Hardin served as the National Sales Manager of Service Supply Systems, a
distribution company which we acquired in 1995. Mr. Hardin received his B.B.A.
in business from the University of Georgia.
C. Lee Denham currently serves as President of the Sunbelt Wood Components
Group of the company. Mr. Denham founded Sunbelt Wood Components, Inc., a
fabricated structural products company which we acquired in 1996. Mr. Denham
received his B.B.A. in marketing from the University of Georgia.
7
<PAGE> 12
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of the date of this proxy statement by: (1)
each director; (2) our chief executive officer and the other four most highly
compensated executive officers who were officers as of the date of this proxy
statement; and (3) all directors and executive officers as a group. Unless
otherwise indicated, all persons listed in the table below have sole voting and
investment power in respect of all shares shown as beneficially owned by them.
The inclusion of any shares for any shareholder in the table below is not an
admission that such shareholder is, for any purpose, the beneficial owner of
such shares. This table does not include shares of common stock that may be
purchased pursuant to options not exercisable within 60 days of the date of this
proxy statement. An asterisk denotes beneficial ownership of less than one
percent of the shares of common stock deemed outstanding.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
- ------------------------ ----------------------- ----------
<S> <C> <C>
Frederick B. Hegi, Jr. ..................................... 5,790,909(1) 45.8%
Jerry E. Kimmel............................................. 3,744,760(2) 29.6%
James A. Johnson............................................ 0 *
Richard Nevins.............................................. 7,405(3) *
William L. Estes............................................ 0 *
Peter B. McKee.............................................. 0 *
Clyde A. Reed, Jr. ......................................... 30,015(4) *
Dan Russell Hardin.......................................... 14,400(5) *
C. Lee Denham............................................... 9,400(5) *
All directors and executive officers as a group (9
persons).................................................. 9,596,889(6) 76.0%
</TABLE>
- ---------------
(1) See Note 1 under "-- Security Ownership of Certain Beneficial Owners."
(2) See Note 3 under "-- Security Ownership of Certain Beneficial Owners."
(3) Includes 2,500 shares of common stock subject to presently exercisable
options.
(4) Includes 18,847 shares of common stock subject to presently exercisable
options.
(5) Includes 9,400 shares of common stock subject to presently exercisable
options.
(6) Includes 3,090,909 shares of common stock issuable upon exchange of the
Tranche A note and 40,146 shares of common stock subject to presently
exercisable options.
8
<PAGE> 13
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The compensation committee of the board is responsible for reviewing our
compensation arrangements with our senior executive officers. The current
members of the compensation committee are Messrs. Johnson, McKee, Estes and
Nevins. The principal elements of our 1998 executive compensation program
consisted of base salaries, the opportunity for annual cash bonuses based on our
financial performance, equity-based compensation in the form of stock options
and other customary fringe benefits.
Philosophy
The compensation committee believes that all of our executive officers
should be compensated on a competitive basis with other distribution and
manufacturing companies of comparable size in sales and earnings. The
compensation committee's primary objectives with respect to executive
compensation are to establish a total compensation program that provides base
salaries in a competitive range, bonus opportunities that reward above-average
performance with above-average pay, and equity-based incentives designed to
enhance our profitable growth and the value of our common stock and to align
management and shareholder interests.
Base Salaries
For 1998, our executive officers received base salaries in accordance with
recommendations of the compensation committee.
Stock Option Programs
We intend to attract, retain and motivate our executive officers and other
employees through the grant of stock options under our 1995 stock option plan,
our 1996 stock option plan and, if and when approved, our 1999 stock option
plan. During 1998, the compensation committee awarded no options pursuant to any
plan.
CEO Compensation
Jerry E. Kimmel, our CEO during fiscal 1998, was compensated under the
terms of his former employment agreement, which provided for an annual base
salary of $250,000 and bonuses as described under the heading "Employment
Agreements" below. For 1998, Mr. Kimmel received a bonus of $238,299. Although
we have not entered into an employment agreement with Mr. Hegi, our current
Chairman, President and CEO, Mr. Hegi may receive indirect financial benefits
under the monitoring and oversight and financial advisory agreements discussed
above under the caption "Compensation of Directors."
Tax Considerations
In formulating its compensation policies, the compensation committee
considers the relevant provisions, including section 162(m) of the Internal
Revenue Code of 1986, as amended (Code), that limit the deductibility of certain
executive compensation and the consequences to us if the compensation paid to
our executive officers is not deductible.
COMPENSATION COMMITTEE
Peter B. McKee, Chairman
James A. Johnson
William L. Estes
Richard Nevins
9
<PAGE> 14
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, Richard S. Tucker, our former Secretary and a former
director of the company, served as both Secretary of the company and as a member
of the compensation committee. Mr. Tucker resigned as a director of the company
on July 26, 1999 and as an officer of the company on August 17, 1999. None of
our executive officers served either as a director or on the compensation
committee of any other entity whose executive officers served either as a member
of our board or of our compensation committee.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the last three fiscal years to our then CEO and other most
highly compensated executive officers, based on salary and bonus earned during
1998, whose total compensation exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ---------------
COMPENSATION SECURITIES
FISCAL -------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($)
- --------------------------- ------ --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Jerry E. Kimmel,...................... 1998 $250,000 $238,299 -- $34,821(1)
Vice Chairman of the Board 1997 250,000 244,961 -- 13,593(2)
1996 366,271 249,600 -- 17,163(3)
Clyde A. Reed, Jr.,................... 1998 224,477 59,842 -- 14,470(4)
Executive Vice President 1997 204,540 81,438 -- 12,655(5)
1996 188,088 96,667 11,750 29,756(6)
Ellis L. McKinley, Jr.,............... 1998 177,824 25,026 -- --
Former Vice President, Chief 1997 162,975 27,146 -- 1,047(7)
Financial Officer and Treasurer 1996 145,980 29,167 14,400 1,057(7)
C. Lee Denham,........................ 1998 145,220 125,572 -- 590(8)
President, Sunbelt Wood 1997 114,095 98,178 -- 1,594(9)
Components Group 1996 95,580 222,221 9,400 1,434(10)
</TABLE>
- ---------------
(1) Consists of $11,501 representing personal use of a company supplied car and
$23,320 representing personal use of a company supplied aircraft. Mr.
Kimmel resigned as Chairman of the Board, President and CEO and assumed the
responsibilities of Vice Chairman on July 26, 1999.
(2) Consists of $12,546 representing personal use of a company supplied car and
$1,047 representing our contribution to such individual's 401(k) plan
account.
(3) Consists of $12,546 representing personal use of a company supplied car,
$3,560 representing our payments for medical insurance premiums and $1,057
representing our contribution to such individual's 401(k) plan account.
(4) Consists of $2,470 representing personal use of a company supplied car and
$12,000 representing expense recognized by the company in 1998 relating to
future payments to be made under a deferred compensation agreement. Mr.
Reed resigned as a director of the company on January 25, 1999 and Chief
Operating Officer of the company on July 26, 1999.
(5) Consists of $3,851 representing personal use of a company supplied car,
$7,757 representing expense recognized by us in 1997 relating to future
payments to be made under a deferred compensation agreement and $1,047
representing our contribution to such individual's 401(k) plan account.
(6) Consists of $4,518 representing personal use of a company supplied car,
$24,181 representing expense recognized by us in 1996 relating to future
payments to be made under a deferred compensation agreement and $1,057
representing our contribution to such individual's 401(k) plan account.
(7) Represents our contribution to Mr. McKinley's 401(k) plan account. Mr.
McKinley resigned as a director and executive officer of the company on May
31, 1999.
(8) Represents personal use of a company supplied car.
(9) Consists of $547 representing personal use of a company supplied car and
$1,047 representing our contribution to such individual's 401(k) plan
account.
(10) Consists of $377 representing personal use of a company supplied car and
$1,057 representing our contribution to such individual's 401(k) plan
account.
10
<PAGE> 15
YEAR-END OPTION VALUES
The following table presents the information regarding the value of stock
options outstanding at December 31, 1998 held by each of our then executive
officers. No stock options were exercised by these executive officers in 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END
(#) ($) (1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerry E. Kimmel.................................. -- -- -- --
Clyde A. Reed, Jr. .............................. 18,847(2) -- $11,426 --
C. Lee Denham.................................... 9,400(3) -- -- --
Ellis L. McKinley, Jr. .......................... 17,450(4) 4,000(5) $11,351 --
</TABLE>
- ---------------
(1) The closing price for our common stock as reported through The Nasdaq Stock
Market on December 31, 1998, was $7.25. Value is calculated on the basis of
the difference between the option exercise price and $7.25 multiplied by the
number of shares of common stock underlying the option.
(2) Consists of options to acquire 7,097 shares of common stock at $5.64 per
share and options to acquire 11,750 shares of common stock at $11.17 per
share.
(3) Consists of options to acquire 9,400 shares of common stock at $11.17 per
share.
(4) Consists of options to acquire 7,050 shares of common stock at $5.64 per
share, options to acquire 9,400 shares of common stock at $11.17 per share
and options to acquire 1,000 shares of common stock at $13.50 per share.
(5) Consists of options to acquire shares of common stock at $13.50 per share,
vesting at 500 shares per year.
EMPLOYMENT AGREEMENTS
Effective October 1, 1996, Jerry E. Kimmel entered into a five year
employment agreement with us which provided for an annual base salary of
$250,000. In addition to base salary, Mr. Kimmel, through his employment
agreement, was eligible for an annual bonus equal to 2.4% of our income before
income taxes for the year provided that income before income taxes was at least
$5.0 million. Under the agreement, Mr. Kimmel performed services on our behalf
in Fort Worth, Texas as he reasonably determined was necessary to carry out his
duties under the agreement. Mr. Kimmel, his spouse and dependents participated
at our expense in health programs offered to our employees generally. Upon the
termination of this agreement effective July 26, 1999, we entered into a
four-year consulting agreement with Mr. Kimmel providing for the payment of
$210,000 annually for general consulting services from time to time if and when
required by the company. This agreement also requires us to include Mr. Kimmel
and his immediate family in all group health and dental benefits offered to our
employees generally.
Effective May 24, 1977, we entered into a retirement agreement with Mr.
Reed that generally provides that we will pay Mr. Reed or his beneficiaries
$55,000 per year for 10 years if Mr. Reed is employed with us at age 65 or upon
death or disability. Such agreement also provides for a smaller lump sum payment
that we will make upon Mr. Reed's termination of employment prior to age 65.
Such lesser amount equals approximately $14,000 for each year following the
effective date of the agreement, up to such termination. Effective January 25,
1999, Mr. Reed resigned as a director of the company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease three of our warehouse locations from an affiliated partnership
(K&E Land & Leasing, a Texas general partnership) of which Mr. Kimmel is a
managing partner. We also lease computer equipment from K&E Land & Leasing.
These leases (1) expire in November 2003, April 2005, October 2007 and October
2003, respectively, (2) provide for total future (i.e. post September 1999) base
rent payments of approximately $534,000, $508,000, $1.9 million and $0.9
million, respectively, and (3) require payments to be made in equal monthly
amounts. As of September 30, 1999, Mr. Kimmel's indirect interest in such leases
was 38.0% and Gregory G. Kimmel's (Mr. Kimmel's son and former director of the
company) aggregate
11
<PAGE> 16
beneficial interest in such leases was 4.0%. Mr. Kimmel's immediate family
members (including Gregory G. Kimmel's beneficial interest) owned indirect
interests in such leases of 12.0%. Aggregate expenditures by the company under
such leases for the nine months ended September 30, 1999 were approximately
$504,000, of which approximately $191,000 was indirectly attributable to Jerry
Kimmel's interests in such partnership (excluding immediate family members'
interests) and of which approximately $20,000 was indirectly attributable to
Gregory G. Kimmel's beneficial interest. We anticipate that our aggregate
expenditures under such leases for the remainder of their terms will be
approximately $3.8 million, of which approximately $1.4 million will be
indirectly payable (less partnership expenses) to Jerry Kimmel (excluding
immediate family members' interests) and of which approximately $152,000 will be
indirectly payable (less partnership expenses) to Gregory G. Kimmel. We believe
that the amounts we have paid under such leases have not been less favorable to
us than had the leases been negotiated on an arms-length basis. Two of the
leased warehouses were financed through economic development and industrial
revenue bonds; one series of which was issued by Newton, Kansas in the original
principal amount of $575,000, and with respect to which we are the sub-lessee of
the premises and a co-guarantor, and one series of which was issued by Elkhart,
Indiana in the original principal amount of $400,000, and with respect to which
we are the lessee of the premises and have agreed to perform the obligation of
the lessor contained in the mortgage.
Gregory G. Kimmel and James Kimmel, Jerry Kimmel's brother, earned, in the
aggregate, approximately $192,000 in compensation in 1998 and $134,000 for the
nine-month period ended September 30, 1999.
We engaged Mr. Nevins to provide financial advisory services from August
1998 through January 1999. In consideration of these services, we compensated
Mr. Nevins $5,000 for each month during this period and granted him 3,905 shares
of our common stock.
12
<PAGE> 17
STOCK PERFORMANCE CHART
The following chart compares the percentage change in the cumulative total
shareholder return on our common stock from November 1, 1996, the date of our
initial public offering, through December 31, 1998, with the cumulative total
return on the S&P Small Cap 600 and the Nasdaq Stock Market. The comparison
assumes $100 was invested immediately prior to such period in common stock and
in each of the foregoing indices and assumes reinvestment of dividends. Dates on
the following chart represent the last day of the indicated fiscal year. We paid
no dividends during such period, except that immediately prior to the
consummation of our initial public offering, we declared and made distributions
to our shareholders of record on such declaration date.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
KEVCO, INC. S&P SMALLCAP 600 THE NASDAQ STOCK MARKET
----------- ---------------- -----------------------
<S> <C> <C> <C>
11/1/96 $100.00 $100.00 $100.00
12/31/96 $117.00 $105.00 $106.00
12/31/97 $138.00 $132.00 $130.00
12/31/98 $ 60.00 $130.00 $183.00
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers, directors, and persons who own more than 10% of a registered class
of our equity securities, to file ownership reports with the SEC. Such persons
are required by SEC regulation to furnish us with copies of these reports.
Based solely on our review of the copies of such reports received by us
with respect to fiscal 1998, or written representations from these reporting
persons, we believe that our officers, directors and persons who own more than
10% of a registered class of our equity securities have complied with all
applicable filing requirements.
13
<PAGE> 18
PROPOSAL NO. 2 -- CHARTER AMENDMENT
INTRODUCTION
The board has unanimously approved, and submits to you for your approval,
the charter amendment which, if approved by the shareholders, will authorize the
increase in the total number of authorized shares of our capital stock from
100,000,000 to 150,000,000, including:
- 30,000,000 shares of preferred stock, par value $0.01 per share, without
designation, of which 3,500,000 shares will be designated as Series A
10 3/8% Convertible Pay-in-Kind Voting Preferred Stock, par value $0.01
per share, and 9,500,000 shares will be designated as Series B 10 3/8%
Convertible Pay-in-Kind Nonvoting Preferred Stock, par value $0.01 per
share; and
- 20,000,000 shares of a class of nonvoting common stock, par value $0.01
per share.
The full text of the charter amendment is set forth in Exhibit A to this
proxy statement and is incorporated herein by reference. The following summary
should be read in conjunction with, and is qualified in its entirety by
reference to, Exhibit A.
The voting preferred stock will have a liquidation preference of $5.50 per
share, will be initially convertible into an equal number of shares of common
stock and will be entitled to vote together as a single class with the common
stock on an as-converted basis. The nonvoting preferred stock will have a
liquidation preference of $5.50 per share, will be initially convertible into an
equal number of shares of nonvoting common stock and will have limited voting
rights in connection with certain extraordinary corporate events affecting
holders of nonvoting preferred stock. The nonvoting common stock will have
dividend and distribution rights and rights on dissolution of the company that
are substantially identical to those of the common stock and will have limited
voting rights in connection with certain extraordinary corporate events
affecting holders of nonvoting common stock. In addition to the voting preferred
stock and the nonvoting preferred stock, the board could establish from time to
time other series of preferred stock with such designations, rights and
preferences as the board may determine from time to time in its sole discretion.
Detailed descriptions of the preferred stock and the nonvoting common stock are
provided below. The currently issued and outstanding common stock will remain
issued and outstanding and will be affected by the charter amendment as
described below under "-- Effect of the Charter Amendment."
Jerry E. Kimmel, the Vice Chairman of the Board has indicated that he
intends to vote all 3,744,760 of the shares of common stock owned of record by
him, representing approximately 39.2% of the issued and outstanding shares of
common stock, for the approval and adoption of the charter amendment, and
Frederick B. Hegi, Jr., our President, Chairman of the Board and Chief Executive
Officer and the sole manager of the KPI Trust, has indicated that he intends to
vote all 2,700,000 of the shares of common stock owned of record by the KPI
Trust, representing approximately 28.2% of the issued and outstanding shares,
for the approval and adoption of the charter amendment. Accordingly, the charter
amendment will be approved without regard to the votes of the other
shareholders.
REASONS FOR THE CHARTER AMENDMENT
On July 14, 1999, we entered into a securities purchase agreement with
Wingate whereby we agreed to issue and sell to Wingate, and Wingate agreed to
purchase from us:
- 2,700,000 newly-issued shares of common stock for a purchase price of
$5.00 per share;
- three warrants to purchase 675,000 shares, 772,727 shares, and 295,455
shares, respectively, of nonvoting common stock;
- a Tranche A Senior Subordinated Exchangeable Note in the principal amount
of $17 million; and
- a Tranche B Senior Subordinated Exchangeable Note in the principal amount
of $6.5 million.
The aggregate purchase price for the shares, the warrants, and the notes
was $37 million.
14
<PAGE> 19
The warrants are exercisable for 675,000 shares, 772,727 shares, and
295,455 shares of nonvoting common stock, respectively, subject to customary
adjustment to protect against dilution. Each warrant has a term of five years
and has an initial exercise price of $5.50 per share (subject to adjustment as
provided therein).
The Tranche A note is exchangeable at any time at the holder's option for
(1) 3,090,909 shares of voting preferred stock, or (2) directly into 3,090,909
shares of common stock, in each case at an initial exchange ratio of $5.50 per
share, subject to customary adjustment to protect against dilution. The Tranche
B note is exchangeable at any time at the holder's option for (1) 1,181,818
shares of nonvoting preferred stock, or (2) directly into 1,181,818 shares of
nonvoting common stock, in each case at an initial exchange ratio of $5.50 per
share, subject to customary adjustment to protect against dilution. When issued,
the voting preferred stock will be convertible on a share-for-share basis into
common stock and the nonvoting preferred stock will be convertible on a
share-for-share basis into nonvoting common stock.
Interest on the notes may be paid in cash or, at our option, continue to
accrue unpaid, in which case a noteholder may elect to have all accrued interest
paid in the equivalent value of shares of nonvoting preferred stock. Dividends
on the nonvoting preferred stock and the voting preferred stock may, at our
option, be paid in cash or in additional shares of nonvoting preferred stock. We
can redeem the notes and any preferred stock issued in exchange for notes
beginning on July 26, 2002 (i.e., the third anniversary of the closing of the
transactions contemplated by the securities purchase agreement).
As permitted by section 13.8 of the securities purchase agreement, Wingate
entered into an assignment agreement dated as of July 25, 1999, whereby Wingate
assigned its right to purchase a portion of the shares, the warrants, and the
notes to Wingate Affiliates II, L.P. and certain other entities and persons
(assignees).
On June 28, 1999, in contemplation of the execution and delivery of the
purchase agreement and the assignment agreement, Wingate and the assignees, each
as a grantor and unitholder, entered into the business trust agreement of the
KPI Trust with First Union Trust company, National Association, a national
banking association, as trustee, and Mr. Hegi, as manager. Under the trust
agreement, the grantors agreed to convey, immediately following the closing
contemplated by the securities purchase agreement, the shares, the warrants, and
the notes to the KPI Trust in exchange for ownership interests in the KPI Trust.
On July 26, 1999, (1) the closing of the transactions contemplated by the
securities purchase agreement were consummated, and (2) immediately thereafter,
the grantors entered into an assignment agreement with the KPI Trust, pursuant
to which the grantors assigned to the KPI Trust, and the KPI Trust acquired from
the grantors, all of the grantors' rights, title, and interest in and to the
securities. The securities purchase agreement requires us, promptly following
the closing, to amend our charter to provide for the creation of the nonvoting
common stock, the voting preferred stock and the nonvoting preferred stock. The
securities purchase agreement also originally required this proxy statement to
be filed with the SEC by September 24, 1999. This date was subsequently extended
to October 31, 1999 pursuant to a waiver executed by Wingate on October 1, 1999.
Our failure to hold the annual meeting within 120 days of the filing of this
proxy statement or to secure the approval of the charter amendment at the annual
meeting would result in the company's being required to pay Wingate liquidated
damages of $1.0 million pursuant to the terms of the securities purchase
agreement.
The board believes that approval of the charter amendment is in our best
interests in order to fulfill our obligations under the securities purchase
agreement. Additionally, authorization of the preferred stock and the nonvoting
common stock will provide us with increased flexibility to issue equity in the
future to meet various needs. Nonvoting common stock could be issued, without
diluting the voting power of our existing shareholders, including the KPI Trust
and Mr. Kimmel.
Other than the issuances under the securities purchase agreement described
above, we do not currently have any plans or commitments that would require the
issuance of any preferred stock or nonvoting common stock. Adoption of the
charter amendment, however, will provide us with the flexibility to do so upon
such conditions and for such consideration as the board may determine. Except as
otherwise required by law or by the applicable rules of The Nasdaq National
Market System or any other trading system or exchange on which our shares may be
listed, holders of common stock will have no right to participate in any future
decision to issue any shares of preferred stock or nonvoting common stock.
15
<PAGE> 20
We received proceeds of approximately $37 million from the sale and
issuance to Wingate and the assignees of the shares, the warrants and the notes
under the securities purchase agreement. We have used such proceeds to pay
transaction related expenses of $5.4 million. The remaining proceeds balance of
$31.6 million was used to reduce outstanding indebtedness to our senior lenders
under our revolving credit facility.
EFFECT OF THE CHARTER AMENDMENT
The KPI Trust currently owns 2,700,000 shares, or approximately 28.2%, of
the outstanding common stock. Assuming the exchange of the Tranche A note into
common stock, the KPI Trust would own an aggregate of 5,790,909 shares, or
approximately 45.8%, of the outstanding common stock. After giving effect to the
proposed charter amendment, and assuming the exercise of the warrants into
nonvoting common stock and the exchange of the Tranche A note and Tranche B note
into common stock and nonvoting common stock, respectively, the KPI Trust would
own 5,790,909 shares, or approximately 45.8%, of the outstanding common stock
and 2,925,000 shares of nonvoting common stock, representing in the aggregate
approximately 55.9% of our total common equity (excluding shares potentially
issuable as a result of interest accruing under the notes or as dividends on the
voting preferred stock and the nonvoting preferred stock).
Mr. Kimmel is the record holder of 3,744,760 shares of common stock, which
represented approximately 54.6% of the outstanding common stock before the
closing of the securities purchase agreement, and which now represents
approximately 39.2% of the outstanding common stock. After giving effect to the
proposed charter amendment, and assuming the exercise of the warrants and the
conversion of the Tranche A note and Tranche B note into common stock and
nonvoting common stock, respectively, Mr. Kimmel would own approximately 29.6%
of common stock and 24.0% of our total common equity (excluding shares
potentially issuable as a result of interest accruing under the notes or as
dividends on the voting preferred stock and the nonvoting preferred stock).
While the board has determined that the charter amendment is in our and
your best interests, the board recognizes that the charter amendment and any
subsequent issuance of preferred stock or nonvoting common stock authorized
thereby may have certain disadvantages, including, but not limited to, the
matters discussed below.
The charter amendment provides for the immediate authorization of nonvoting
common stock, the voting preferred stock and the nonvoting preferred stock. When
and if issued, the voting preferred stock and the nonvoting preferred stock
would have dividend and liquidation preferences that are senior to those of the
common stock. The issuance of voting preferred stock would dilute the voting
power of the common stock. The issuance of voting preferred stock, nonvoting
preferred stock and nonvoting common stock could make it less likely that a
takeover or other change of control of the company would take place. Holders of
common stock do not have preemptive rights to subscribe for the purchase of
additional securities that we may issue.
The charter amendment will also authorize the board to provide for the
issuance, from time to time, of preferred stock in one or more series (in
addition to the voting preferred stock and the nonvoting preferred stock) and to
fix the terms of each series. Each series of preferred stock issued in the
future is likely to rank senior to the common stock in respect of dividends and
liquidation rights. In establishing the terms of a series of preferred stock,
the board will be authorized to determine, among other things, such voting
rights, the number of shares in the series, the dividend rate, if any, and
relative preferences, the redemption provisions, if any, the establishment of
retirement or sinking funds, the conversion rights and any other special rights
and protective provisions as the board deems advisable. Such terms could include
provisions prohibiting our payment of common stock dividends or redemption or
other purchases of common stock. In addition, the issuance of a series of
preferred stock could affect the holders of common stock in the following ways:
- if voting rights are granted to any newly-issued series of preferred
stock, the voting power of the common stock will be diluted;
- the issuance of preferred stock may result in a dilution of earnings per
share of the common stock;
- dividends payable on any series of preferred stock will reduce the amount
of funds available for payment of dividends on the common stock;
16
<PAGE> 21
- future amendments to the charter may require approval by the separate
vote of the holders of preferred stock before we can take action; and
- issuance of preferred stock may make more difficult or discourage an
attempt to obtain control of the company by means of a merger, tender
offer, proxy contest or otherwise.
Under our current capital structure, the KPI Trust and Mr. Kimmel together
control the majority of our voting power and have the ability to prevent any
attempt to acquire us through a merger, consolidation, sale of assets or tender
offer. The charter amendment will permit us in the future to make further
issuances of shares of equity without diluting the voting power of our existing
shareholders. Therefore, the charter amendment, in combination with future
issuances of nonvoting common stock and certain preferred stock, will make it
less likely that a merger proposal, an unfriendly tender offer, a proxy contest,
or the removal of incumbent directors or management would take place.
Consequently, the charter amendment and such future issuances, if they take
place, might have the effect of reducing the possibility that our shareholders
would have an opportunity to sell their shares at a premium over then prevailing
market prices.
Certain tax and regulatory issues may affect our ability to utilize newly
issued nonvoting common stock as opposed to common stock in any future
transaction. These considerations will include the fact that certain tax-free
reorganizations can only be accomplished when the sole consideration is voting
stock of the issuer; and the fact that certain state securities laws limit the
exemptions available for the issuance of nonvoting stock where such stock is not
listed on a national securities exchange.
If the charter amendment is approved by the shareholders, the board intends
to file the charter amendment promptly with the Secretary of State of Texas. The
charter amendment will become effective upon the issuance of a restated
certificate of incorporation by the Secretary of State of Texas.
DESCRIPTION OF THE PREFERRED STOCK
Under the charter amendment, the board may approve the designation, from
time to time, from the authorized and unissued shares of preferred stock of one
or more series of preferred stock and to fix the terms of each series. In
establishing the terms of a series of preferred stock, the board will be
authorized to determine, among other things, voting rights, the number of shares
of such series, the dividend rate, if any, and preferences, the redemption
provisions, if any, the establishment of retirement or sinking funds, the
conversion rights and any other special rights and protective provisions as the
board deems advisable. Additionally, the charter amendment authorizes the
designation of two series of preferred stock, (1) the voting preferred stock and
(2) the nonvoting preferred stock, the terms of which are described below.
Voting Preferred Stock
The charter amendment designates 3,500,000 shares of Series A 10 3/8%
Convertible Pay-in-Kind Voting Preferred Stock, which will have the voting and
other rights described below. The rights, powers and limitations of the voting
preferred stock are set forth in full in Article Four of the charter amendment.
The summary set forth below should be read in conjunction with, and is qualified
in its entirety by reference to, the charter amendment which is attached as
Exhibit A to this proxy statement.
Rank. With respect to dividends and distributions upon our liquidation,
winding-up and dissolution, the voting preferred stock will rank on a parity
with the nonvoting preferred stock and will rank senior to the nonvoting common
stock, all classes of common stock (including the voting common stock) and each
other class of capital stock that does not expressly provide that it ranks
senior to or on a parity with the voting preferred stock.
Voting. The holders of voting preferred stock would be entitled to vote as
a single class with the holders of common stock on all matters requiring
shareholder approval. Each share of voting preferred stock would have a number
of votes equal to the number of shares of common stock into which the voting
preferred stock was convertible at the time the vote was taken. Notwithstanding
the foregoing, we (1) could not amend the charter so as to adversely affect the
designations, preferences, limitations and rights of the voting preferred stock,
or to authorize additional shares of voting preferred stock, without the consent
of the holders of a majority of the voting preferred stock and (2) could not
authorize a class or series of stock with rights equal or
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senior to the voting preferred stock and the nonvoting preferred stock without
the consent of the holders of a majority of the voting preferred stock and the
nonvoting preferred stock voting together as a class. Additionally, upon a
Voting Rights Triggering Event (as defined in the charter amendment), the
holders of the voting preferred stock and nonvoting preferred stock, voting as a
single class, could elect two directors to the board. Generally, a Voting Rights
Triggering Event would occur in the event (1) we failed to convert the
outstanding shares of voting preferred stock and nonvoting preferred stock into
common stock and nonvoting common stock, respectively, under the conversion
provisions of the charter amendment; (2) we failed to redeem shares of voting
preferred stock and nonvoting preferred stock in the event of a change of
control (as defined in the charter amendment); or (3) we violated certain
covenants set forth in Article Four of the charter amendment; however, no Voting
Rights Triggering Event could occur unless Wingate, the assignees and their
affiliates owned at least 50% of the outstanding voting preferred stock and
nonvoting preferred stock at the time.
Conversion. The shares of voting preferred stock would be convertible at
any time (without the payment of any additional consideration), in whole or in
part, at the option of the holder into shares of common stock. Upon such
conversion, a holder of voting preferred stock would receive one share of common
stock for each $5.50 of liquidation preference of voting preferred stock
converted (subject to certain anti-dilution adjustments), unless as a result a
change of control would have been deemed to occur under our Indenture, dated
December 1, 1997, governing our 10 3/8% Senior Subordinated Notes, due December
1, 2007. The shares of voting preferred stock are also convertible at any time
(without the payment of any additional consideration), in whole or in part, at
the option of the holder into shares of nonvoting preferred stock. Upon such
conversion, a holder of voting preferred stock will receive one share of
nonvoting preferred stock for each $5.50 of liquidation preference of voting
preferred stock converted (subject to certain anti-dilution adjustments).
Dividends. Holders of voting preferred stock would be entitled to receive,
when, as and if declared by a special committee of the board consisting solely
of independent directors and one of Mr. Kimmel's designees, cash dividends on
each share of voting preferred stock at the rate of 10 3/8% per annum multiplied
by the then-effective liquidation preference per share. All dividends would be
cumulative and paid pro rata to holders. At our option, as determined by the
special committee, any dividend could be declared and paid wholly or partially
in kind in lieu of cash by issuing whole shares of nonvoting preferred stock
with an aggregate liquidation preference in an amount equal to the aggregate
cash dividend cumulated and unpaid to such date, with cash paid in lieu of
issuing fractional shares. The amount of dividends payable but not paid in full
on a dividend payment date would be added to the liquidation preference of the
voting preferred stock.
Liquidation Preference. The voting preferred stock would have an initial
liquidation preference of $5.50 per share. Upon the voluntary or involuntary
liquidation, dissolution or winding up of our affairs, the holders of voting
preferred stock would be entitled to be paid out of our assets available for
distribution to our shareholders an amount in cash equal to the then-existing
liquidation preference for each share outstanding, plus an amount in cash equal
to accumulated and unpaid dividends thereon. Holders of voting preferred stock
would be entitled to such payment before payment was made to any holders of
junior stock, including the common stock.
Redemption. At any time after July 26, 2002, we could, at our option,
redeem shares of voting preferred stock at a redemption price per share in cash
equal to 100% of the then-effective liquidation preference per share, plus
accrued and unpaid cash dividends thereon. In the event of a change of control,
we would be required to offer to redeem all of the outstanding share of voting
preferred stock at a redemption price per share in cash equal to 100% of the
then-effective liquidation preference per share, plus accrued and unpaid cash
dividends thereon.
Nonvoting Preferred Stock
The charter amendment authorizes 9,500,000 shares of Series B 10 3/8%
Convertible Pay-in-Kind Nonvoting Preferred Stock, which would have limited
voting rights, along with the other rights described below. The rights, powers
and limitations of the nonvoting preferred stock are set forth in full in
Article Four of the charter amendment. The summary set forth below should be
read in conjunction with, and is qualified in its entirety by reference to, the
charter amendment which is attached as Exhibit A to this proxy statement.
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Rank. With respect to dividends and distributions upon our liquidation,
winding-up and dissolution, the nonvoting preferred stock would rank on a parity
with the voting preferred stock and senior to the nonvoting common stock, all
classes of common stock (including the voting common stock) and each other class
of capital stock that does not expressly provide that it ranks senior to or on a
parity with the voting preferred stock.
Voting. Holders of nonvoting preferred stock would have no voting rights,
except as follows:
- without the consent of the holders of a majority of the voting preferred
stock and the nonvoting preferred stock, voting together as a class, we
could not authorize the issuance of a class of stock with rights equal or
senior to the voting preferred stock and the nonvoting preferred stock;
- without the consent of the holders of a majority of the nonvoting
preferred stock, we could not amend the charter to adversely affect the
designations, preferences, limitations and rights of the nonvoting
preferred stock, or to authorize additional shares of nonvoting preferred
stock; and
- upon a Voting Rights Triggering Event, the holders of voting preferred
stock and nonvoting preferred stock, voting as a single class, could
elect two directors to the board.
Conversion. The shares of nonvoting preferred stock would be convertible at
any time, in whole or in part (without the payment of any additional
consideration), at the option of the holder into shares of nonvoting common
stock. Upon such conversion, a holder of nonvoting preferred stock would receive
one share of nonvoting common stock for each $5.50 of liquidation preference of
nonvoting preferred stock converted (subject to certain anti-dilution
adjustments).
Dividends. Holders of nonvoting preferred stock would be entitled to
receive, when, as and if declared by the special committee, cash dividends on
each share of nonvoting preferred stock at the rate of 10 3/8% per annum
multiplied by the then-effective liquidation preference per share. All dividends
would be cumulative and paid pro rata to holders. At our option, as determined
by the special committee, any dividend could be declared and paid wholly or
partially in kind in lieu of cash by issuing whole shares of nonvoting preferred
stock with an aggregate liquidation preference in an amount equal to the
aggregate cash dividend cumulated and unpaid to such date, with cash paid in
lieu of issuing fractional shares. The amount of dividends payable but not paid
in full on a dividend payment date would be added to the liquidation preference
of the nonvoting preferred stock.
Liquidation Preference. The nonvoting preferred stock would have an initial
liquidation preference of $5.50 per share. Upon the voluntary or involuntary
liquidation, dissolution or winding up of our affairs, the holders of nonvoting
preferred stock would be entitled to be paid out of our assets available for
distribution to our shareholders an amount in cash equal to the then-effective
liquidation preference for each share outstanding, plus an amount in cash equal
to accumulated and unpaid dividends thereon. Holders of nonvoting preferred
stock would be entitled to such payment before payment is made to any holders of
junior stock, including the common stock.
Redemption. At any time after July 26, 2002, we could redeem shares of
nonvoting preferred stock at a redemption price per share in cash equal to 100%
of the then-effective liquidation preference per share, plus accrued and unpaid
cash dividends thereon. In the event of a change of control, we would be
required to offer to redeem all of the outstanding shares of nonvoting preferred
stock at a redemption price per share in cash equal to 100% of the
then-effective liquidation preference per share, plus accrued and unpaid cash
dividends.
DESCRIPTION OF THE NONVOTING COMMON STOCK
The charter amendment authorizes 20,000,000 shares of nonvoting common
stock, which would have no voting rights except in the limited circumstances
described below. The rights, powers and limitations of the nonvoting common
stock are set forth in full in Article Four of the charter amendment. The
summary set forth below should be read in conjunction with, and is qualified in
its entirety by reference to, the charter amendment which is attached as Exhibit
A to this proxy statement.
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Voting. Holders of nonvoting common stock would have no voting rights,
provided that without the consent of the holders of 51% of the nonvoting common
stock at any time outstanding, the company could not (1) amend, alter, modify or
repeal any provision of the charter or the bylaws of the company in any manner
which would adversely affect the rights, preferences, or powers of the nonvoting
common stock or (2) voluntarily effect an exchange or reclassification of shares
of nonvoting common stock into shares of another class of our capital stock.
Dividends and Distributions Upon Liquidation. Each share of common stock
and nonvoting common stock would rank equally with respect to dividends and
other distributions of cash, property or securities, including distributions in
connection with our liquidation, winding up or dissolution, but would be junior
to shares of preferred stock. All dividends or distributions payable on the
common stock and nonvoting common stock in shares of common stock and nonvoting
common stock would be declared on both classes of shares at the same rate and
would be payable in shares of the class of stock held by the shareholder to whom
the dividend or distribution is payable.
Stock Splits; Reclassification; Mergers and Consolidations. In no event
could either the common stock or nonvoting common stock be split, subdivided, or
combined unless the other was proportionately split, subdivided or combined. No
reclassification or any other adjustment or modification of the rights or
preferences could be effected with respect to either class of stock unless both
the common stock and nonvoting common stock were reclassified or the rights or
preferences were adjusted or modified in exactly the same manner and at the same
time. In the case of our merger or consolidation with or into any other entity,
a sale or transfer of all or substantially all of our assets, or the
reclassification of the common stock into any other form of our capital stock,
each holder of nonvoting common stock and common stock would be entitled to
receive the same per share consideration.
INTERESTS OF CERTAIN PERSONS IN THE MATTER TO BE ACTED UPON
Some of our officers and directors have interests concerning the charter
amendment separate from their interests as officers and directors of the
company.
- Frederick B. Hegi, Jr., President, Chief Executive Officer and Chairman
of the Board, is also the sole manager of the KPI Trust. The KPI Trust is
the holder of the three warrants which are exercisable for 675,000
shares, 772,727 shares and 295,455 shares, respectively, of nonvoting
common stock. In addition, the KPI Trust is the holder of (1) the Tranche
A note, which is exchangeable for shares of voting preferred stock or
common stock, and (2) the Tranche B note, which is exchangeable for
shares of nonvoting preferred stock or nonvoting common stock.
- Each of Mr. Hegi and James A. Johnson, a director and our Executive Vice
President, is (1) a principal of Wingate Management Limited, L.L.C.,
which serves as the general partner of Wingate Management Company II,
L.P., which in turn serves as the general partner of Wingate Partners II,
L.P., and (2) a general partner of Wingate Affiliates II, L.P. Each of
Wingate and Wingate Affiliates II, L.P. have ownership interests in the
KPI Trust. Consequently, each of Mr. Hegi and Mr. Johnson has an indirect
beneficial interest in the KPI Trust.
The charter amendment was approved by the board prior to Mr. Hegi and Mr.
Johnson becoming directors.
RECOMMENDATION OF BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
CHARTER AMENDMENT.
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PROPOSAL NO. 3 -- 1999 STOCK OPTION PLAN
SUMMARY OF THE PLAN
Background and Purpose. The 1999 stock option plan is intended to motivate
certain employees, non-employee directors, affiliated persons and independent
contractors to put forth maximum efforts toward our growth, profitability and
success by providing incentives to such persons through the ownership and
performance of common stock. In addition, the 1999 stock option plan is intended
to provide incentives that will attract and retain highly qualified individuals
as employees and non-employee directors and to assist in aligning the interests
of such employees and non-employee directors with those of the shareholders. The
full text of the 1999 stock option plan is set forth in Exhibit B to this proxy
statement and is incorporated herein by reference. The summary set forth below
should be read in conjunction with, and is qualified in its entirety by
reference to, the 1999 stock option plan which is attached as Exhibit B to this
proxy statement.
Eligibility. All employees, non-employee directors, certain affiliated
persons who have been designated as such by the compensation committee (as
defined below), and certain independent contractors rendering services to us
will be eligible to participate in the 1999 stock option plan and to receive
options under the 1999 stock option plan. Participants will consist of such
employees, non-employee directors, affiliated persons and independent
contractors as the compensation committee in its sole discretion designates to
receive options under the 1999 stock option plan. The adoption of the 1999 stock
option plan will not be deemed to give any person a right to be granted options.
Administration. The 1999 stock option plan will be administered by the
compensation committee of the board or any other committee appointed by the
board provided that the board may act as the committee if it chooses to do so.
The compensation committee will have the responsibility, in its sole discretion,
to control, operate, manage and administer the 1999 stock option plan in
accordance with its terms.
Types of Options under the 1999 Stock Option Plan. The 1999 stock option
plan authorizes incentive stock options, non-qualified stock options and
performance-based stock options.
Shares Available and Maximum Individual Grants. The aggregate number of
shares of common stock available for grants of options under the 1999 stock
option plan during its term will be 1,500,000 shares. The maximum aggregate
number of shares of common stock underlying all options that may be granted to
any single participant during the life of the 1999 stock option plan is 350,000
shares. Shares of common stock available for issuance under the 1999 stock
option plan may be either authorized but unissued shares, shares of issued stock
held in the treasury, or both, and are subject to any adjustments in accordance
with the 1999 stock option plan. Any shares of common stock underlying options
that terminate by expiration, forfeiture, cancellation or otherwise without the
issuance of such shares will again be available for grants of options under the
1999 stock option plan.
Adjustment to Shares. If there is any change in the common stock, such as
due to a merger, consolidation, combination, liquidation, recapitalization,
stock dividend, stock split, split-up, split-off, spin-off, combination of
shares, exchange of shares or other like change in our capital structure, the
1999 stock option plan provides for appropriate adjustments to be made to
outstanding options.
Stock Options. The compensation committee will, in its sole discretion,
determine the employees, the non-employee directors, the affiliated persons and
the independent contractors who will receive stock options and the number of
shares of common stock underlying each stock option. The compensation committee
may grant "incentive stock options" (as such options are described under section
422 of the Code); provided, that such options shall be granted only to
employees, or it may grant stock options that are not incentive stock options
("non-qualified stock options") to all participants. Each stock option will be
subject to such terms and conditions consistent with the 1999 stock option plan
as the compensation committee may impose from time to time. In addition,
incentive stock options are subject to certain restrictions imposed by the Code.
Stock Option Exercise Price. The compensation committee will determine the
exercise price of each stock option, which exercise price will not be lower than
the fair market value of the common stock on the date of grant; provided, that
the exercise price of any non-qualified stock option may be lower than the fair
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market value of the common stock on the date of grant if the compensation
committee, in its sole discretion and due to special circumstances, determines
otherwise on the date of grant. Stock options granted under the 1999 stock
option plan cannot be exercised after the tenth anniversary of the date of
grant; provided, that non-qualified stock options may be exercised after the
tenth anniversary of the date of grant if the compensation committee, in its
sole discretion, provides otherwise. The market value of our common stock as of
September 27, 1999 was $4.875 per share.
Vesting of Stock Options. The compensation committee will determine when
and to what extent each stock option vests. Stock options granted under the 1999
stock option plan may also be subject to such other terms and conditions as
determined by the compensation committee, including, without limitation,
accelerating the vesting based on individual performance or if certain
performance goals are achieved.
Payment of Stock Option Exercise Price. The stock option exercise price may
be paid in cash or, in the sole discretion of the compensation committee, by the
delivery of shares of common stock then owned by the participant, or the
withholding of shares of common stock for which a stock option is exercisable.
The compensation committee, in its sole discretion, may provide an arrangement
through registered broker-dealers whereby temporary financing may be made
available to a participant. The compensation committee may prescribe any other
method of payment of the exercise price that it determines to be consistent with
applicable law and the purposes of the 1999 stock option plan.
Performance-Based Options. The compensation committee, in its sole
discretion, may designate and design options granted under the 1999 stock option
plan as "performance-based options" if it determines that compensation
attributable to such options might not otherwise be tax deductible due to the
deduction limitation imposed by section 162(m) of the Code. Accordingly, an
award granted under the 1999 stock option plan may be granted in such a manner
that the compensation attributable to such award is intended by the compensation
committee to qualify as "performance-based compensation" (as such term is used
in section 162(m) of the Code) and thus be exempt from the deduction limitation
imposed by such section. The compensation committee may use the following
performance measures (either individually or in any combination) to set
performance goals with respect to options intended to qualify as
performance-based options: net sales; pre-tax income before allocation of
corporate overhead and bonus; budget; cash flow; earnings per share; net income;
division, group or corporate financial goals; return on shareholders' equity;
return on assets; attainment of strategic and operational initiatives;
appreciation in and/or maintenance of the price of the common stock or any other
of our publicly-traded securities; market share; gross profits; earnings before
interest and taxes; earnings before interest, taxes, depreciation and
amortization; economic value-added models; comparisons with various stock market
indices; increase in number of customers; and/or reductions in costs. In
addition, the material terms of performance goals as described above will be
disclosed to and reapproved by the shareholders no later than the first
shareholder meeting that occurs in the fifth year following the year in which
the shareholders previously approved such performance goals.
Change in Control. If there is a change in control, the compensation
committee may accelerate the vesting date and/or payout of such options.
Termination of Employment. If a participant's employment is terminated due
to death or disability, all non-vested portions of options held by the
participant will immediately be forfeited and all vested portions of stock
options and stock appreciation rights held by the participant will remain
exercisable until the earlier of 180 days after the date of death or termination
of employment or the date the stock option or stock appreciation right would
otherwise expire. If a participant's employment is terminated for cause or by
the participant voluntarily, all options held by a participant, whether vested
or non-vested, will immediately be forfeited by such participant. If a
participant's employment is terminated for any reason other than for cause or
such participant's death, disability or voluntary resignation, all non-vested
portions of options held by the participant will immediately be forfeited and
all vested portions of stock options and stock appreciation rights held by the
participant will remain exercisable until the earlier of the end of the 30-day
period following the date of the termination of employment or the date the stock
option or stock appreciation right would otherwise expire.
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Purchase Option. If a participant's employment or relationship with us
terminates for any reason at any time or a change of control occurs, under the
1999 stock option plan, we may purchase from the participant any shares of
common stock and/or options held by the participant. Written notice of any
purchase will be given within one year of the date of the termination of a
participant's employment or the date of a change of control. The purchase price
for shares will be the fair market value per share as of the date of the notice
times the number of shares purchased and the purchase price for any option will
be the fair market value per share times the number of vested shares subject to
such option, less the applicable per share option exercise price. We will pay
the purchase price in cash.
Termination and Amendment of the 1999 Stock Option Plan. The board may
amend, modify, suspend or terminate the 1999 stock option plan at any time
provided that such action does not materially impair the value of any option
previously granted, without the participant's consent. No amendment of the 1999
stock option plan will, without the approval of the shareholders:
- increase the total number of shares which may be issued under the 1999
stock option plan;
- decrease the minimum option exercise price in the case of an incentive
option; or
- modify the requirements as to eligibility for options under the 1999
stock option plan.
In addition, the 1999 stock option plan may be amended without the approval
of the shareholders if such amendment is required under the rules and
regulations of the stock exchange or national market system on which our common
stock is listed or will disqualify any incentive stock option granted under the
1999 stock option plan.
Miscellaneous. A participant may be required to reimburse us for any taxes
required by any governmental regulatory authority to be withheld or otherwise
deducted and paid by us with respect to any award, and we have the right to
withhold the amount of such taxes from any other sums due or to become due from
us to the participant upon such terms and conditions as the compensation
committee shall prescribe, which may include withholding shares of common stock
underlying any award. Options granted under the 1999 stock option plan are not
transferable otherwise than by will or the laws of descent and distribution, and
stock options and stock appreciation rights are exercisable, during the
participant's lifetime, only by the participant.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The discussion below is based on federal income tax law and authorities as
of the date of this proxy statement, which are subject to change at any time
(possibly with retroactive effect). The law is technical and complex and the
discussion represents only a general summary of some of the applicable
provisions of federal income tax law. Consequently, a participant is urged to
consult his or her tax advisor before taking any specific action with respect to
the options granted under the 1999 stock option plan.
Incentive Stock Options. The incentive stock options (ISOs) granted under
the 1999 stock option plan are intended qualify as "incentive stock options"
under section 422(b) of the Code.
An employee who receives an ISO will not recognize taxable income upon the
grant of such ISO. Similarly, such employee generally should not recognize
taxable income upon the exercise of such option provided that the employee is
employed by us from the option's grant date until three months prior to such
exercise. This three-month period is (1) extended to one year if the employee is
terminated by reason of disability or (2) waived if the employee dies. However,
depending upon his or her particular tax circumstances, an employee may have a
federal "alternative minimum tax" liability on such exercise. If a participant
exercises an ISO after the three-month period (or one-year period if disabled),
the ISO will be treated as a non-qualified stock option (NSO) and will be
subject to the rules governing NSOs as set forth below.
When an employee disposes of stock held pursuant to the exercise of an ISO,
he or she generally will recognize capital gain or loss equal to the difference,
if any, between the amount received for the common stock and the exercise price,
provided the "applicable holding period" requirements are met. The applicable
holding period rule requires that an employee not dispose of his or her stock
for at least two years from the
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option grant date and he or she must hold the stock for at least one year after
the stock was transferred. The applicable holding period requirements are waived
in the event of an employee's death. Any gain recognized on common stock held
longer than 12 months should be entitled to the long-term capital gains rate of
20%. However, if an employee disposes of the common stock before the applicable
holding period, thereby making a "disqualifying disposition," the employee
generally will recognize ordinary income equal to the excess of the fair market
value of the shares at the time the ISO was exercised over the exercise price
and the balance, if any, of the gain will be capital gain (provided the employee
held such common stock as a capital asset at such time). The long-term capital
gains rate will apply for stock held longer than 12 months. If the disqualifying
disposition is a sale or exchange and the sales proceeds are less than the fair
market value over the adjusted basis of the common stock, the employee's
ordinary income would be limited to the gain realized on the sale.
An employee who exercises an ISO by delivering common stock previously
acquired pursuant to the exercise of another ISO is treated as making a
"disqualifying disposition" of such common stock if the common stock is
delivered before the expiration of the applicable holding period. Upon the
exercise of an ISO with previously acquired shares as to which no disqualifying
disposition occurs, it appears that the employee would not recognize gain or
loss with respect to such previously acquired shares.
We generally are not entitled to a federal income tax deduction upon the
grant or exercise of an ISO or the disposition, after the applicable holding
period, of the common stock acquired upon exercise of an ISO. In the event of a
disqualifying disposition, we generally will be entitled to a deduction in an
amount equal to the ordinary income realized by the employee, provided that such
amount constitutes an ordinary and necessary business expense and the
limitations of sections 280G and 162(m) of the Code (discussed below) do not
apply.
Non-Qualified Stock Options. Non-qualified stock options (NSOs) granted
under the 1999 stock option plan are options that do not qualify as ISOs. A
participant who receives a NSO will not recognize any taxable income upon the
grant of such NSO. However, the participant generally will realize ordinary
income upon exercise of a NSO equal to the amount by which the fair market value
of the common stock at the time of exercise exceeds the option exercise price.
For any participant who is an officer, director or a beneficial owner of
more than 10% of any class of equity securities, Section 16(b) of the Exchange
Act may cause, under certain circumstances, the timing of income recognition
upon the NSO's exercise to be deferred (generally for up to six months).
However, such a participant may elect under section 83(b) of the Code to
recognize income when the shares are transferred. A section 83(b) election must
be in writing and must be filed with the Internal Revenue Service within 30 days
after the date of transfer of such shares.
For employees, the ordinary income recognized with respect to the receipt
of shares or cash upon exercise of a NSO will be subject to both wage
withholding and other employment taxes. In addition to the customary methods of
satisfying the withholding tax liabilities that arise upon the exercise of a
NSO, we may satisfy the liability in whole or in part by withholding shares of
common stock from those that otherwise would be issuable to the participant or
by the participant tendering other shares owned, valued at their fair market
value as of the date that the tax withholding obligation arises. For eligible
non-employees, we will report the amount of income on a Form 1099 in the year
the non-employee realizes the income.
A federal income tax deduction generally will be allowed to us in an amount
equal to the ordinary income recognized by the participant with respect to a
NSO, provided that such amount constitutes an ordinary and necessary business
expense and the limitations of sections 280G and 162(m) of the Code (discussed
below) do not apply.
If a participant exercises a NSO by delivering shares of common stock to
us, other than shares previously acquired pursuant to the exercise of an ISO
which is treated as a "disqualifying disposition" as described above, the
participant will not recognize gain or loss with respect to the exchange of such
shares, even if the shares' then fair market value is different from the
participant's tax basis. The participant, however, will be taxed as described
above with respect to the exercise of the NSO as if the participant had paid the
exercise price in cash, and we likewise generally will be entitled to an
equivalent tax deduction.
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Dividends and Dividend Equivalents. To the extent options under the 1999
stock option plan earn dividends or dividend equivalents, whether paid currently
or credited to an account established under the 1999 stock option plan, a
participant generally will recognize ordinary income with respect to such
dividend or dividend equivalents at the time paid in cash or shares of common
stock.
Change of Control. In general, if the total amount of payments to a
participant that are contingent upon a "change in ownership or control" (as
defined in section 280G(b)(2)(A)(i) of the Code), including payments under the
1999 stock option plan that vest upon a "change in ownership or control," equals
or exceeds three times the participant's "base amount" (generally, such
participant's average annual compensation for the five calendar years preceding
the change in ownership or control), then, subject to certain exceptions, the
payments may be treated as "parachute payments" under the Code, in which case
the portion of the parachute payment that exceeds the base amount allocated to
such payment would be non-deductible to us and the participant would be subject
to a 20% excise tax on such portion.
Certain Limitations on Deductibility of Executive Compensation. With
certain exceptions, section 162(m) of the Code denies a deduction to
publicly-held corporations for compensation paid to certain executive officers
in excess of $1 million per executive per taxable year (including any deduction
with respect to the exercise of a NSO or the disqualifying disposition of stock
purchased pursuant to an ISO). One such exception applies to certain
performance-based compensation, provided that such compensation has been
approved by stockholders in a separate vote and certain other requirements are
met. In general, we intend for stock options and performance-based options
granted under the 1999 stock option plan to qualify for the performance-based
compensation exception to section 162(m) of the Code.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PLAN.
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SHAREHOLDER PROPOSALS
We must receive shareholder proposals to be included in the proxy statement
relating to the 2000 annual meeting of shareholders within a reasonable time
before we begin to print and mail proxy materials. All such proposals should be
mailed to our principal executive offices, 1300 South University Drive, Suite
200, Fort Worth, Texas 76107-5734, Attention: Secretary. Shareholders who intend
to nominate candidates for election as a director or to bring business before
the meeting must also comply with the applicable procedures set forth in our
bylaws. We will furnish copies of such bylaw provisions upon written request to
our Secretary at the above address. In the case of other shareholder proposals
not included in our proxy materials, we may generally exercise discretionary
voting authority, conferred by proxies, at our 2000 annual meeting with respect
to any such proposal that is not timely submitted.
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP served as our independent auditors for the
fiscal year ended December 31, 1998. Effective August 3, 1999, we dismissed
PricewaterhouseCoopers LLP and engaged Ernst & Young LLP as our independent
auditors.
- There have been no adverse opinions, disclaimers of opinion, or
qualifications or modifications as to uncertainty, audit scope, or
accounting principles regarding the reports of PricewaterhouseCoopers LLP
on our financial statements for each of the fiscal years ended December
31, 1998 and 1997.
- The audit committee approved the change of accountants and that action
was ratified by the board.
- During the fiscal years ended December 31, 1998 and 1997 and the
subsequent interim period to August 3, 1999, there were no disagreements
with PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP
to make reference to the subject matter of the disagreements in
connection with its report.
The board expects representatives of both firms to be present at the
meeting, to be available to respond to appropriate questions of shareholders and
to have an opportunity to make a statement if they desire.
ADDITIONAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998, AS AMENDED, AND THE COMPANY'S QUARTERLY REPORTS ON FORM
10-Q FOR THE FISCAL QUARTERS ENDED MARCH 31, 1999 AND JUNE 30, 1999, ARE
AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST. Requests should
be directed to Kevco, Inc., 1300 South University Drive, Suite 200, Fort Worth,
Texas 76107-5734, Attention: James A. Johnson, Executive Vice President and
Secretary.
ANNUAL REPORT
The Kevco, Inc. 1998 Annual Report, which includes financial statements, is
being mailed with this proxy statement.
/s/ JAMES A. JOHNSON
JAMES A. JOHNSON
Executive Vice President and
Secretary
November 2, 1999
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EXHIBIT A
RESTATED ARTICLES OF INCORPORATION
ARTICLE ONE
Kevco, Inc., pursuant to the provisions of Article 4.07 of the Texas
Business Corporation Act (the "TBCA"), hereby adopts restated articles of
incorporation which accurately copy the articles of incorporation and all
amendments thereto that are in effect to date and as further amended by such
restated articles of incorporation as hereinafter set forth and which contain no
other change in any provision thereof.
ARTICLE TWO
The articles of incorporation of the corporation are amended by the
restated articles of incorporation as follows:
(i) by amending and restating Article Four (Capitalization);
(ii) by amending and restating Article Nine (Business Combinations);
(iii) by amending and restating Article Fourteen (Registered Agent);
and
(iv) by amending and restating Article Fifteen (Directors).
ARTICLE THREE
Each amendment made by the restated articles of incorporation has been
effected in conformity with the provisions of the Texas Business Corporation Act
and such restated articles of incorporation and each such amendment made by the
restated articles of incorporation was duly adopted by the shareholders of the
corporation at a meeting duly called and held on the day of ,
1999.
ARTICLE FOUR
On the date of such meeting, the number of shares outstanding was
; the number of shares entitled to vote on the restated articles of
incorporation as so amended was ; the number of shares voted for such
restated articles as so amended was ; and the number of shares voted
against such restated articles as so amended was .
ARTICLE FIVE
The articles of incorporation and all amendments and supplements thereto
are hereby superceded by the following restated articles of incorporation which
accurately copy the entire text thereof and as amended as above set forth:
<PAGE> 32
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF KEVCO, INC.
ARTICLE ONE
The name of the corporation is Kevco, Inc.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purpose for which the corporation is organized is to buy, sell and deal
in personal property, real property and services as well as to engage in any and
all other lawful business and activities authorized or permitted under Texas
law.
ARTICLE FOUR
The total number of shares of all classes of capital stock that the
corporation shall have authority to issue is 150,000,000 shares, consisting of
(a) 30,000,000 shares of a class designated as preferred stock, par value $0.01
per share (the "Preferred Stock"), including (i) 3,500,000 shares of a series of
Series A 10 3/8% Convertible Pay-in-Kind Voting Preferred Stock, par value $0.01
per share (the "Series A Voting Preferred Stock"), and (ii) 9,500,000 shares of
a series of Series B 10 3/8% Convertible Pay-in-Kind Nonvoting Preferred Stock,
par value $0.01 per share (the "Series B Nonvoting Preferred Stock" and
collectively with the Series A Voting Preferred Stock, the "Convertible
Preferred Stock"), (b) 100,000,000 shares of a class designated as common stock,
par value $0.01 per share (the "Voting Common Stock"), and (c) 20,000,000 shares
of a class designated as nonvoting common stock, par value $0.01 per share (the
"Nonvoting Common Stock" and together with the Voting Common Stock, or either
class thereof, the "Aggregate Common Stock").
Capitalized terms not otherwise defined elsewhere in this Article Four have
the meanings ascribed to them in Section III of this Article Four.
I. Designation of Classes of Capital Stock. The designations and the powers,
preferences, rights, qualifications, limitations, and restrictions of the
Preferred Stock, the Voting Common Stock and Nonvoting Common Stock are as
follows:
A. Provisions Relating to the Preferred Stock.
1. The Preferred Stock may be issued from time to time in one or more
series, the shares of each series to have such designations, powers,
preferences and rights and such qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by
the Board of Directors as hereafter prescribed.
2. Authority is hereby expressly granted to and vested in the Board of
Directors to authorize the issuance of the Preferred Stock from time to
time in one or more series, and with respect to each series of the
Preferred Stock, to fix and state by the resolution or resolutions from
time to time adopted providing for the issuance thereof the following:
a. whether or not the series is to have voting rights, full,
special or limited, or is to be without voting rights, and whether or
not such series is to be entitled to vote as a separate class either
alone or together with the holders of one or more other series of stock;
b. the number of shares to constitute the series and the
designations thereof;
c. the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, with respect to any series, including the
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preferences, if any, and the amounts thereof that the holders of any
series thereof shall be entitled to receive upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of,
the corporation;
d. whether or not the shares of any series shall be redeemable at
the option of the corporation or the holders thereof or upon the
happening of any specified event, and, if redeemable, the redemption
price or prices (which may be payable in the form of cash, notes,
securities or other property) and the time or times at which, and the
terms and conditions upon which, such shares shall be redeemable and the
manner of redemption;
e. whether or not the shares of a series shall be subject to the
operation of retirement or sinking funds to be applied to the purchase
or redemption of such shares for retirement, and, if such retirement or
sinking fund or funds are to be established, the annual amount thereof
and the terms and provisions relative to the operation thereof;
f. the dividend rate, whether dividends are payable in cash,
securities of the corporation or other property, the conditions upon
which and the times when such dividends are payable, the preference to
or the relation to the payment of dividends payable on any other class
or classes or series of stock, whether or not such dividends shall be
cumulative or noncumulative and, if cumulative, the date or dates from
which such dividends shall accumulate;
g. whether or not the shares of any series, at the option of the
corporation or the holder thereof or upon the happening of any specified
event, shall be convertible into or exchangeable for the shares of any
other class or classes or of any other series of the same or any other
class or classes of stock, securities, including debt securities, or
other property of the corporation and the conversion price or prices or
ratio or ratios or the rate or rates at which such exchange may be made,
with such adjustments, if any, as shall be stated and expressed or
provided for in such resolution or resolutions; and
h. such other special rights and protective provisions with respect
to any series as may to the Board of Directors seem advisable.
3. The shares of each series of the Preferred Stock may vary from the
shares of any other series thereof in any or all of the foregoing respects.
The Board of Directors may increase the number of shares of the Preferred
Stock designated for any existing series by a resolution adding to such
class or series authorized and unissued shares of the Preferred Stock not
designated for any other series. The Board of Directors may decrease the
number of shares of the Preferred Stock designated for any existing series
by a resolution subtracting from such series authorized and unissued shares
of the Preferred Stock designated for such existing series, and the shares
so subtracted shall become authorized, unissued and undesignated shares of
the Preferred Stock.
B. Provisions Relating to Common Stock.
1. Notwithstanding any other provision of these Articles of
Incorporation to the contrary, in no event shall any Holder of the Series A
Voting Preferred Stock have the right to receive, or to elect to receive,
Voting Common Stock if, as a result thereof, a "change of control" would
have been deemed to occur under the Indenture, and, in lieu thereof, such
Holder shall have the right to receive, or the right to elect to receive,
an equivalent number of shares of Nonvoting Common Stock.
2. Except as otherwise provided in this Article Four, all shares of
Voting Common Stock and Nonvoting Common Stock shall be identical and shall
entitle the holder thereof to the same rights and privileges.
3. Subject to the prior rights and preferences, if any, applicable to
shares of the Preferred Stock or any series thereof, the holders of
outstanding shares of Voting Common Stock and Nonvoting Common Stock shall
be entitled to receive dividends on the shares of Voting Common Stock and
Nonvoting Common Stock when, as, and if declared by the Board of Directors,
out of funds legally available for such purpose. Subject to the prior
rights and preferences, if any, applicable to shares of the Preferred Stock
or
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any series thereof, all holders of shares of Voting Common Stock and
Nonvoting Common Stock shall share ratably, in accordance with the numbers
of shares held by each such holder, in all dividends or distributions on
such shares whether payable in cash, in property, or in securities of the
corporation. No such dividend or distribution shall be declared, set aside
for payment, or paid unless and until a ratable dividend or distribution is
simultaneously declared and paid on all shares of Voting Common Stock and
Nonvoting Common Stock outstanding, and any such dividend or distribution
shall be declared and paid in identical property, except as set forth in
the following sentence. All dividends or distributions declared on shares
of Voting Common Stock and Nonvoting Common Stock that are payable in
shares of Voting Common Stock or Nonvoting Common Stock shall be declared
on both classes of shares at the same rate; provided, however, that any
such dividend or distribution shall be payable in shares of the class of
Voting Common Stock or Nonvoting Common Stock held by the shareholder to
whom the dividend or distribution is payable. The corporation shall not,
nor shall it permit any of its Subsidiaries to, redeem or repurchase or
otherwise acquire shares of Voting Common Stock unless and until it
simultaneously redeems, repurchases, or otherwise acquires shares of
Nonvoting Common Stock on a pro rata basis, in accordance with the numbers
of shares held by each holder thereof.
4. The corporation shall not in any manner subdivide (by stock split, stock
dividend, or otherwise), or combine (by reverse stock split or otherwise) the
outstanding shares of Voting Common Stock or Nonvoting Common Stock unless the
outstanding shares of the other class shall be proportionately subdivided or
combined. No reclassification or any other adjustment or modification of the
rights or preferences shall be effected (including without limitation pursuant
to a merger, consolidation, share exchange, or liquidation involving the
corporation) with respect to either the Voting Common Stock or the Nonvoting
Common Stock unless both the Voting Common Stock and Nonvoting Common Stock are
reclassified or the rights or preferences are adjusted or modified in exactly
the same manner and at the same time. In this regard, and without limiting the
generality of the foregoing, in the case of any consolidation or merger of the
corporation with or into any other entity (other than a merger or consolidation
which does not result in any reclassification, conversion, exchange, or
cancellation of the Voting Common Stock or the Nonvoting Common Stock), or in
case of any sale or transfer of all or substantially all the assets of the
corporation, share exchange or the reclassification of the Voting Common Stock
or the Nonvoting Common Stock into any other form of capital stock of the
corporation, whether in whole or in part, the holder of each share of the other
class, whether Voting Common Stock or Nonvoting Common Stock, as the case may
be, shall, after such consolidation, merger, sale, share exchange, or transfer
or reclassification, have the right to convert into the kind and amount of
shares of stock and other securities and property which such holder would have
been entitled to receive upon such consolidation, merger, sale, share exchange
or transfer or reclassification if such holder had held such Voting Common Stock
(or Nonvoting Common Stock, as the case may be) immediately prior to such
consolidation, merger, sale, share exchange, or transfer or reclassification.
Notwithstanding the prior sentence, to the extent that receipt of such stock and
other securities and property may cause a "change of control" (as defined in the
Indenture), holders of the Nonvoting Common Stock will receive stock and/or
other securities and property as nearly equivalent to that received by the
holders of Voting Common Stock as possible that will not result in a change of
control.
5. In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the corporation, after distribution in full of
the preferential amounts, if any, to be distributed to the holders of shares of
the Preferred Stock or any series thereof, the holders of shares of Voting
Common Stock and Nonvoting Common Stock shall be entitled to share ratably, in
accordance with the number of shares held by each such holder, in all of the
assets of the corporation available for distribution to the holders of shares of
Voting Common Stock.
6. Subject to the voting rights, if any, applicable to shares of the
Preferred Stock or any series thereof, except as otherwise provided herein or by
law, the entire voting power of the corporation shall be vested in the holders
of shares of Voting Common Stock and each holder of shares of Voting Common
Stock shall be entitled to one vote for each share of Voting Common Stock held
of record by such holder; provided, however, that without the consent of the
holders of record of at least 51% of Nonvoting Common Stock at the time
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outstanding, given in writing or by the vote at any regular or special meeting
of shareholders of the corporation, the corporation shall not:
a. amend, alter, modify, or repeal any provision of these Articles
of Incorporation or the bylaws of the corporation in any manner which
adversely affects the relative rights, preferences, qualifications,
powers, limitations or restrictions of the Nonvoting Common Stock, or
amend, alter, modify, or repeal paragraph I.B.5; or
b. voluntarily effect an exchange or reclassification of shares of
Nonvoting Common Stock into shares of another class of capital stock of
the corporation.
II. Provisions Relating to Convertible Preferred Stock. The designations and the
powers, preferences, rights, qualifications, limitations, and restrictions of
the Convertible Preferred Stock are as follows:
A. Designation. There is hereby created out of the authorized and unissued
shares of Preferred Stock of the corporation (i) the Series A Voting Preferred
Stock, with an initial liquidation preference of $5.50 per share, and (ii) the
Series B Nonvoting Preferred Stock, with an initial liquidation preference of
$5.50 per share, in each case having the designations, preferences, limitations,
and relative rights, including voting rights, as follows in this Section II.
B. Rank. The Convertible Preferred Stock shall, with respect to dividends
and distributions upon the liquidation, winding-up, and dissolution of the
corporation, rank senior to all classes of Voting Common Stock and Nonvoting
Common Stock, and each other class of Capital Stock or class or series of
Preferred Stock hereafter created which does not expressly provide that it ranks
senior to, or on a parity with, the Convertible Preferred Stock as to dividends
and distributions upon the liquidation, winding-up, and dissolution of the
corporation ("Junior Stock"). The Convertible Preferred Stock shall, with
respect to dividends and distributions upon the liquidation, winding-up, and
dissolution of the corporation, rank on a parity with any class of Capital Stock
or series of Preferred Stock hereafter created which expressly provides that it
ranks on a parity with the Convertible Preferred Stock as to dividends and
distributions upon the liquidation, winding-up, and dissolution of the
corporation ("Parity Stock"); provided, however, that any such Parity Stock that
was not approved by the Holders in accordance with paragraph II.F.2.a shall be
deemed to be Junior Stock and not Parity Stock. The Convertible Preferred Stock
shall, with respect to dividends and distributions upon the liquidation,
winding-up, and dissolution of the corporation, rank junior to each class of
Capital Stock or series of Preferred Stock hereafter created which has been
approved by the Holders in accordance with paragraph II.F.2.b and which
expressly provides that it ranks senior to the Convertible Preferred Stock as to
dividends or distributions upon the liquidation, winding-up, and dissolution of
the corporation ("Senior Stock").
C. Dividends.
1. Beginning on the applicable Issue Date, the Holders of the
outstanding shares of Convertible Preferred Stock being issued on such
Issue Date shall be entitled to receive, when, as, and if declared by the
Special Committee, out of funds legally available therefor, cash dividends
on each share of Convertible Preferred Stock, at the rate (the "Dividend
Rate") of 10 3/8% per annum multiplied by the then-effective liquidation
preference per share of the Convertible Preferred Stock. Additional
dividends, at the Dividend Rate, shall accrue in respect of, and compound
on, any dividends which are in arrears. All dividends shall be cumulative,
whether or not earned or declared, from the Issue Date and shall compound
to the extent not paid on the next succeeding Dividend Payment Date, and
shall be payable quarterly in arrears on each Dividend Payment Date,
commencing on the first Dividend Payment Date after the applicable Issue
Date. At the option of the corporation as determined by the Special
Committee, any dividend payable on any Dividend Payment Date may be
declared and paid wholly or partially "in kind" in lieu of cash, by issuing
whole shares of Series B Nonvoting Preferred Stock on such Dividend Payment
Date with an aggregate liquidation preference in an amount equal to the
aggregate cash dividend cumulated and unpaid to such date (or any portion
thereof) with cash paid in lieu of issuing fractional shares. The amount of
any dividends payable on any Dividend Payment Date not declared or paid in
full in cash or by the issuance of shares of Series B Nonvoting Preferred
Stock shall be
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added to the liquidation preference of the Convertible Preferred Stock on
such date. Each dividend shall be payable to Holders of record as they
appear on the stock books of the corporation on the Dividend Record Date
immediately preceding the related Dividend Payment Date.
2. All dividends paid with respect to shares of the Convertible
Preferred Stock pursuant to paragraph II.C.1 shall be paid pro rata to the
Holders entitled thereto. The corporation shall not pay any dividend on the
Convertible Preferred Stock "in kind" pursuant to the provisions of
paragraph II.C.1 unless it declares a pro rata dividend in kind on all then
outstanding shares of Convertible Preferred Stock.
3. Dividends in arrears for any past Dividend Period (including any
dividends compounding thereon) and dividends in connection with any
conversion pursuant to paragraph II.E may be declared and paid at any time,
without reference to any regular Dividend Payment Date, pro rata to Holders
of record on such date, not more than forty-five (45) days prior to the
payment thereof, as may be fixed by the Special Committee.
4. No dividends in cash or other property (other than dividends paid
in the same class or series of stock) shall be declared by the Board of
Directors or paid or set apart for payment by the corporation on any Parity
Stock for any period, nor shall the corporation or any Subsidiary thereof
effect any redemption or repurchase of Parity Stock, or distribution
thereon unless full compounded, cumulative dividends, plus amounts equal to
any amounts added to the liquidation preference pursuant to paragraph
II.C.1, have been or contemporaneously are declared and paid in full in
cash or "in kind" by issuing shares of Series B Nonvoting Preferred Stock
as determined by the Special Committee as provided in paragraph II.C.1 on
the Convertible Preferred Stock. Notwithstanding the prior sentence, the
corporation shall nevertheless have the right to pay cash dividends,
provided that all cash dividends declared upon shares of the Convertible
Preferred Stock and any other Parity Stock shall be declared pro rata so
that the amount of dividends declared and paid per share on the Convertible
Preferred Stock and such Parity Stock shall in all cases bear to each other
the same ratio that accrued dividends per share on the Convertible
Preferred Stock and such Parity Stock bear to each other.
5. Holders of shares of the Convertible Preferred Stock shall be
entitled to receive the dividends provided for in paragraph II.C.1 in
preference to and in priority over any dividends upon any of the Junior
Stock, or redemption or repurchase of any Junior Stock by the corporation
or any Subsidiary, and following payment of any unpaid dividends on any
Senior Stock.
6. Dividends payable on the Convertible Preferred Stock shall be
computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed in the period for which payable.
D. Liquidation Preference.
1. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the affairs of the corporation, the Holders
of shares of Convertible Preferred Stock then outstanding shall be entitled
to be paid out of the assets of the corporation available for distribution
to its shareholders an amount in cash equal to the then-existing
liquidation preference for each share outstanding, plus, without
duplication, an amount in cash equal to accumulated and unpaid dividends
thereon (including any compounded dividends) to the date fixed for
liquidation, dissolution, or winding up (including an amount equal to a
prorated dividend for the period from the last Dividend Payment Date to the
date fixed for liquidation, dissolution, or winding up) before any payment
shall be made or any assets distributed to the holders of any of Junior
Stock including, without limitation, the corporation's Aggregate Common
Stock. Except as provided in the preceding sentence, Holders of Convertible
Preferred Stock shall not be entitled to any distribution in the event of
any liquidation, dissolution, or winding up of the affairs of the
corporation. If the assets of the corporation are not sufficient to pay in
full the liquidation payments payable to the holders of outstanding shares
of the Convertible Preferred Stock and all Parity Stock, then the holders
of all such shares shall share equally and ratably in such distribution of
assets in proportion to the full
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liquidation preference, including, without duplication, all accrued and
unpaid dividends, to which each is entitled.
2. For the purposes of this paragraph II.D, neither the sale,
conveyance, exchange, or transfer (for cash, shares of stock, securities,
or other consideration) of all or substantially all of the property or
assets of the corporation nor the consolidation or merger of the
corporation with or into one or more entities shall be deemed to be a
liquidation, dissolution, or winding up of the affairs of the corporation.
E. Conversion.
1. Optional Conversion.
a. The shares of Series A Voting Preferred Stock shall be
convertible without the payment of any additional consideration, in
whole or in part, at any time and from time to time at the option of the
Holder, into shares of fully paid and non-assessable Voting Common
Stock. On any such conversion, Holders of Series A Voting Preferred
Stock shall receive (subject to adjustment as provided in paragraph
II.E.3) one (1) share of Voting Common Stock for each $5.50 (as
adjusted, the "Series A Conversion Price") of liquidation preference
(including amounts added to the liquidation preference in accordance
with paragraph II.D.1) of Series A Voting Preferred Stock converted;
provided, however, that in no event shall any Holder of Series A Voting
Preferred Stock have the right to receive, or to elect to receive,
Voting Common Stock if, as a result thereof, a "change of control" would
have been deemed to occur under the Indenture, and, in lieu thereof,
such Holder shall have the right to receive an equivalent number of
shares of Nonvoting Common Stock.
b. The shares of Series A Voting Preferred Stock shall be
convertible without the payment of any additional consideration, in
whole or in part, at any time and from time to time at the option of the
Holder, into shares of fully paid and non-assessable Series B Nonvoting
Preferred Stock. On any such conversion Holders of Series A Voting
Preferred Stock shall receive that number of shares of Series B
Nonvoting Preferred Stock equal to the Series A Voting Preferred Stock
liquidation preference at such time divided by the then-effective Series
A Conversion Price.
c. The shares of Series B Nonvoting Preferred Stock shall be
convertible without the payment of any additional consideration, in
whole or in part, at any time and from time to time at the option of the
Holder, into shares of fully paid and non-assessable Nonvoting Common
Stock. On any such conversion, Holders of Series B Nonvoting Preferred
Stock shall receive (subject to adjustment as provided in paragraph
II.E.3) one (1) share of Nonvoting Common Stock for each $5.50 (as
adjusted, the "Series B Conversion Price" and, together with the Series
A Conversion Price, the "Conversion Price") of liquidation preference
(including amounts added to the liquidation preference in accordance
with paragraph II.D.1) of Series B Nonvoting Preferred Stock converted.
2. Conversion Procedures.
a. The corporation will not issue any fractional shares of Voting
Common Stock or Nonvoting Common Stock upon a conversion pursuant to
this paragraph II.E, but the Holder shall be entitled to be paid out of
the assets of the corporation available for distribution to its
shareholders an amount in cash equal to the Market Price of any
fractional shares of Voting Common Stock or Nonvoting Common Stock, as
the case may be, otherwise issuable upon conversion, plus, without
duplication, an amount in cash equal to accumulated and unpaid dividends
thereon (including any compounded dividends) to the date of the
conversion.
b. At the time of a conversion pursuant to this paragraph II.E, the
Holder of Convertible Preferred Stock shall deliver to the office of the
corporation or any transfer agent for the corporation the certificate or
certificates representing the shares of Convertible Preferred Stock to
be converted, duly endorsed in blank or accompanied by duly executed
proper instruments of transfer and written notice to the corporation
stating that such Holder elects to convert such share or shares and
stating the name and addresses in which each certificate for shares of
Voting Common Stock or Nonvoting Common Stock, as the case may be,
issued upon such conversion is to be issued; provided, however,
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that if the Holder has received a redemption notice under paragraph
II.H.1, such Holder must notify the corporation within 10 Business Days
after its receipt of the redemption notice in order for such Holder to
convert in whole or part its shares of Convertible Preferred Stock into
shares of Aggregate Common Stock prior to the redemption date.
Conversion shall be deemed to have been effected at the close of
business on the date when such delivery is made to the corporation or
the transfer agent of the shares to be converted, and the Holder of
shares of Convertible Preferred Stock subject to such conversion shall
be deemed to be the Holder of record of the number of shares of Voting
Common Stock or Nonvoting Common Stock, as the case may be, issuable
upon such conversion at such time.
3. Antidilution Provisions. The Conversion Price from time to time in
effect and the number of shares of Voting Common Stock or Nonvoting Common
Stock, as the case may be, issuable upon conversion of Convertible
Preferred Stock shall be subject to adjustments from time to time after the
Issue Date of such Convertible Preferred Stock as hereinafter set forth in
this paragraph II.E.3.
a. Common Stock Splits. Upon any subdivision by the corporation on
or after the Issue Date of all of its outstanding shares of Aggregate
Common Stock into a greater number of shares or upon any issuance by the
corporation on or after such date of a greater number of shares of
Aggregate Common Stock in a pro rata exchange for all of its outstanding
shares of Aggregate Common Stock, then in each case from and after the
record date for such subdivision or exchange the number of shares of
Voting Common Stock or Nonvoting Common Stock, as the case may be,
issuable upon the conversion of shares of Convertible Preferred Stock
shall be increased in proportion to such increase in the number of
outstanding shares of Aggregate Common Stock and the Conversion Price
shall be correspondingly decreased. Upon any pro rata reduction by the
corporation on or after the Issue Date of its outstanding shares of
Aggregate Common Stock as a whole or upon any issuance by the
corporation after such date of a lesser number of shares of Aggregate
Common Stock in a pro rata exchange for all of its outstanding shares of
Aggregate Common Stock, then in each case from and after the record date
for such reduction or exchange the number of shares of Voting Common
Stock or Nonvoting Common Stock, as the case may be, issuable upon the
conversion of shares of Convertible Preferred Stock shall be decreased
in proportion to such reduction in the number of outstanding shares of
Aggregate Common Stock and the Conversion Price shall be correspondingly
increased.
b. Common Stock Dividends. Upon any declaration and payment by the
corporation on or after the Issue Date of a dividend upon Aggregate
Common Stock payable in shares of either class of Aggregate Common
Stock, then in each case from and after the record date for the payment
of such stock dividend, the number of shares of Voting Common Stock or
Nonvoting Common Stock, as the case may be, issuable upon the conversion
of shares of Convertible Preferred Stock shall be increased in
proportion to the increase in the number of outstanding shares of
Aggregate Common Stock through such stock dividend and the Conversion
Price shall be correspondingly decreased.
c. Other Issues. Upon any issuance by the corporation of shares of
Aggregate Common Stock on or after the Issue Date (other than issuances
of stock requiring adjustments hereunder pursuant to the immediately
preceding paragraphs II.E.3.a and II.E.3.b for a consideration lower
than the Market Price per share of stock in effect immediately prior to
such issuance, the Conversion Price then in effect shall be reduced to
equal the following amount:
[(D X E) + F]
G X -------------
C X E
where C equals the number of shares of Aggregate Common Stock to be
outstanding immediately after such additional issuance, D equals the
number of shares of Aggregate Common Stock outstanding immediately prior
to the issue of such additional Aggregate Common Stock, E equals the
Market Price per share of Aggregate Common Stock in effect immediately
prior to the issue of such additional Aggregate Common Stock, F equals
the aggregate consideration (before deducting underwriting discounts,
commissions, and other expenses) received or to be received by the
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corporation in connection with the issuance of such additional Aggregate
Common Stock, and G equals the Conversion Price which would have been in
effect immediately prior to such issuance had all previous adjustments
(if any) under this paragraph II.E.3.c been made. Upon any such
reduction in the Conversion Price, the number of shares of Voting Common
Stock or Nonvoting Common Stock, as the case may be, issuable upon the
conversion of shares of Convertible Preferred Stock shall be
correspondingly increased. The provisions of this paragraph II.E.3.c
shall not be applicable to any issuance of Aggregate Common Stock upon
actual exercise or actual conversion of any option, warrant, right, or
other security convertible into or exercisable for Aggregate Common
Stock if the Conversion Price was fully and properly adjusted pursuant
to the immediately following paragraph II.E.3.d at the time such option,
warrant, right, or other security was issued.
d. Common Stock Options; Subscription Rights; Convertible
Securities. Upon any issuance by the corporation on or after the Issue
Date of options, warrants, or rights to subscribe for shares of
Aggregate Common Stock or of any securities convertible into or
exchangeable for shares of Aggregate Common Stock or of any similar
securities for a consideration per share other than the Market Price in
effect immediately prior to the issuance of such options, warrants,
rights, or securities, the Conversion Price shall be reduced (and the
number of shares of Voting Common Stock or Nonvoting Common Stock, as
the case may be, issuable upon the conversion of shares of Convertible
Preferred Stock shall be appropriately increased), by making
computations in accordance with paragraph II.E.3.c.; provided, however,
that:
(i) The maximum number of shares of Aggregate Common Stock
deliverable under any such option, warrant, or right shall be
considered to have been delivered at the time such option, warrant,
or right was issued, for a consideration equal to the minimum
purchase price per share of Aggregate Common Stock provided for in
such option, warrant, or right, plus the consideration, if any,
received by the corporation for such option, warrant, or right
(before deducting underwriting discounts, commissions, and other
expenses);
(ii) The aggregate maximum number of shares of Aggregate Common
Stock deliverable upon conversion of or exchange for any such
securities shall be considered to have been delivered at the time of
issuance of such securities, for a consideration equal to the
consideration received by the corporation for such securities (before
deducting underwriting discounts, commissions, and other expenses)
plus the minimum consideration (other than such securities) to be
received by the corporation upon the exchange or conversion of such
securities;
(iii) If the purchase or conversion price provided for in any
rights, options, or warrants referred to above, the additional
consideration, if any, payable upon the conversion or exchange of
convertible securities referred to above, or the rate at which any
options, warrants, rights, or convertible securities referred to
above are convertible into or exchangeable for shares of Aggregate
Common Stock shall change (other than under or by reason of
provisions designed to protect against dilution), the Conversion
Price (and the number of shares of Voting Common Stock or Nonvoting
Common Stock, as the case may be, issuable upon the conversion of
shares of Convertible Preferred Stock) in effect at the time of such
event shall be readjusted to the Conversion Price (and the number of
shares of Voting Common Stock or Nonvoting Common Stock, as the case
may be, issuable upon the conversion of shares of Convertible
Preferred Stock) which would have been in effect at such time had
such rights, options, warrants, or convertible securities still
outstanding provided for such new purchase or conversion price,
additional consideration, or conversion rate, as the case may be, at
the time initially granted, issued, or sold. If the purchase or
conversion price provided for in any such right, option, or warrant
referred to above, the additional consideration, if any, payable upon
the conversion or exchange of convertible securities referred to
above, or the rate at which any convertible securities referred to
above are convertible into or exchangeable for shares of Aggregate
Common Stock shall be changed at any time by reason of provisions
designed to protect against dilution, then when shares of Aggregate
Common Stock are delivered upon the exercise of any such right,
option, or warrant or upon conversion or exchange of any such
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convertible security, the Conversion Price (and the number of shares
of Voting Common Stock or Nonvoting Common Stock, as the case may be,
issuable upon the conversion of shares of Convertible Preferred
Stock) then in effect hereunder shall be readjusted to such amount as
would have been obtained had such right, option, warrant, or
convertible security never been issued as to such shares of Aggregate
Common Stock and had the adjustments required hereunder been made at
the time of the issuance of the shares of Aggregate Common Stock
delivered as aforesaid; and
(iv) On the expiration of any such options, warrants, or rights,
or at the termination of any such rights to convert or exchange, the
Conversion Price (and the number of shares of Voting Common Stock or
Nonvoting Common Stock, as the case may be, issuable upon the
conversion of shares of Convertible Preferred Stock) then in effect
shall be readjusted to the Conversion Price (and the number of shares
of Voting Common Stock or Nonvoting Common Stock, as the case may be,
issuable upon the conversion of shares of Convertible Preferred
Stock) which would have been in effect had the adjustments (and
readjustments) made upon the issuance of such expired or terminated
options, warrants, rights, or securities (or upon the occurrence of
any event with respect thereto specified in the immediately preceding
paragraph II.E.3.d(iii)) been made without reference to the number of
shares of Aggregate Common Stock subject to such terminated or
expired options, warrants, rights, or securities. Notwithstanding the
prior sentence, the Holder shall not be required to surrender or
adjust any shares of Voting Common Stock or Nonvoting Common Stock,
as the case may be, theretofore received by the Holder upon
conversion of shares of Convertible Preferred Stock.
e. Special Dividends; Purchase Rights.
(i) If at any time on or after the Issue Date the corporation
shall distribute to all holders of shares of Aggregate Common Stock
of any class evidences of its indebtedness or assets (excluding any
regular periodic cash dividend) or a distribution in partial
liquidation, each payable otherwise than in shares of Aggregate
Common Stock or in securities to which the provisions of the
immediately following paragraph II.E.3.e(ii) are applicable, the
corporation shall pay to the Holder of Convertible Preferred Stock,
upon the conversion thereof at any time on or after the payment of
such dividend or distribution, the securities and other property
(including cash) which such Holder would have received (together with
all subsequent dividends and distributions thereon) if such Holder
had converted such Convertible Preferred Stock on the record date
fixed in connection with such dividend or distribution, and the
corporation shall take whatever steps are necessary or appropriate to
keep in reserve at all times any securities and other properties
which are required to fulfill such obligations of the corporation.
Notwithstanding the foregoing, the rights of the Holder under this
paragraph II.E.3.e(i) upon the corporation's declaration of a
dividend or distribution in partial liquidation payable only in
securities convertible into shares of Aggregate Common Stock may be
exercised only in lieu of any adjustment (in this paragraph
II.E.3.e(i)) called a "subparagraph (d) adjustment") because of such
dividend or distribution called for under paragraph II.E.3.d, and
upon exercise hereof such Holder must elect either such subparagraph
(d) adjustment or the rights and benefits provided for in this
paragraph II.E.3.e(i)). For the purposes of determining the
Conversion Price from time to time in effect and the number of shares
from time to time subject hereto prior to the conversion of shares of
Convertible Preferred Stock, it shall be assumed that the Holder
hereof will so elect subparagraph (d) adjustments, but upon any
election of the rights and benefits provided for in this paragraph
II.E.3.e(i) made at the time of exercise hereof the Conversion Price
then in effect (and the number of outstanding shares of Voting Common
Stock or Nonvoting Common Stock, as the case may be, purchasable upon
such conversion) shall be redetermined to equal the amounts which
would have been in effect had such subparagraph (d) adjustments never
been made. Notwithstanding the other provisions of this paragraph
II.E.3.e(i), in no event shall any Holder have the right to receive,
or to elect to receive, Voting Common Stock pursuant to
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this subsection if, as a result thereof, a "change of control" could
be deemed to occur under the Indenture, and, in lieu thereof, the
Holder shall have the right to receive, or the right to elect to
receive, an equivalent number of shares of Nonvoting Common Stock.
(ii) If at any time on or after the Issue Date the corporation
shall grant, issue, or sell any options or rights to purchase stock,
warrants, securities, or other property pro rata to the holders of
Aggregate Common Stock of all classes ("Purchase Rights"), then each
Holder shall be entitled (but not obligated) to acquire, in lieu of
any subparagraph (d) adjustment and upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder
could have acquired if it had held the number of shares of Voting
Common Stock or Nonvoting Common Stock, as the case may be, issuable
upon conversion of the Convertible Preferred Stock immediately prior
to the time or times at which the corporation granted, issued, or
sold such Purchase Rights.
f. Additional Adjustments.
(i) If at any time or from time to time conditions arise by
reason of action taken by the corporation which are not adequately
covered by the provisions of this paragraph II.E.3, and which might
materially and adversely affect the exercise rights of the Holders of
Convertible Preferred Stock, upon the request of at least a majority
in interest of the Holders (determined as a single series), the
corporation shall appoint at its sole discretion a firm of
independent certified public accountants of recognized national
standing (which may be the regular auditors of the corporation),
which shall give their opinion upon the adjustment, if any, of the
number of shares issuable upon the conversion of the Convertible
Preferred Stock, on a basis consistent with the standards established
in the other provisions of this paragraph II.E.3 of and assuming all
other adjustments required pursuant to this paragraph II.E.3 have
been made, necessary in order to preserve without diminution the
rights of the Holders of the Convertible Preferred Stock. Upon
receipt of such opinion, the Board of Directors shall forthwith make
the adjustments described therein.
(ii) Notwithstanding any other provision hereof, any
antidilution adjustments made pursuant to the terms hereof or of the
Warrants and the Subordinated Notes shall be deemed to be made
simultaneously, the intention being to avoid any iterative
calculations.
g. Effect of Reorganization and Asset Sales. If any capital
reorganization of the corporation, reclassification of the Aggregate
Common Stock of the corporation, statutory exchange, consolidation, or
merger of the corporation with another Person, or sale of all or
substantially all of the corporation's assets to another Person shall be
effected in such a way that holders of Aggregate Common Stock shall be
entitled to receive stock, securities, or assets (including cash) of the
corporation or another Person with respect to or in exchange for
Aggregate Common Stock (each such transaction being hereinafter referred
to as a "Transaction"), then, as a condition of the consummation of each
Transaction, lawful and adequate provisions shall then be made so that
each Holder, upon the conversion of the Convertible Preferred Stock at
any time after the consummation of such Transaction, shall be entitled
to receive, and such Convertible Preferred Stock shall thereafter
represent the right to receive, in lieu of Voting Common Stock or
Nonvoting Common Stock, as the case may be, issuable upon conversion
thereof but otherwise upon and subject to all terms and conditions
hereof, the cash, securities, or other property to which such Holder
would have been entitled upon the consummation of such Transaction if
such Holder had converted such Convertible Preferred Stock immediately
prior thereto (subject to adjustments from and after the consummation
date of such Transaction as nearly equivalent as possible to the
adjustments provided for in this paragraph II.E.3). The corporation
shall not effect any Transaction unless prior to the consummation
thereof each Person (other than the corporation) which may be required
to deliver any securities or other property upon the conversion of the
Convertible Preferred Stock as provided herein shall assume, by written
instrument delivered to each registered Holder of the Convertible
Preferred Stock in form and substance reasonably satisfactory to at
least a majority in interest of the
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Holders, the obligation to continue to honor the terms of the
Convertible Preferred Stock and to deliver to such Holders such
securities or other property to which, in accordance with the foregoing
provisions, such Holders may be entitled, and such Person shall have
similarly delivered to each registered Holder an opinion of counsel for
such Person, in substance and from such counsel as is acceptable to the
Holders, stating that the Convertible Preferred Stock shall thereafter
continue in full force and effect and shall be enforceable against such
Person in accordance with the terms hereof and thereof.
h. Notice of Adjustment or Substitution. On the happening of an
event requiring an adjustment of the Conversion Price and upon each
change in the number of shares of Voting Common Stock or Nonvoting
Common Stock, as the case may be, issuable upon the conversion of the
Convertible Preferred Stock, and in the event of any change in the
rights of the Holder of Convertible Preferred Stock by reason of other
events herein set forth, the corporation shall as soon as practicable
give written notice (the "Notice of Adjustment") to the registered
Holder(s) of Convertible Preferred Stock: (i) describing the event; (ii)
stating the adjusted Conversion Price and the number of shares of Voting
Common Stock or Nonvoting Common Stock, as the case may be, issuable
based upon the difference between the Conversion Price before and after
such adjustment; and (iii) stating how such adjustment of Conversion
Price or number of shares of Voting Common Stock or Nonvoting Common
Stock, as the case may be, was calculated and the facts on which the
calculation is based.
i. Accountant's Opinion. Upon each adjustment of the Conversion
Price and upon each change in the number of shares of Voting Common
Stock or Nonvoting Common Stock, as the case may be, issuable upon the
conversion of the Convertible Preferred Stock, and in the event of any
change in the rights of the Holder of Convertible Preferred Stock by
reason of other events herein set forth, then and in each such case,
upon the reasonable written request of at least 50% in interest of the
registered Holders of Convertible Preferred Stock, determined as a
single series, given to the corporation within thirty (30) days after
the corporation has given the Notice of Adjustment, the corporation will
promptly obtain an opinion of independent certified public accountants
selected by the corporation and reasonably satisfactory to such
Holder(s), stating the adjusted Conversion Price and the new number of
shares of Voting Common Stock or Nonvoting Common Stock, as the case may
be, so issuable, or specifying the other shares of stock, securities, or
assets and the amount thereof receivable as a result of such adjustment
or change in rights, and setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based. The
corporation will promptly mail a copy of such accountant's opinion to
each registered Holder of Convertible Preferred Stock. The costs of the
accountant's opinion shall be borne (i) by the corporation, if the
accountant's opinion reflects any change to the adjusted Conversion
Price or the number of shares of Voting Common Stock or Nonvoting Common
Stock, as the case may be, so issuable set forth in the Notice of
Adjustment, or (ii) by the Holders, if the accountant's opinion reflects
no change to the adjusted Conversion Price or the number of shares of
Voting Common Stock or Nonvoting Common Stock, as the case may be, so
issuable set forth in the Notice of Adjustment. Any dispute or
controversy in respect of the accountant's opinion shall be submitted to
final and binding arbitration in Dallas, Texas pursuant to the
commercial arbitration rules of the American Arbitration Association.
All costs and expenses (including reasonable attorneys' fees) incurred
by the corporation and the Holders in connection with any such
arbitration proceeding shall be paid by the non-prevailing party (as
determined by the arbitrator(s)).
j. Adjustment of Less Than $0.01. The corporation shall not be
required to give any Notice of Adjustment of the Conversion Price in
accordance with paragraph II.E.3.h if the amount of such adjustment
shall be less than $0.01, but in such case any such adjustment shall be
carried forward and notice thereof shall be given at the time of and
together with the next subsequent adjustment, which, together with any
adjustment so carried forward, shall amount to not less than $0.01 per
share; provided, however, that notice of each such adjustment of the
Conversion Price shall be given
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not later than three years from the date such adjustment would have been
required to be made except for the provisions of this paragraph
II.E.3.j.
k. Treasury Shares. The number of shares of Aggregate Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the corporation or any of its Subsidiaries, but
the disposition of any such shares shall be considered an issue or sale
of Aggregate Common Stock for the purposes of this paragraph II.E.
l. Adjustment Exceptions. Anything in this paragraph II.E to the
contrary notwithstanding, no adjustment of the Conversion Price or the
number of shares of Voting Common Stock or Nonvoting Common Stock, as
the case may be, issuable upon the conversion of the Convertible
Preferred Stock shall be made upon (i) the issuance of any shares of
Aggregate Common Stock upon the exercise of any of the Warrants,
exchange of the Subordinated Notes, conversion of any Convertible
Preferred Stock, or the issuance of rights to acquire shares of
Aggregate Common Stock under any of the foregoing, (ii) the issuance of
any shares of Aggregate Common Stock or other securities pursuant to any
Plans or (iii) the issuance of shares of Aggregate Common Stock or
rights to acquire Aggregate Common Stock in connection with any
redemption pursuant to Article 3 of either of the Subordinated Notes or
in connection with any redemption of Convertible Preferred Stock.
F. Voting Rights.
1. General.
a. The Holders of shares of Series A Voting Preferred Stock shall
be entitled to vote with the holders of Voting Common Stock as a single
class on all matters requiring shareholder approval. Each share of the
Series A Voting Preferred Stock shall have a number of votes equal to
the number of shares of Common Stock into which such share of Series A
Voting Preferred Stock is convertible pursuant to paragraph II.E.1
hereof at the time the vote is taken.
b. The Holders of Series B Nonvoting Preferred Stock, except as
required under Texas law or as set forth in paragraphs II.F.2, II.F.3
and II.F.4, shall not be entitled or permitted to vote on any matter
required or permitted to be voted upon by the shareholders of the
corporation.
2. Restrictions.
a. In addition to the voting right of Series A Voting Preferred
Stock set forth in paragraph II.F.1.a, so long as any shares of the
Convertible Preferred Stock are outstanding, the corporation shall not
authorize any class of Parity Stock without the affirmative vote or
consent of Holders of at least a majority of the then outstanding shares
of Convertible Preferred Stock, voting or consenting, as the case may
be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
b. In addition to the voting right of Series A Voting Preferred
Stock set forth in paragraph II.F.1.a, so long as any shares of the
Convertible Preferred Stock are outstanding, the corporation shall not
authorize any class of Senior Stock, without the affirmative vote or
consent of Holders of at least a majority of the outstanding shares of
Convertible Preferred Stock, voting or consenting, as the case may be,
as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
c. In addition to the voting right of Series A Voting Preferred
Stock set forth in paragraph II.F.1.a, so long as any shares of
Convertible Preferred Stock are outstanding, the corporation shall not
amend these Articles of Incorporation so as to affect adversely the
specified designations, preferences, limitations and relative rights,
including voting rights, of the shares of Convertible Preferred Stock or
to authorize the issuance of any additional shares of Convertible
Preferred Stock (other than upon exchange of the Subordinated Notes or
as dividends thereon) without the affirmative vote or consent of Holders
of at least a majority of the issued and outstanding shares of
Convertible Preferred Stock, voting or consenting, as the case may be,
as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting; provided,
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however that the foregoing, with respect to provisions of these Articles
of Incorporation that affect adversely only the Series A Voting
Preferred Stock or the Series B Nonvoting Preferred Stock, as the case
may be, shall only require the vote or consent of such series so
affected.
d. Except as set forth in paragraphs II.F.2.a, II.F.2.b and
II.F.2.c, (i) the creation, authorization, or issuance of any shares of
any Junior Stock, Parity Stock, or Senior Stock, including the
designation thereof within the existing series of Convertible Preferred
Stock or (ii) the increase or decrease in the amount of authorized
Capital Stock of any class, including Preferred Stock, shall not require
the consent of Holders of Convertible Preferred Stock.
3. Triggering Events.
a. If, so long as the Initial Investors or their Affiliates own at
least 50% of the aggregate number of shares of Convertible Preferred
Stock outstanding, (i) the corporation fails to convert all of the then
outstanding shares of Convertible Preferred Stock under the conversion
provisions of paragraph II.E.1 (after notice has been given), (ii) the
corporation fails to purchase shares of Convertible Preferred Stock
pursuant to paragraph II.H.2, or (iii) the corporation violates the
covenants set forth in paragraph II.I in any material manner (each, a
"Voting Rights Triggering Event"), then the number of directors
constituting the Board of Directors shall be adjusted by the number, if
any, necessary to permit the Holders of Convertible Preferred Stock,
voting as a single class, to elect two directors of the Board of
Directors. Holders of a majority of the issued and outstanding
Convertible Preferred Stock, voting as one class, shall for the periods
set forth in paragraph II.F.3.b have the exclusive right to elect two
directors of the Board of Directors at a meeting therefor called upon
occurrence of such Voting Rights Triggering Event and at every
subsequent meeting at which the terms of office of the directors so
elected expire. The number of directors elected by the Holders of
Convertible Preferred Stock shall be reduced by the number of directors,
if any, elected to the Board of Directors by the Holders or their
Affiliates under the terms of the Subordinated Notes.
b. The right of Holders of Convertible Preferred Stock to elect
members of the Board of Directors as set forth in paragraph II.F.3.a
shall continue until such time as the failure, breach, or default giving
rise to such Voting Rights Triggering Event is remedied or is waived by
Holders of at least a majority of the shares of Convertible Preferred
Stock then outstanding and entitled to vote thereon, at which time (i)
the special right of Holders of Convertible Preferred Stock to vote for
the election of directors and (ii) the term of office of the directors
elected by Holders of Convertible Preferred Stock shall terminate. At
any time after voting power to elect directors shall have become vested
and be continuing in Holders of Convertible Preferred Stock pursuant to
paragraph II.F.3.a, or if vacancies shall exist in the offices of
directors elected by Holders of Convertible Preferred Stock, a proper
officer of the corporation may, and upon the written request of the
Holders of record of at least twenty-five percent (25%) of the shares of
Convertible Preferred Stock then outstanding addressed to the secretary
of the corporation shall, call a special meeting of the Holders of
Convertible Preferred Stock for the purpose of electing the directors
which such Holders are entitled to elect. If such meeting shall not be
called by a proper officer of the corporation within twenty (20)
Business Days after personal service of said written request upon the
secretary of the corporation, or within twenty (20) Business Days after
mailing the same within the United States by certified mail, addressed
to the secretary of the corporation at its principal executive offices,
then (A) the Holders of record of at least twenty-five percent (25%) of
the outstanding shares of Convertible Preferred Stock may designate in
writing one of their number to call such meeting at the expense of the
corporation, and such meeting may be called by the Person so designated
upon the notice required for the annual meetings of shareholders of the
corporation and shall be held at the place designated in such notice, or
(B) the Holders of record of at least a majority of the outstanding
shares of Convertible Preferred Stock may elect such members to the
Board of Directors without a meeting, without prior notice, and without
a vote, if such Holders sign a consent or consents in writing electing
such members to the Board of Directors. Any Holder of Convertible
Preferred Stock
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so designated shall have, and the corporation shall provide, access to
lists of shareholders to be called pursuant to the provisions hereof.
c. At any meeting held for the purpose of electing directors at
which the Holders of Convertible Preferred Stock shall have the right to
elect directors as aforesaid, the presence in person or by proxy of the
Holders of at least a majority of the outstanding shares of Convertible
Preferred Stock shall be required to constitute a quorum of such
Convertible Preferred Stock.
4. Number of Votes. In any case in which the Holders of Convertible
Preferred Stock shall be entitled to vote pursuant to this paragraph II.F
(except as provided in paragraph II.F.1.a) or pursuant to Texas law, each
Holder of Convertible Preferred Stock entitled to vote with respect to such
matter shall be entitled to one vote for each share of Convertible
Preferred Stock held. The right of Holders of Convertible Preferred Stock
to elect directors pursuant to this paragraph II.F shall be in addition to,
and not in substitution for or diminution of, the rights of the Holder and
its assigns or Affiliates to appoint members of the Board of Directors
under the terms of the Purchase Agreement.
G. Reissuance of Convertible Preferred Stock. Shares of Convertible
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed, shall (upon compliance with any applicable
provisions of the laws of Texas) have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be redesignated and
reissued as part of any series of Preferred Stock; provided, however, that any
issuance of such shares as Convertible Preferred Stock must be in compliance
with the terms hereof.
H. Redemption.
1. Redemption at the Option of the Corporation. At any time after July
26, 2002, to the extent the corporation shall have funds legally available
for such payment, the corporation may, at its option as determined by the
Special Committee and upon at least 10 Business Days prior written notice
to Holders, redeem shares of Convertible Preferred Stock in whole or in
part, at a redemption price per share in cash equal to 100% of the then
liquidation preference of such shares, plus (without duplication) accrued
and unpaid cash dividends thereon to the date fixed for redemption, without
interest.
2. Redemption in the Event of a Change of Control. In the event of a
Change of Control, the corporation shall, to the extent it shall have funds
legally available for such payment, offer to redeem for cash all of the
shares of Convertible Preferred Stock then outstanding, and shall redeem
the shares of Convertible Preferred Stock of any Holder of such shares that
shall consent to such redemption upon a date no later than 30 Business Days
following the Change of Control, at a redemption price per share equal to
100% of the then liquidation preference of such shares, in cash, plus
(without duplication) accrued and unpaid cash dividends thereon to the date
fixed for redemption, without interest.
3. Failure to Redeem. If the corporation is unable or shall fail to
discharge its obligation to redeem all outstanding shares of Convertible
Preferred Stock pursuant to paragraph II.H.2 (a "Mandatory Redemption
Obligation"), such Mandatory Redemption Obligation shall be discharged as
soon as the corporation is able to discharge such Mandatory Redemption
Obligation. If and so long as any Mandatory Redemption Obligation with
respect to the Convertible Preferred Stock shall not be fully discharged,
neither the corporation nor any Subsidiary thereof shall (a) directly or
indirectly, redeem, purchase, or otherwise acquire any Parity Stock or
discharge any mandatory or optional redemption, sinking fund, or other
similar obligation in respect of any Parity Stock (except in connection
with a redemption, sinking fund, or other similar obligation to be
satisfied pro rata with the Convertible Preferred Stock) or (b) declare or
make any dividend or distribution on any Junior Stock, or, directly or
indirectly, discharge any mandatory or optional redemption, sinking fund,
or other similar obligation in respect of the Junior Stock.
4. Procedure for Redemption.
a. In the event that fewer than all the outstanding shares of
Convertible Preferred Stock are to be redeemed pursuant to paragraph
II.H.1, the number of shares to be redeemed shall be
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determined by the Board of Directors and the shares so redeemed shall be
selected pro rata (with any fractional shares being rounded to the
nearest whole share) according to the number of whole shares held by
each holder of Convertible Preferred Stock.
b. In the event the corporation shall redeem shares of Convertible
Preferred Stock pursuant to paragraph II.H.1, notice of such redemption
(the "Redemption Notice") shall be given by express delivery service
sent not more than 75 Business Days nor less than 40 Business Days prior
to the redemption date, to each Holder of record of the shares of
Convertible Preferred Stock to be redeemed at such Holder's address as
the same appears on the stock register of the corporation; provided,
however, that neither the failure to give the Redemption Notice nor any
defect therein shall affect the validity of the giving of notice for the
redemption of any share of Convertible Preferred Stock to be redeemed
except as to the Holder to whom the corporation has failed to give the
Redemption Notice or except as to the Holder whose Redemption Notice was
defective. Each Redemption Notice shall state: (i) the redemption date;
(ii) the number of shares of Convertible Preferred Stock to be redeemed
and, if fewer than all the shares of Convertible Preferred Stock held by
such Holder are to be redeemed, the number of such shares to be redeemed
from such Holder; (iii) customary provisions regarding the surrender of
certificates; (iv) the redemption price; (v) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (vi) that dividends on the shares to be redeemed
will cease to accrue on such redemption date.
c. In the case of any redemption pursuant to paragraph II.H.1, and
if the Redemption Notice has been properly provided in accordance with
paragraph II.H.4.b, from and after the applicable redemption date
(unless the corporation shall default in providing money necessary for
payment of the redemption price for the shares of Convertible Preferred
Stock called for redemption), dividends on the shares of Convertible
Preferred Stock so called for redemption shall cease to accrue and all
rights of the Holders thereof as shareholders of the corporation (except
the right to receive the redemption price from the corporation) shall
cease. Upon surrender in accordance with any such redemption notice of
the certificates for any shares of Convertible Preferred Stock so
redeemed (properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the notice shall so state), such shares
of Convertible Preferred Stock shall be redeemed by the corporation at
the redemption price specified herein and in the Redemption Notice. If
fewer than all the shares of Convertible Preferred Stock represented by
any such certificate are redeemed, the corporation shall issue a new
certificate representing the unredeemed shares of Convertible Preferred
Stock without cost to the Holder thereof.
d. In the case of a redemption pursuant to paragraph II.H.2, notice
of such redemption shall be given by express delivery service sent not
more than ten Business Days following the occurrence of the Change of
Control, to each Holder of record of the shares of Convertible Preferred
Stock to be redeemed at such Holder's address as the same appears on the
stock register of the corporation; provided, however, that neither the
failure to give such notice nor any defect therein shall affect the
validity of the giving of notice for the redemption of any share of
Convertible Preferred Stock to be redeemed, except as to the Holder to
whom the corporation has failed to give said notice or except as to the
Holder whose notice was defective. Each such redemption notice shall
state: (i) that a Change of Control has occurred; (ii) the redemption
date; (iii) the redemption price; (iv) customary provisions regarding
the surrender of certificates; (v) that such Holder may elect to cause
the corporation to redeem all or any of the shares of Convertible
Preferred Stock held by such Holder; (vi) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (vii) that dividends on the shares the Holder
elects to cause the corporation to redeem will cease to accrue on such
redemption date. Upon receipt of such redemption notice, the Holder of
Convertible Preferred Stock shall, within 10 Business Days of receipt
thereof, return such redemption notice to the corporation indicating the
number of shares of Convertible Preferred Stock such Holder shall elect
to cause the corporation to redeem, if any.
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e. In the case of a redemption pursuant to paragraph II.H.2, and if
notice thereof has been properly provided in accordance with paragraph
II.H.4.d, from and after the redemption date (unless the corporation
shall default in providing necessary money for the payment of the
redemption price for the shares of Convertible Preferred Stock called
for redemption), dividends on such shares of Convertible Preferred Stock
as the Holder elects to cause the corporation to redeem shall cease to
accrue, and all rights of the electing Holders thereof as shareholders
of the corporation as to such Shares (except the right to receive the
redemption price from the corporation) shall cease. Upon surrender in
accordance with such redemption notice of the certificates for any
shares of Convertible Preferred Stock so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors shall so require and
the notice shall so state), such shares of Convertible Preferred Stock
shall be redeemed by the corporation at the redemption price specified
herein and in such redemption notice.
f. Notwithstanding any other provision of these Articles of
Incorporation to the contrary, in the event the corporation (i) delivers
a Redemption Notice under paragraph II.H.1 and the Holder timely elects
to convert shares of Convertible Preferred Stock pursuant to paragraph
II.E, then, for purposes of a redemption under paragraph II.H.1, the
"redemption date" shall mean the latter of (A) the redemption date set
forth in the Redemption Notice and (B) the date upon which any
applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") shall have expired
or early termination thereof shall have been granted without limitation,
restriction, or condition, and (ii) delivers a redemption notice under
paragraph II.H.2 and the Holder timely elects to convert shares of
Convertible Preferred Stock pursuant to paragraph II.E, then, for
purposes of a redemption under paragraph (2) of this paragraph II.H, the
"redemption date" shall mean the latter of (A) the date 40 Business Days
after a Change of Control and (B) the date upon which any applicable
waiting period under the HSR Act shall have expired or early termination
thereof shall have been granted without limitation, restriction, or
condition.
I. Covenants.
1. Limitation on Sale of Assets and Subsidiary Stock.
a. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale, unless (i) the
corporation or such Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value (which, if it exceeds $1,000,000, shall be determined by
(i) the Board of Directors and set forth in a Board Resolution delivered
to the Holders or (ii) to the extent any such Asset Sale involves a sale
to a Holder, the Special Committee and set forth in a resolution
delivered to the Holders) of the assets (including, if appropriate,
Equity Interests) disposed of or issued, as appropriate, and (ii) at
least 75% of the consideration therefor received by the corporation or
such Subsidiary is in the form of cash or Cash Equivalents; provided,
however, that the 75% limitation referred to above shall not apply to
any Asset Sale in which the cash portion of the consideration received
therefor, determined in accordance with the following sentence, is equal
to or greater than what the after-tax net proceeds would have been had
such transaction complied with the aforementioned 75% limitation.
b. For purposes of this covenant (and not for purposes of any other
provision of these Articles of Incorporation), the term "cash" shall be
deemed to include (i) any notes or other obligations received by the
corporation or such Subsidiary as consideration as part of such Asset
Sale that are immediately converted by the corporation or such
Subsidiary into actual cash or Cash Equivalents (to the extent of the
actual cash or Cash Equivalents so received) and (ii) any liabilities of
the corporation or such Subsidiary (as shown on the most recent balance
sheet of the corporation or such Subsidiary) that are payable in cash
and that (A) are assumed by the transferee of the assets which are the
subject of such Asset Sale as consideration therefor in a transaction
the result of which is that the corporation and all of its Subsidiaries
are released from all liability for such assumed
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liability, (B) are not owed to the corporation or any Subsidiary of the
corporation and (C) constitute short-term liabilities (as determined in
accordance with GAAP).
c. Within 360 days after the receipt of any Net Proceeds from an
Asset Sale, the corporation may apply, directly or indirectly, such Net
Proceeds (i) to repay permanently Senior Indebtedness of the corporation
or of its Subsidiaries or (ii) to the making of a capital expenditure or
the acquisition of other long-term assets, in each case, in a Related
Business. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10,000,000, the corporation may make an offer
to all holders of the Notes to the extent required by Section 4.08(b) of
the Indenture. Pending the final application of any such Net Proceeds,
the corporation or its Subsidiaries, as the case may be, may temporarily
reduce Indebtedness under the Senior Credit Facility or otherwise invest
such Net Proceeds in any manner that is not prohibited by this Section
II. If the aggregate principal amount of Notes tendered by the holders
thereof is less than the amount of Excess Proceeds, the Company may use
any remaining Excess Proceeds for general corporate purposes. Upon
completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
d. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit
any of its Subsidiaries to, transfer, convey, sell, or otherwise dispose
of any Capital Stock of any of its Subsidiaries to any Person (other
than the corporation or another Subsidiary of the corporation), unless
(i) such transfer, conveyance, sale, or other disposition is of all of
the Capital Stock of such Subsidiary owned by the corporation and its
Subsidiaries or is otherwise permitted under paragraph II.I.6 and (ii)
such transaction is conducted in accordance with paragraphs II.I.1.a and
II.I.1.b.
2. Limitation on Restricted Payments.
a. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit
any of its Subsidiaries to, directly or indirectly, (i) declare or pay
any dividend or make any other payment or distribution on account of the
corporation's or any of its Subsidiary's Equity Interests (including,
without limitation, any payment in connection with any merger or
consolidation) other than dividends or distributions (A) paid or payable
in Equity Interests (other than Disqualified Stock) of the corporation
or (B) paid or payable to the corporation or any Subsidiary of the
corporation; (ii) purchase, redeem, or otherwise acquire or retire for
value any Equity Interests of the corporation or any direct or indirect
parent of the corporation or other Affiliate of the corporation or any
Subsidiary of the corporation (other than any such Equity Interests
owned by the corporation or any Subsidiary of the corporation); (iii)
make any principal payment on, or purchase, redeem, defease, or
otherwise acquire or retire for value prior to the scheduled maturity,
scheduled repayment, or scheduled sinking fund payment, any Subordinated
Indebtedness (except, if no Voting Rights Triggering Event is continuing
or would result therefrom, any such payment, purchase, redemption,
defeasance, or other acquisition or retirement for value made (A) out of
Excess Proceeds available for general corporate purposes if such payment
or other action is required by the indenture or other agreement or
instrument pursuant to which such Subordinated Indebtedness was issued,
(B) upon the occurrence of a Change of Control if (1) such payment or
other action is required by the indenture or other agreement or
instrument pursuant to which such Subordinated Indebtedness was issued
and (2) the corporation has purchased all of the Subordinated Notes
properly tendered pursuant to the terms thereof or (3) upon the
redemption of the Convertible Preferred Stock in accordance with the
terms of these Articles of Incorporation); or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(i) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof;
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(ii) cumulative dividends on the Convertible Preferred Stock
have been paid in full;
(iii) the corporation would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the applicable
Reference Period, have been permitted to Incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio test
set forth in paragraph II.I.3.a; and
(iv) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments declared or made by the corporation
and its Subsidiaries after the Issue Date shall not exceed, at the
date of determination, the sum of (a) 50% of aggregate Consolidated
Net Income of the corporation from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of the
corporation's most recently ended fiscal quarter for which financial
statements are available at the time of such Restricted Payment (or,
if such aggregate Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (b) 100% of the aggregate
net cash proceeds received by the corporation from the issue or sale
after the Issue Date of Equity Interests of the corporation or of
Disqualified Stock or debt securities of the corporation that have
been converted into such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of the corporation and other than Disqualified Stock
or debt securities that have been converted into Disqualified Stock),
plus (c) the aggregate net cash proceeds received by the corporation
as capital contributions to the corporation (other than from a
Subsidiary of the corporation) after the Issue Date (other than
capital contributions from Wingate, its partners, or their respective
Affiliates).
b. The foregoing provisions will not prohibit the following
Restricted Payments:
(i) the payment of any dividend or other distribution within 60
days after the date of declaration thereof, if, at said date of
declaration, such payment would have complied with the provisions of
this Section II;
(ii) the redemption, repurchase, retirement, or other
acquisition of any Equity Interests of the corporation (other than
Disqualified Stock) in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the
corporation) of other Equity Interests of the corporation (other than
Disqualified Stock or one or more sales of Equity Interests to
Wingate, its partners, or their respective Affiliates); provided that
the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, or other acquisition shall
be excluded from clause (iii) of paragraph II.I.2.a (both for
purposes of determining the aggregate amount of Restricted Payments
made and for purposes of determining the aggregate amount of
Restricted Payments permitted);
(iii) the payment, purchase, redemption, defeasance, or other
acquisition or retirement for value of Subordinated Indebtedness with
the net cash proceeds from a substantially concurrent Incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent
sale (in each case other than to a Subsidiary of the corporation) of
Equity Interests of the corporation (other than Disqualified Stock or
one or more sales of Equity Interests to Wingate, its partners, or
their respective Affiliates); provided that the amount of any such
net cash proceeds that are utilized for any such payment, purchase,
redemption, defeasance, or other acquisition or retirement shall be
excluded from clause (iii) of paragraph II.I.2.a (both for purposes
of determining the aggregate amount of Restricted Payments made and
for purposes of determining the aggregate amount of Restricted
Payments permitted);
(iv) so long as no Voting Rights Triggering Event is continuing,
the repurchase of Equity Interests of the corporation from former
employees of the corporation or any Subsidiary thereof (or the
estates, heirs, or legatees of such former employees) for
consideration which does not exceed $500,000 in the aggregate in any
fiscal year;
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(v) any Restricted Investment made with the net cash proceeds
from a substantially concurrent sale (other than to a Subsidiary of
the corporation) of Equity Interests of the corporation (other than
Disqualified Stock or one or more sales of Equity Interests to
Wingate, its partners, or their respective Affiliates); and
(vi) so long as no Voting Rights Triggering Event is continuing,
any Restricted Investment which, together with all other Restricted
Investments outstanding made pursuant to this paragraph II.I.2.b does
not exceed $5,000,000.
Except to the extent specifically noted above, Restricted Payments made
pursuant to this paragraph II.I.2.b shall be included in calculating the amount
of Restricted Payments made after the Issue Date.
c. The amount of all Restricted Payments not made in cash shall be
the Fair Market Value (which, if it exceeds $1,000,000, shall be
determined in good faith by the Board of Directors and set forth in a
Board Resolution delivered to the Holders) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the corporation or
any Subsidiary thereof, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the
corporation shall deliver to the Holders an Officer's Certificate
stating that such Restricted Payments were permitted and setting forth
the basis upon which the calculations required by this paragraph II.I.2
were computed, which calculations may be based upon the corporation's
latest available financial statements.
3. Limitation on Incurrence of Indebtedness.
a. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit
any of its Subsidiaries to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness), except for Permitted
Indebtedness; provided, however, that the corporation and its
Subsidiaries may Incur Indebtedness (including Acquired Indebtedness)
if, at the time of Incurrence of such Indebtedness, after giving pro
forma effect to such Incurrence as of such date and to the use of
proceeds therefrom (including the application or the use of the net
proceeds therefrom to repay Indebtedness or make any Restricted Payment)
(i) no Voting Rights Triggering Event shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro
forma basis to, such Incurrence of Indebtedness and (ii) on the date of
such Incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio
of the corporation for the Reference Period immediately preceding the
Incurrence Date, after giving effect on a pro forma basis to such
Incurrence of Indebtedness and, to the extent set forth in the
definition of Consolidated Coverage Ratio, the use of proceeds thereof,
would exceed 1.75 to 1 (the "Debt Incurrence Ratio").
b. "Permitted Indebtedness" means any and all of the following:
(i) Indebtedness of the corporation Incurred pursuant to the
Senior Credit Facility in the aggregate principal amount at any time
outstanding not to exceed the sum of the aggregate commitments
pursuant to the Senior Credit Facility as in effect on the date
hereof;
(ii) Existing Indebtedness, including the Subordinated Notes;
(iii) intercompany Indebtedness between or among the corporation
and any of its Subsidiaries; provided that (a) if the corporation is
an obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to
the Convertible Preferred Stock and (b) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the corporation or a Subsidiary of
the corporation, or any sale or other transfer of any such
Indebtedness to a Person that is not either the corporation or a
Subsidiary of the corporation, shall be deemed to constitute a new
Incurrence of such Indebtedness by the corporation or such
Subsidiary, as the case may be;
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(iv) Permitted Refinancing Indebtedness Incurred in exchange
for, or the net proceeds of which are used to extend, refinance,
renew, replace, defease, or refund, (a) Indebtedness (other than
Permitted Indebtedness) that was Incurred in compliance with these
Articles of Incorporation, (b) Indebtedness referred to in paragraph
II.I.3.b(i) or II.I.3.b(ii) or (c) Existing Indebtedness, other than
Existing Indebtedness, if any, related to the Indebtedness refinanced
by the Senior Credit Facility;
(v) Indebtedness of a Subsidiary of the corporation constituting
a Guarantee of Indebtedness of the corporation or a Subsidiary
thereof, which Indebtedness was Incurred pursuant to this paragraph
II.I.3.b or the Debt Incurrence Ratio test set forth in paragraph
II.I.3.a;
(vi) the Incurrence by the corporation or any of its
Subsidiaries of Hedging Obligations of the following types: (a)
Interest Rate Hedges with respect to any Indebtedness of such Person
that is permitted by the terms of these Articles of Incorporation to
be outstanding, the notional principal amount of which does not
exceed the principal amount of the Indebtedness to which such
Interest Rate Hedge relates and (b) Currency Hedges that do not
increase the outstanding loss potential or liabilities other than as
a result of fluctuations in foreign currency exchange rates; and
(vii) other Indebtedness of the corporation and its Subsidiaries
from time to time outstanding in an aggregate principal amount not to
exceed $20,000,000.
c. Indebtedness of any Person which is outstanding at the time such
Person becomes a Subsidiary of the corporation or is merged with or into
or consolidated with the corporation or a Subsidiary of the corporation
shall be deemed to have been Incurred at the time such Person becomes
such a Subsidiary of the corporation or is merged with or into or
consolidated with the corporation or a Subsidiary thereof, as
applicable.
4. Limitation on Liens. For so long as any shares of Convertible
Preferred Stock are issued and outstanding, the corporation will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, affirm, assume, or suffer to exist any Liens of any kind, other than
Liens securing Senior Indebtedness, the Subordinated Indebtedness, and
Permitted Liens, against or upon any assets or property now owned or
hereafter acquired or any income or profits therefrom or assign or convey
any right to receive income therefrom.
5. Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, assume, or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any such Subsidiary to (a) (i)
pay dividends or make any other distributions to the corporation or any of
its Subsidiaries on its Capital Stock or with respect to any other interest
or participation in, or measured by, its profits or (ii) pay any
Indebtedness owed to the corporation or any of its Subsidiaries, (b) make
loans or advances to the corporation or any of its Subsidiaries or (c)
transfer any of its properties to the corporation or any of its
Subsidiaries, except for such encumbrances or restrictions existing under
or by reason of (i) Existing Indebtedness, (ii) the Senior Credit Facility,
(iii) applicable law, (iv) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the corporation or any of its Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was Incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties of any Person, other than the Person, or the
property of the Person, so acquired, provided that in the case of
Indebtedness, such Indebtedness was permitted by the terms of these
Articles of Incorporation to be Incurred, (v) customary non-assignment
provisions in leases, licenses, sales agreements, or other contracts (but
excluding contracts related to the extension of credit) entered into in the
ordinary course of business and consistent with past practices, (vi)
restrictions imposed pursuant to a binding agreement for the sale or
disposition of all or substantially all of the Equity Interests or assets
of any Subsidiary of the corporation, provided such restrictions apply
solely to the Equity Interests or assets being sold, (vii) restrictions
imposed by Permitted Liens on the transfer of the
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assets that are subject to such Liens, (viii) Permitted Refinancing
Indebtedness Incurred to refinance Existing Indebtedness or Indebtedness of
the type described in clause (iv) above, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, as a whole, than those contained in
the agreements governing the Indebtedness being refinanced, (ix) the terms
of Purchase Money Indebtedness, but only to the extent such Purchase Money
Indebtedness encumbers or restricts the property acquired with such
Purchase Money Indebtedness and (x) the Subordinated Notes.
6. Limitation on Issuance, Sale and Ownership of Capital Stock of
Subsidiaries. For so long as any shares of Convertible Preferred Stock are
issued and outstanding, the corporation will not, and will not permit any
of its Subsidiaries to, (a) sell, assign, transfer, convey or otherwise
dispose of, any Equity Interests of any Subsidiary of the corporation,
other than to the corporation or another Subsidiary of the corporation, (b)
permit any Subsidiary of the corporation to issue any Equity Interests
(including, without limitation, pursuant to any merger, consolidation,
recapitalization or similar transaction) other than to the corporation or
another Subsidiary of the corporation or (c) permit any Person other than
the corporation or its Subsidiaries to own any Equity Interests of any
Subsidiary of the corporation, except that (i) the corporation or its
Subsidiaries may consummate a sale to a Person of all of the Equity
Interests of a Subsidiary of the corporation, if such sale is made by the
corporation or another Subsidiary of the corporation subject to, and in
compliance with, paragraph II.I.1 and (ii) the corporation may issue and
permit the subsequent ownership by directors of, directors' qualifying
shares.
7. Limitation on Mergers, Consolidations, or Sales of Assets. For so
long as any shares of Convertible Preferred Stock are issued and
outstanding, the corporation will not merge or consolidate (whether or not
the corporation is the surviving corporation), or sell, assign, transfer,
lease, convey, or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless: (a) the corporation is the surviving corporation or the Person
formed by or surviving any such merger or consolidation (if other than the
corporation) or to which such sale, assignment, transfer, lease,
conveyance, or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof, or the District of Columbia; (b) the Convertible Preferred Stock
shall be converted or exchanged for and shall become shares of such
successor, transferee, or resulting Person having in respect of such
successor, transferee, or resulting Person the same powers, preferences,
and relative participating, optional, or other special rights and
qualifications, limitations, or restrictions thereon, that the Convertible
Preferred Stock had immediately prior to that transaction; and (c) the
corporation, any of its Subsidiaries, or any Person formed by or surviving
any such merger or consolidation, or to which such sale, assignment,
transfer, lease, conveyance, or other disposition shall have been made
will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable Reference Period, be permitted to Incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio test set
forth in paragraph II.I.3.a.
J. Business Day. If any payment or conversion shall be required by the
terms hereof to be made on a day that is not a Business Day, such payment or
conversion shall be made on the immediately succeeding Business Day.
K. The Special Committee. Notwithstanding any other provision of this
Article Four to the contrary, all determinations with respect to the payment of
dividends on the Convertible Preferred Stock requiring action by the
corporation's Board of Directors shall be taken by the Special Committee.
L. No Obligation to Repurchase. Notwithstanding any other provision of this
Article Four to the contrary, in no event shall the corporation be required to
repurchase any shares of Convertible Preferred Stock on or prior to the date
that is 91 days after the date on which the Notes mature.
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III. Definitions. As used in this Article Four, including this Section III, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Acquired Indebtedness" means, in respect of the corporation or any of its
Subsidiaries, (i) Indebtedness of any other Person existing at the time such
other Person is merged with or into or becomes a Subsidiary of the corporation
or any of its Subsidiaries, including, without limitation, Indebtedness Incurred
in connection with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of the corporation or any of its Subsidiaries and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by the
corporation or any of its Subsidiaries.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Sale" means (i) the direct or indirect sale, lease, license,
conveyance, transfer, or other disposition of any assets or rights (including,
without limitation, by way of a sale and leaseback or similar arrangement, by
merger or consolidation) by the corporation or any of its Subsidiaries (a
"disposition"), in one transaction or a series of transactions; provided,
however, that the disposition of all or substantially all of the assets of the
corporation and its Subsidiaries taken as a whole will be governed by the
provisions of paragraph II.I.7 and not by the provisions of paragraph II.I.1 and
(ii) the issuance or disposition by the corporation or any of its Subsidiaries
of Equity Interests of the corporation's Subsidiaries.
Notwithstanding the foregoing paragraph, none of the following will be
deemed an Asset Sale: (i) a disposition of assets by the corporation to a
Subsidiary of the corporation or by a Subsidiary of the corporation to the
corporation or to another Subsidiary of the corporation; (ii) an issuance
of Equity Interests by a Subsidiary of the corporation to the corporation
or to another Subsidiary of the corporation; (iii) a Restricted Payment
that is permitted by paragraph II.I.2; (iv) dispositions of $250,000 or
less; (v) dispositions of assets or rights in the ordinary course of
business consistent with past practices; (vi) the grant in the ordinary
course of business of any non-exclusive license of intellectual property
rights; (vii) any liquidation of any Cash Equivalents; (viii) any
disposition of defaulted receivables for collection; and (ix) the grant of
any Lien securing Indebtedness (or any foreclosure thereon) to the extent
that such Lien is granted in compliance with paragraph II.I.4.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Average Life" means, as of the date of determination, in respect of any
security or instrument, the quotient obtained by dividing (i) the sum of the
products (A) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (B) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Bankruptcy Law" means Title II, U.S. Code or any similar federal or state
law for the relief of debtors.
"Beneficial Owner" or "beneficial owner" (including, with correlative
meanings, the terms "Beneficial Ownership" and "Beneficially Owns") for purposes
of the definition of Change of Control has the meaning attributed to it in Rules
13d-3 and 13d-5 under the Exchange Act (as in effect on the date of these
Articles of Incorporation), whether or not applicable, except that a "person"
(as such term is used in Sections 13(d)(3) of the Exchange Act) shall be deemed
to have "Beneficial Ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time or is exercisable only upon the occurrence of a subsequent
condition.
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"Board of Directors" means the board of directors of the corporation.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the corporation to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such
certification and delivered to each Holder of Convertible Preferred Stock.
"Business Day" means any day except a Saturday, a Sunday, or any day on
which banking institutions in Fort Worth, Texas are required or authorized by
law or other governmental action to be closed.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights, or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) Government Securities having maturities of not
more than 12 months from the date of acquisition, (ii) certificates of deposit
and eurodollar time deposits with maturities of 12 months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any member bank of the U.S.
Federal Reserve System having capital and surplus in excess of $500,000,000,
(iii) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any financial institution meeting the qualifications specified in clause
(ii) above and (iv) commercial paper having the rating of at least P-1 from
Moody's Investors Services, Inc. ("Moody's"), or any successor to its rating
business, or at least A-1 from Standard & Poor's Ratings Services ("S&P"), or
any successor to its rating business, and in each case maturing within 180 days
after the date of acquisition.
"Change of Control" means the occurrence or existence of any of the
following events or circumstances after the date hereof: (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act)
(other than the Initial Investors or their Affiliates) becomes the Beneficial
Owner of 50% or more of the Voting Common Stock or Jerry E. Kimmel, his family
members, heirs, estate or Affiliates, individually or collectively become the
Beneficial Owners of more than 46% of the Voting Common Stock (an "Acquiring
Person"); or (ii) a sale or transfer of all or substantially all of the assets
of the corporation and its Subsidiaries, taken as a whole, to any person or
group (other than any person or group consisting solely of any or all of the
Initial Investors or their respective Affiliates) has been consummated; or (iii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (together with any new directors
whose election was approved by a vote of a majority of the directors then still
in office, who either were 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 the directors of the corporation then in
office, other than as a result of a reduction of the number of directors
comprising the Board of Directors, pursuant to the provisions of these Articles
of Incorporation or under the terms of the Senior Credit Facility.
Notwithstanding the foregoing, for purposes of clause (i) above, a Change of
Control shall not be deemed to have occurred if any person or group becomes an
Acquiring Person through one or more transactions which includes the
acquisition, directly or indirectly, of any of the Voting Common Stock
Beneficially Owned by the Initial Investors or their Affiliates, unless such
action is part of a transaction, including a tender or exchange offer, merger,
consolidation, or other business combination, in which such person or group
acquires or offers to acquire, on substantially the same terms and conditions as
those applicable to the Initial Investors and their Affiliates, substantially
the same proportion of shares of the outstanding Voting Common Stock of the
corporation held by the remaining shareholders; provided, however, that a Change
of Control may occur notwithstanding the fact that (A) holders of Voting Common
Stock may elect more than one form of consideration in such transaction or (B)
such holders may receive cash in lieu of the purchase of fractional shares.
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"Composite Tape" means in respect of any security, the reporting by the
National Association of Securities Dealers, Inc. (or any successor reporting
mechanism) of all trades of such security occurring on all exchanges on which
such security is traded.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (i) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses discounted or disposed of) for the Reference Period to
(ii) the aggregate Consolidated Fixed Charges of such Person (exclusive of
amounts attributable to operations and businesses discontinued or disposed of,
but only to the extent that the obligations giving rise to such Consolidated
Fixed Charges would no longer be obligations contributing to such Person's
Consolidated Fixed Charges subsequent to the Transaction Date) during the
Reference Period; provided, however, that for purposes of such calculation, (A)
acquisitions which occurred during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date shall be assumed to
have occurred on the first day of the Reference Period, (B) transactions giving
rise to the need to calculate the Consolidated Coverage Ratio shall be assumed
to have occurred on the first day of the Reference Period, (C) the Incurrence of
any Indebtedness or issuance of any Disqualified Stock during the Reference
Period or subsequent to the Reference Period and on or prior to the Transaction
Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) shall be assumed to have occurred on the
first day of such Reference Period and (D) the Consolidated Fixed Charges of
such Person attributable to interest on any Indebtedness or dividends on any
Disqualified Stock bearing a floating interest (or dividend) rate shall be
computed on a pro forma basis as if the average rate in effect from the
beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to a Hedging Obligation (which by its terms will remain
in effect for the 12-month period immediately following the Transaction Date)
that has the effect of fixing the interest rate on the date of computation, in
which case such rate (whether higher or lower) shall be used. For purposes of
this definition whenever pro forma effect is to be given to a transaction, the
pro forma calculations of Consolidated EBITDA and Consolidated Fixed Charges
shall be made in accordance with Article 11 of Regulation S-X of the Commission
and subject to agreed-upon procedures to be performed by the corporation's
independent accountants to determine whether the pro forma calculations are made
in accordance with Article 11 of Regulations S-X.
"Consolidated EBITDA" means, in respect of the corporation, for any period,
the Consolidated Net Income of the corporation for such period adjusted to add
thereto (to the extent deducted in determining Consolidated Net Income), without
duplication, the sum of (i) consolidated income tax expense, (ii) consolidated
depreciation and amortization expense, and other non-cash charges required to be
reflected as expenses for such period on the books and records of the
corporation and (iii) Consolidated Fixed Charges, less the amount of all cash
payments made by the corporation or any of its Subsidiaries during such period
to the extent such payments relate to non-cash charges that were added back in
determining Consolidated EBITDA for such period or any prior period.
"Consolidated Fixed Charges" means, in respect of the corporation for any
period, the sum of (i) the consolidated interest expense of the corporation and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount, non
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capitalized
Lease Obligations, imputed interest in respect of Attributable Debt, interest
payments in respect of Indebtedness of another Person that is Guaranteed by the
corporation or one or more of its Subsidiaries or secured by a Lien on assets of
the corporation or one or more of its Subsidiaries, commissions, discounts, and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), (ii) the consolidated interest expense of the corporation and its
Subsidiaries that was capitalized during such period, in each case, on a
consolidated basis and in accordance with GAAP and (iii) the product of (A) the
aggregate amount of dividends paid (to the extent not accrued in a prior period)
or accrued on Disqualified Stock of the corporation and its Subsidiaries or
preferred stock of the corporation's Subsidiaries, to the extent such
Disqualified Stock or preferred stock is owned by Persons other than the
corporation and its Subsidiaries and
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(B) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state, local, and foreign statutory
tax rate of the corporation, expressed as a decimal.
"Consolidated Net Income" means, in respect of the corporation for any
period, the aggregate of the Net Income of the corporation and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (i) the Net Income (but not loss) of any Person that is
not a Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or distributions
paid in cash to the corporation or any of its Subsidiaries as to which
Consolidated Net Income is being calculated, (ii) the Net Income of any
Subsidiary of the corporation shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
of such Net Income would not be permitted at the date of determination or,
directly or indirectly, pursuant to the terms of its charter and bylaws (or
similar organizational and governing documents) and all agreements, instruments,
judgments, decrees, orders, statutes, rules, or governmental regulations
applicable to such Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded, (v) income or loss
attributable to discounted operations shall be excluded and (vi) any gain (but
not loss) realized upon the sale or other disposition of any property, plant, or
equipment of the corporation or its Subsidiaries (including pursuant to any sale
and leaseback transaction) which is not sold or otherwise disposed of in the
ordinary course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person shall be excluded.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the Maturity Date (as defined in the Subordinated Notes).
"Dividend Payment Date" means the last day of June, September, December,
and March of each year (unless such day is not a Business Day, in which case the
Dividend Payment Date shall be the next succeeding Business Day).
"Dividend Period" means a quarterly period of three months.
"Dividend Record Date" means the 15th day of June, September, December and
March of each year.
"Dollars" and "$" mean lawful money or currency of the United States of
America.
"Equity Interests" means Capital Stock and all warrants, options, or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Notes and all other Indebtedness of the
corporation and its Subsidiaries in existence on the Issue Date, including the
Subordinated Notes.
"Fair Market Value" means, in respect of 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; provided, however, that if such value exceeds
$1,000,000, such determination shall be made in good faith by the Board of
Directors.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Government Securities" means direct obligations of, or obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness (and "Guaranteed" shall have a meaning correlative to the
foregoing).
"Hedging Obligations" means, in respect of any Person, the obligations of
such Person under (i) interest or currency exchange rate swap agreements,
interest or currency exchange rate cap agreements, and interest or currency
exchange rate collar agreements and (ii) other agreements or arrangements, in
any case, designed to protect such Person against fluctuations in interest or
currency exchange rates (as appropriate, "Interest Rate Hedges" and "Currency
Hedges").
"Holder" means a record holder of shares of Convertible Preferred Stock as
reflected in the stock books of the corporation.
"Incur" means, in respect of any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange, or otherwise), assume,
Guarantee, or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable," and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in GAAP that
results in an obligation of such Person that exists at such time, and is not
theretofore classified as Indebtedness, becoming Indebtedness shall not be
deemed an Incurrence of such Indebtedness.
"Indebtedness" means, in respect of any Person, (i) any liability of such
Person, whether or not contingent (A) for borrowed money, or under any
reimbursement obligation relating to a letter of credit, bankers' acceptance, or
note purchase facility; (B) evidenced by a bond, note, debenture, or similar
instrument (including a purchase money obligation); (C) for the payment of money
relating to a Capitalized Lease Obligation; (D) for or pursuant to Disqualified
Stock; (E) for or pursuant to preferred stock of any Subsidiary of such Person
(other than preferred stock held by such Person or any of its Subsidiaries or in
the case of the corporation, any of its Subsidiaries); (F) representing the
balance deferred and unpaid of the purchase price of any property or services
(except any such balance that constitutes a trade payable or accrued liability
in the ordinary course of business that is not overdue by more than 90 days or
is being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted); or (G) under or in respect of Hedging Obligations;
(ii) any liability of others described in the preceding clause (i) that such
Person has Guaranteed, that is recourse to such Person or that is otherwise its
legal liability, or the payment of which is secured by (or for which the holder
of such liability has an existing right to be secured by) any Lien upon property
owned by such Person, even though such Person has not assumed or become liable
for the payment of such liability; and (iii) any amendment, supplement,
modification, deferral, renewal, extension, or refunding of any liability of the
types referred to in clauses (i) and (ii) above. The amount of any non-interest
bearing or other discount Indebtedness shall be deemed to be the principal
amount thereof that would be shown on the balance sheet of the issuer dated such
date prepared in accordance with GAAP, but such Indebtedness shall be deemed to
have been Incurred only on the date of the original issuance thereof.
"Indenture" means the Indenture, dated December 1, 1997, governing the
Notes as amended or supplemented from time to time.
"Independent Director" means any director of the corporation not affiliated
with Wingate or its assigns or Jerry E. Kimmel and who does not have any other
relationship (including any relationship, contractual or otherwise, with
Wingate, its assigns or Jerry E. Kimmel) that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director.
"Initial Investors" means any person or group comprised solely of any or
all of the "Purchasers" under the Purchase Agreement, including any such
Purchasers acquiring rights by way of assignment pursuant to Section 13.8
thereof.
"Investments" means, in respect of any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations (but
excluding endorsements of negotiable instruments for collection in the ordinary
course of
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business)), advances or capital contributions (excluding commissions, travel,
and similar advances to directors, officers, and employees made in the ordinary
course of business), purchases or other acquisitions (for consideration) of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP.
"Issue Date" means the date of original issuance of the applicable shares
of Convertible Preferred Stock.
"Kimmel Designees" means Jerry E. Kimmel, if he is a director of the
corporation, and any other director of the corporation elected or appointed at
the designation of Jerry E. Kimmel.
"Lien" means, in respect of any asset, any mortgage, lien, pledge, charge,
security interest, or encumbrance of any kind in respect of such asset, whether
or not filed, recorded, or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement or any lease in the
nature thereof).
"Market Price" means, with respect to any Aggregate Common Stock, on a per
share basis and as of any date, an amount equal to the average, for each of the
ten (10) consecutive Trading Days immediately prior to such date, of the closing
prices for a share of Voting Common Stock on such Trading Day as reported on the
Composite Tape (as reported in The Wall Street Journal or, if not reported
thereby, any other authoritative source). If no price can be determined under
the foregoing, then the "Market Price" shall be deemed to be the fair market
value thereof, as determined by the Special Committee in good faith as of a date
which is within fifteen (15) days preceding the date as of which the
determination is to be made.
"Net Income" means, in respect of any Person, the net income (loss) of such
Person, determined in accordance with GAAP.
"Net Proceeds" means, in respect of any Asset Sale, the aggregate amount of
cash proceeds (including any cash received by way of deferred payment pursuant
to a note receivable issued in connection with such Asset Sale, other than the
portion of such deferred payment constituting interest, and including any
amounts received as disbursements or withdrawals from any escrow or similar
account established in connection with any such Asset Sale, but, in either case,
only as and when so received) received by the corporation or any of its
Subsidiaries in respect of such Asset Sale, net of: (i) the cash expenses of
such Asset Sale (including, without limitation, the payment of principal of, and
premium, if any, and interest on, Indebtedness required to be paid as a result
of such Asset Sale and legal, accounting, management and advisory, and
investment banking fees and sales commissions); (ii) taxes paid or payable as a
result thereof; (iii) any portion of cash proceeds that the corporation
determines in good faith should be reserved for post-closing adjustments, it
being understood and agreed that on the day that all such post-closing
adjustments have been determined, the amount (if any) by which the reserved
amount in respect of such Asset Sale exceeds the actual post-closing adjustments
payable by the corporation or any of its Subsidiaries shall constitute Net
Proceeds on such date; (iv) any relocation expenses and pension, severance, and
shutdown costs incurred as a result thereof; and (v) any cash amounts actually
set aside by the corporation or any of its Subsidiaries as a reserve in
accordance with GAAP against any retained liabilities associated with the asset
disposed of in such transaction, including, without limitation, pension and
other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Notes" means the corporation's 10 3/8% Senior Subordinated Notes, due
December 1, 2007.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, in respect of the corporation, the Chief Executive
Officer, the President, the Chief Operating Officer, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary,
any Assistant Secretary, or any Vice President of the corporation.
"Officer's Certificate" means a certificate signed on behalf of the
corporation by two Officers of such Person, one of whom must be the principal
executive officer, the principal financial officer, or the principal accounting
officer of the corporation.
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"Permitted Investments" means (i) any Investment in the corporation or in a
Subsidiary of the corporation, (ii) any Investment in Cash Equivalents, (iii)
any Investment by the corporation or any of its Subsidiaries in a Person engaged
in a Related Business if, as a result of such Investment, (A) such Person
becomes a Subsidiary of the corporation or (B) such Person is merged,
consolidated, or amalgamated with or into, or transfers or conveys all or
substantially all of its assets to, or is liquidated into, the corporation or a
Subsidiary of the corporation, (iv) Investments the payment for which consists
exclusively of Equity Interests (excluding Disqualified Stock) of the
corporation, (v) Investments in shares of money market mutual or similar funds
having assets in excess of $500,000,000, and (vi) Investments in negotiable
instruments held for collection in the ordinary course of business and lease,
utility, and similar deposits.
"Permitted Liens" means (i) Liens securing Permitted Indebtedness Incurred
pursuant to clause (i) of the definition of such term, (ii) Liens in favor of
the corporation and/or its Subsidiaries, (iii) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the
corporation or any of its Subsidiaries, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the corporation or any of its Subsidiaries, (iv) Liens securing any
Acquired Indebtedness and which exist at the time of acquisition thereof by the
corporation or any of its Subsidiaries, provided that such Liens were in
existence prior to the contemplation of such acquisition, (v) Liens existing on
the Issue Date or arising since such date in compliance with Section II, (vi)
Liens arising by reason of (A) any judgment, decree, or order of any court not
constituting an Voting Rights Triggering Event; (B) taxes not yet delinquent or
which are being contested in good faith by appropriate proceedings which suspend
the collection thereof, promptly instituted and diligently conducted, and for
which adequate reserves have been established to the extent required by GAAP;
(C) security for payment of workers' compensation or other insurance; (D) good
faith deposits in connection with tenders, leases, and contracts (other than
contracts for the payment of money), bids, licenses, performance or similar
bonds and other obligations of a like nature, in the ordinary course of
business; (E) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, restrictions on the use of property
or minor irregularities of title (and in respect of 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 lessees), none of
which materially impairs the use of any parcel of property material to the
operation of the business of the corporation or any of its Subsidiaries or the
value of such property for the purpose of such business; (F) deposits to secure
public or statutory obligations or in lieu of surety or appeal bonds; (G)
surveys, exceptions, title defects, encumbrances, easements, reservations of, or
rights or others for, rights of way, sewers, electric lines, telegraph or
telephone lines and other similar purposes or zoning or other restrictions as to
the use of real property not interfering with the ordinary conduct of the
business of the corporation or any of its Subsidiaries; or (H) operation of law
or statute and incurred in the ordinary course of business, including without
limitation, those in favor of mechanics, materialmen, suppliers, laborers or
employees, and, if securing sums of money, for sums which are not yet delinquent
or are being contested in good faith by appropriate proceedings which suspend
the collection thereof, promptly instituted and diligently conducted, and for
which adequate reserves have been established to the extent required by GAAP,
(vii) Liens resulting from the deposit of funds in trust for the purpose of
decreasing or defeasing Indebtedness of the corporation and its Subsidiaries so
long as such deposit of funds and such decreasing or defeasing of Indebtedness
are permitted under paragraph II.I.2, and (viii) any extension, renewal, or
replacement (or successive extensions, renewals, or replacements), in whole or
in part, of any Lien referred to in the foregoing clauses (iii), (iv), and (v)
above; provided, however, that the principal amount of the Indebtedness secured
thereby shall not exceed the principal amount of Indebtedness secured thereby
immediately prior to the time of such extension, renewal, or replacement, and
that such extension, renewal, or replacement Lien shall be limited to all or a
part of the property that secured the Lien so extended, renewed, or replaced
(plus improvements on such property).
"Permitted Refinancing Indebtedness" means any Indebtedness of the
corporation or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used by such Person to extend, refinance, renew, replace,
defease, or refund other Indebtedness of such Person ("Old Indebtedness");
provided, however, that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Old Indebtedness
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plus any premium or penalty payable thereon and any reasonable expenses incurred
in connection therewith; (ii) such Permitted Refinancing Indebtedness has a
final maturity date equal to or later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Old Indebtedness; (iii) such Permitted Refinancing
Indebtedness is on terms that are no more restrictive, as a whole, than those
governing such Old Indebtedness; and (iv) such Permitted Refinancing
Indebtedness is Incurred only by the corporation or any of its Subsidiaries that
is the obligor on the Old Indebtedness.
"Person" means any individual, corporation, limited liability corporation,
partnership, joint venture, association, joint-stock corporation, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plans" means any plan existing on the date hereof or adopted by the
corporation after the date hereof providing for the issuance of Aggregate Common
Stock of any class or series or other options or rights to purchase stock,
warrants, or other securities.
"Purchase Agreement" means the Securities Purchase Agreement, dated as of
July 14, 1999 between Wingate and Kevco, Inc.
"Purchase Money Indebtedness" means, in respect of the corporation or any
of its Subsidiaries, any Indebtedness of the corporation or any of its
Subsidiaries to any seller or other Person incurred to finance the acquisition
(including in the case of a Capitalized Lease Obligation, the lease) of any real
or personal tangible property acquired after the Issue Date which, in the
reasonable good faith judgment of the Board of Directors or the board of
directors (or similar governing body) of any of its Subsidiaries, as applicable,
is directly related to a Related Business and which is Incurred within 180 days
of such acquisition and is secured only by the assets so financed.
"Reference Period" in respect of any Person means the four full fiscal
quarters for which financial statements are available at the time of
determination (or such lesser period during which such Person has been in
existence) ended immediately preceding any date upon which any such
determination is to be made pursuant to the terms of Section II.
"Related Business" means the business conducted by the corporation and its
Subsidiaries as of the Issue Date and any and all businesses that in the good
faith judgment of the Board of Directors are materially related businesses.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Credit Facility" means the Credit Agreement, as amended, entered
into on December 1, 1997 among the corporation, the guarantors named therein,
and NationsBank of Texas, N.A., as agent and lender, and the other lenders party
thereto.
"Senior Indebtedness" means, in respect of any Person, (i) all Indebtedness
of such Person outstanding under the Senior Credit Facility and all Hedging
Obligations in respect thereof, (ii) any other Indebtedness of such Person
permitted to be issued under Section II, provided that Senior Indebtedness shall
not include any Indebtedness which by the terms of the instrument creating or
evidencing the same is on parity with or is subordinated or junior in right of
payment in any respect to any other Indebtedness of such Person or its
Subsidiaries or Affiliates and (iii) all Obligations in respect of the
foregoing.
Notwithstanding anything to the contrary in the foregoing paragraph, Senior
Indebtedness will not include (i) any liability for federal, state, local,
foreign, or other taxes, (ii) any Indebtedness of any such Person to any of its
Subsidiaries or other Affiliates, (iii) any accounts payable or trade
liabilities arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (iv) any Indebtedness that
is incurred in violation of Section II, (v) Indebtedness of the Person to any
shareholder of the Person, (vi) Indebtedness to, or guaranteed by the Person or
any of its Subsidiaries for the benefit of, any director, officer, or employee
of the Person or any Subsidiary of the Person (including, without limitation,
amounts owed for compensation), (vii) Capital Stock of such Person and
Indebtedness represented by Disqualified Stock, (viii) Indebtedness which, when
Incurred and without respect to any election under
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Section 1111(b) of Title 11, United States Code, is without recourse to such
Person, (ix) any Indebtedness or obligation which is subordinated in right of
payment to any other Indebtedness or obligation of such Person and (x) any
Indebtedness under the Notes or any refinancings thereof.
"Special Committee" means a committee of the Board of Directors composed
solely of the Independent Directors and the Kimmel Designees then in office;
provided, however, that such committee shall be constituted such that a majority
of its members shall always be Independent Directors.
"Subordinated Indebtedness" means Indebtedness of the corporation (or of
its Subsidiaries) that is subordinated in right of payment to the Convertible
Preferred Stock.
"Subordinated Notes" means the corporation's Tranche A and Tranche B Senior
Subordinated Exchangeable Notes in the initial principal amounts of $17,000,000
and $6,500,000, respectively.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). Unless indicated to
the contrary, "Subsidiary" refers to a direct or indirect Subsidiary of the
corporation.
"Trading Day" means any day on which the NASDAQ Stock Market is open for
trading, or if the shares of Voting Common Stock are not quoted on the NASDAQ
Stock Market, any day on which the principal national securities exchange or
national quotation system on which the shares of Voting Common Stock are listed,
admitted to trading or quoted is open for trading.
"Warrants" means the following: (i) the warrant issued by the corporation
dated July 26, 1999 to The Kevco Partners Investment Trust providing for the
purchase of 675,000 shares of Nonvoting Common Stock; (ii) the warrant issued by
the corporation dated July 26, 1999 to The Kevco Partners Investment Trust
providing for the purchase of 772,727 shares of Nonvoting Common Stock; (iii)
the warrant issued by the corporation dated July 26, 1999 to The Kevco Partners
Investment Trust providing for the purchase of 295,455 shares of Nonvoting
Common Stock; and (iv) all reissuances, transfers and substitutions of the
foregoing.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of products
obtained by multiplying (A) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (B) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wingate" means Wingate Partners II, L.P., a Delaware limited partnership.
ARTICLE FIVE
No shareholder of the corporation shall have any preemptive or preferential
right whatsoever to acquire additional, unissued, or treasury shares of the
corporation, or securities of the corporation convertible into or carrying a
right to subscribed to or acquire shares of any class of stock of the
corporation.
ARTICLE SIX
Directors shall be elected by a plurality of the votes cast by the holders
of shares entitled to vote in the election of directors at a meeting of
shareholders at which a quorum is present. Cumulative voting in the election of
directors of the corporation is expressly denied.
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ARTICLE SEVEN
With respect to any matter, other than the election of directors or a
matter for which the affirmative vote of the holders of a specified portion of
the shares entitled to vote is required by the TBCA, the act of the shareholders
shall be the affirmative vote of at least a majority of the shares entitled to
vote on, and voted for or against, that matter at a meeting of shareholders at
which a quorum is present.
With respect to any matter for which the affirmative vote of the holders of
a specified portion of the shares entitled to vote is required by the TBCA, the
act of the shareholders on that matter shall be the affirmative vote of the
holders of at least a majority of the shares entitled to vote on that matter,
rather than the affirmative vote otherwise required by the TBCA.
ARTICLE EIGHT
I. Limitation of Liability. In addition to any other limitation of liability for
directors provided for at law (including the TBCA), the Articles of
Incorporation or the Bylaws, no director of this corporation shall be personally
liable to the corporation or any of its shareholders for monetary damages for an
act or omission in the director's capacity as a director, except that this
Subsection A does not eliminate or limit the liability of a director to the
extent the director is found liable for: (i) a breach of the director's duty of
loyalty to the corporation or its shareholders; (ii) an act or omission not in
good faith that constitutes a breach of duty of the director to the corporation
or an act or omission that involves intentional misconduct or a knowing
violation of the law; (iii) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; or (iv) an act or omission for which
the liability of a director is expressly provided by an applicable statute.
Neither the amendment nor repeal of this Section I, nor the adoption of any
provisions of the Articles of Incorporation of this corporation inconsistent
with this Section I, shall eliminate or reduce the effect of this Section I in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Section I, would accrue or arise, prior to such amendment, repeal or
adoption of any inconsistent provision. If, after approval of this Section I,
the TBCA, the Texas Miscellaneous Corporation Laws Act (the "TMCLA") or any
other laws of the State of Texas are enacted or amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of this corporation shall be eliminated or limited
to the fullest extent permitted by such laws as so enacted or amended from time
to time.
II. Indemnification.
A. The corporation shall indemnify a person who was, is, or is threatened
to be made a named defendant or respondent in a proceeding because the person is
or was a director to the fullest extent and manner permissible under the TBCA or
applicable rules, regulations or laws.
B. A person shall be indemnified under paragraph II.A against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding; but if the person is found liable to the corporation or is found
liable on the basis that personal benefit was improperly received by the person,
the indemnification (i) shall be limited to reasonable expenses actually
incurred by the person in connection with the proceeding and (ii) shall not be
made in respect of any proceeding in which the person shall have been fund
liable for willful or intentional misconduct in the performance of his duty to
the corporation.
C. The mandatory indemnification provision set forth in paragraph II.A
shall be deemed to constitute authorization of indemnification in the manner
required by the TBCA even though this provision may not have been adopted or
authorized in the same manner as the determination that indemnification is
permissible.
D. The corporation shall indemnify a director against reasonable expenses
incurred by him in connection with a proceeding in which he is a named defendant
or respondent because he is or was a director if he has been wholly successful,
on the merits or otherwise, in the defense of the proceeding.
E. Reasonable expenses incurred by a director who was, is, or is threatened
to be made a named defendant or respondent in a proceeding shall be paid or
reimbursed by the corporation in advance of the final
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disposition of the proceeding (and without any prior determination or
authorization being first required) after (i) the corporation receives a written
affirmation by the director of his good faith belief that he has met the
standard of conduct necessary for indemnification under this Article Eight and
the TBCA and (ii) a written undertaking by or on behalf of the director to repay
the amount paid or reimbursed if it is ultimately determined that he has not met
that standard or if it is ultimately determined that indemnification of the
director against expenses incurred by him in connection with that proceeding is
prohibited by the TBCA. This mandatory payment or reimbursement provision shall
be deemed to constitute authorization of that payment or reimbursement.
F. The written undertaking required by paragraph II.E must be an unlimited
general obligation of the director that need not be secured. It may be accepted
without reference to financial ability to make repayment.
G. Notwithstanding any other provision of this Article Eight, the
corporation shall pay or reimburse expenses incurred by a director in connection
with is appearance as a witness or other participation in a proceeding at a time
when he is not a named defendant or respondent in the proceeding.
H. An officer of the corporation shall be indemnified as, and to the same
extent, provided by the TBCA and this Article Eight for a director and is
entitled to indemnification to the same extent as a director. The corporation
shall indemnify and advance expenses to an officer, and may indemnify and
advance expenses to an employee or agent, of the corporation to the same extent
that it is authorized to indemnify and advance expenses to directors under this
Article Eight.
I. The corporation may indemnify and advance expenses to persons who are
not or were not officers, employees or agent of the corporation, but who are or
were serving at the request of the corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, a partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise to the same
extent that it is authorized to indemnify and advance expenses to directors
under this Article Eight.
J. The corporation shall indemnify and advance expenses to an officer, and
may indemnify and advance expenses to an employee, agent or person indemnified
in paragraph II.I and who is not a director, to such further extent, consistent
with law, as may be provided by the Articles of Incorporation of this
corporation, the bylaws, general or specific action of the Board of Directors of
this corporation, or contract or is permitted or required by common law.
III. Insurance or Other Arrangement. The corporation may purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
director, officer, employee or agent of this corporation or who is or was
serving at the request of this corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise, against any
liability asserted against him and incurred by him in such a capacity or arising
out of his status as such a person, whether or not the corporation would have
the power to indemnify him against that liability under this Article Eight. If
the insurance or other arrangement is with a person or entity that is not
regularly engaged in the business of providing insurance coverage, the insurance
or arrangement may provide for payment of a liability with respect to which the
corporation would not have the power to indemnify the person only if including
coverage for the additional liability has been approved by the shareholders of
the corporation.
IV. Miscellaneous.
A. Any indemnification of or advance of expenses to a director in
accordance with this Article Eight shall be reported in writing to the
shareholders of this corporation with or before the notice or waiver of notice
of the next shareholders' meeting or with or before the next submission to
shareholders of a consent to action without a meeting pursuant to the TBCA and,
in any case, within the twelve month period immediately following the date of
the indemnification or advance.
B. For purposes of this Article Eight, the corporation is deemed to have
requested a director to serve an employee benefit plan whenever the performance
by him of his duties to the corporation also imposes duties
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on or otherwise involve services by him to the plan or participants or
beneficiaries of the plan. Excise taxes assessed on a director with respect to
an employee benefit plan pursuant to applicable law are deemed fines. Action
taken or omitted by him with respect to a employee benefit plan in the
performance of his duties for a purpose reasonably believed by him to be in the
best interest of the participants and beneficiaries of the plan is deemed to
before a purpose which is not opposed to the best interest of the corporation.
V. Definitions.
As used in this Article Eight the following terms shall have the following
meanings:
The terms "corporation," "director," "expenses," and "proceeding," shall
have the meanings given such terms in Art. 2.02-1 of the TBCA.
The term "TBCA" means the Texas Business Corporation Act as now in effect
or as hereafter amended.
VI. Enforceability.
A. This Article Eight shall be given its broadest effect and application
permissible under the TBCA and other applicable law and only to such extent. If
it is finally determined by a court of competent jurisdiction that this Article
Eight is invalid, illegal or unenforceable in any respect or respects, it shall
nevertheless be enforceable to the extent and given its broadest effect and
application found by such court to be consistent with the TBCA and other
applicable law.
VII. Non-Exclusive Rights.
A. The rights of indemnification and reimbursement provided herein shall
not be exclusive of any other rights to which such person may be entitled by
law, agreement, general or specific action of the Board of Directors,
shareholders' vote or otherwise.
ARTICLE NINE
VIII. Business Combinations.
A. The corporation shall not, directly or indirectly, enter into or engage
in a business combination with an affiliated shareholder, or any affiliate or
associate of such affiliated shareholder, during the three year period
immediately following such affiliated shareholder's share acquisition date
unless:
1. The business combination or the purchase or acquisition of shares
of the corporation made by such affiliated shareholder on the affiliated
shareholder's share acquisition date is approved by the Board of Directors
of the corporation before the affiliated shareholder's share acquisition
date; or
2. The business combination is approved, by the affirmative vote of
the holders of at least two-thirds of the issued and outstanding voting
shares of the corporation not beneficially owned by such affiliated
shareholder or an affiliate or associate of such affiliated shareholder, at
a meeting of shareholders and not by written consent, duly called for that
purpose not less than six months after the affiliated shareholder's share
acquisition date.
B. Paragraph I.A of this Article Nine shall not apply to:
1. A business combination of the corporation with an affiliated
shareholder that became an affiliated shareholder inadvertently, if the
affiliated shareholder:
a. as soon as practicable divests itself of a sufficient number of
the voting shares of the corporation so that it no longer is the
beneficial owner, directly or indirectly, of twenty percent or more of
the issued and outstanding voting shares of the corporation; and
b. would not at anytime within the three year period preceding the
announcement date of the business combination, have been an affiliated
shareholder but for the inadvertent acquisition:
2. A business combination with affiliated shareholder or an affiliate
or associate of an affiliated shareholder who became an affiliated
shareholder through the transfer of shares of the corporation by will
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or intestate succession and continuously was such an affiliated shareholder
until the announcement date of the business combination; or
3. A business combination of the corporation with a domestic
wholly-owned subsidiary if the domestic subsidiary is not an affiliate or
associate of the affiliated shareholder other than by reason of the
affiliated shareholder's beneficial ownership of voting shares in the
corporation.
II. Other Actions. This Article Nine shall not affect, directly or indirectly,
the validity of any other action by the Board of Directors of the corporation,
nor does it preclude the Board of Directors from taking other action in
accordance with law, nor does the Board of Directors incur a liability for
elections made or not made under this Article Nine.
III. Best Interests. In discharging the duties of director under the TBCA or
otherwise, a director, in considering the best interests of the corporation, may
consider the long-term as well as the short-term interests of the corporation
and its shareholders, including the possibility that those interests may be best
served by the continued independence of the corporation.
IV. Validity. If any provision or clause of this Article Nine or application
thereof to any person or circumstance is held invalid, such invalidity shall not
affect other provisions or applications of this Article Nine that can be given
effect without the invalid provision or application and without being
inconsistent with the intent of this Article Nine, and to this end, the
provisions of this Article Nine are declared to be severable.
V. Definitions.
In this Article Nine:
"Affiliate" means a person who directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with, a
specified person.
"Affiliated Shareholder" means a person, other than the corporation or a
wholly-owned subsidiary of the corporation, that is the beneficial owner of
twenty percent or more of the issued and outstanding voting shares of the
corporation, or that, within the preceding three year period, was the beneficial
owner of twenty percent or more of the then issued and outstanding voting shares
of the corporation. For purposes of determining whether a person is an
affiliated shareholder, the number of voting shares of the corporation
considered outstanding includes shares considered beneficially owned by a
Beneficial Owner, but does not include other unissued voting shares of the
corporation that may be issuable pursuant to an agreement, arrangement or
understanding, or upon exercise or conversion of rights, warrants, or options,
or otherwise.
"Associate," when used to indicate a relationship with any person, means:
1. a corporation or organization (other than the corporation or a
majority owned subsidiary of the corporation) of which such person is an
officer, director or partner or is, directly or indirectly, the beneficial
owner of ten percent or more of any class of equity securities;
2. any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a
similar capacity; or
3. any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of such person or any subsidiary of such person.
"Beneficial Owner" means a person who, with respect to shares or similar
securities:
1. individually, or with or through an affiliate or associate,
beneficially owns the shares or similar securities, directly or indirectly;
2. individually, or with or through an affiliate or associate, has the
right to:
a. acquire the shares or similar securities, whether the right may
be exercised immediately or only after the passage of time, pursuant to
an agreement, arrangement, or understanding, whether or not in writing,
or upon the exercise of conversion rights, exchange rights, warrants, or
options, or
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otherwise, except that a person is not considered the beneficial owner
of shares or similar securities (i) tendered pursuant to a tender or
exchange offer made by the person or an affiliate or associate until the
tendered shares or similar securities are accepted for purchase or
exchange or (ii) that may be subject to an agreement, arrangement, or
understanding that expressly conditions the acquisition or purchase on
the approval of the acquisition or purchase pursuant to Section I of
this Article as long as such person has no direct or indirect rights of
ownership or voting with respect to such shares until such time that
such approval is obtained, at which time such person shall be considered
the beneficial owner of such shares; or
b. vote the shares or similar securities pursuant to an agreement,
arrangement, or understanding, whether or not in writing, except that a
person is not considered the beneficial owner of shares or similar
securities for purposes of this subparagraph if the agreement,
arrangement, or understanding to vote the shares: (i) arises solely from
an immediately revocable proxy that authorizes the person named in the
proxy to vote at a meeting of shareholders that has been called when the
proxy is delivered or at any adjournment of the meeting, and (ii) is not
then reportable on a Schedule 13D under the Securities Exchange Act of
1934 or a comparable or successor report; or
c. has an agreement, arrangement, or understanding, whether or not
in writing, to acquire, hold, or dispose (except pursuant to an
agreement, arrangement, or understanding permitted by paragraph 2.a
under the definition of "Beneficial Owner" or to vote (except under an
immediately revocable proxy under paragraph 2.b under the definition of
"Beneficial Owner" of this Section V) the shares or similar securities
with another person who beneficially owns, or whose affiliate or
associate beneficially owns, directly or indirectly, the shares or
similar securities.
"Business combination" means:
6. any merger, share exchange, or conversion of the corporation or a
subsidiary with:
a. an affiliated shareholder;
b. a foreign or domestic corporation or other entity that is, or
after the merger, share exchange, or conversion would be, an affiliate
or associate of the affiliated shareholder; or
c. another domestic or foreign corporation or other entity, if the
merger, share exchange, or conversion is caused by an affiliated
shareholder, or an affiliate or associate of an affiliated shareholder,
and as a result of the merger, share exchange or conversion this Article
does not apply to the surviving corporation or other entity;
d. a sale, lease, exchange, mortgage, pledge, transfer, or other
disposition, in one transaction or a series of transactions, including
an allocation of assets pursuant to a merger, to or with the affiliated
shareholder, or an affiliate or associate of the affiliated shareholder,
of assets of the corporation or any subsidiary that:
e. have an aggregate market value equal to 10 percent or more of
the aggregate market value of all the assets, determined on a
consolidated basis, of the corporation;
f. have an aggregate market value equal to 10 percent or more of
the aggregate market value of all the outstanding common stock of the
corporation; or
g. represent 10 percent or more of the earning power or net income,
determined on a consolidated basis, or the corporation;
h. the issuance or transfer by the corporation or a subsidiary to
an affiliated shareholder or an affiliate or associate of the affiliated
shareholder, in one transaction or a series of transactions, of shares
of the corporation or a subsidiary, except by the exercise of warrants
or rights to purchase shares of the corporation offered, or a share
dividend paid, pro rata to all shareholders of the corporation after the
affiliated shareholder's share acquisition date;
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i. the adoption of a plan or proposal for the liquidation or
dissolution of a corporation proposed by, or pursuant to any agreement,
arrangement, or understanding whether or not in writing, with an
affiliated shareholder or an affiliate or associate of the affiliated
shareholder.
j. a reclassification of securities, including a reverse share
split or a share split-up, share dividend, or other distribution of
shares, a recapitalization of the corporation, a merger of the
corporation with a subsidiary or pursuant to which the assets and
liabilities of the corporation are allocated among two or more surviving
or new domestic or foreign corporation or other entities, or any other
transaction, whether or not with, into, or otherwise involving the
affiliated shareholder, proposed by, or pursuant to an agreement,
arrangement, or understanding, whether or not in writing, with an
affiliated shareholder or an affiliate or associate of the affiliated
shareholder that has the effect, directly or indirectly, of increasing
the proportionate ownership percentage of the outstanding shares of a
class or series of voting shares or securities convertible into voting
shares of the corporation that is beneficially owned by the affiliated
shareholder or an affiliate or associate of the affiliated shareholder,
except as a result of immaterial changes due to fractional share
adjustments; or
k. the direct or indirect receipt by an affiliated shareholder or
an affiliate or associate of the affiliated shareholder of the benefit
of a loan, advance, guarantee, pledge, or other financial assistance or
a tax credit or other tax advantage provided by or through the
corporation, except proportionately as a shareholder of the corporation.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of equity securities, by contract, or otherwise. A
person's beneficial ownership of 10 percent or more of a person's outstanding
voting shares or similar interests creates a presumption that the person has
control of such other person.
"Person" means an individual, trust, domestic or foreign corporation or
other entity, or a government, or a political subdivision, agency, or
instrumentality of a government. If two or more persons act as a partnership,
limited partnership, syndicate, or other group under an agreement, arrangement,
or other understanding, whether or not in writing, to acquire, hold, vote, or
dispose of shares of a corporation, all members of the partnership, limited
partnership, syndicate, or other group are considered to be a person.
"Share acquisition date" means the date that a person first becomes an
affiliated shareholder of the corporation.
"Subsidiary" means a domestic or foreign corporation or other entity of
which a majority of the outstanding voting shares are owned, directly or
indirectly, by the corporation.
"Voting share" means a share of capital stock of a corporation entitled to
vote generally in the election of directors.
ARTICLE TEN
Special meetings of the shareholders of the corporation may be called by
the holders of at least 25% of the issued and outstanding shares of the
corporation entitled to vote at the proposed special meeting of shareholders of
the corporation.
ARTICLE ELEVEN
Any action required by the TBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual or
special meeting of shareholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holder or holders of shares having
not less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
action were present and voted.
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<PAGE> 68
ARTICLE TWELVE
The Board of Directors of the corporation shall have the sole power to
alter, amend or repeal the bylaws of the corporation or adopt new bylaws.
ARTICLE THIRTEEN
The corporation will not commence business until it has received for the
issuance of its shares consideration of the value of at least ONE THOUSAND AND
NO/100 DOLLARS ($1,000.00) consisting of money paid, labor done or property
actually received.
ARTICLE FOURTEEN
The address of its initial registered office is: 350 N. St. Paul Street,
Dallas Texas 75201 and the registered agent at such address is CT Corporation
System.
ARTICLE FIFTEEN
The number of directors of the corporation shall be fixed form time to time
by the bylaws of the corporation, and such number may from time to time be
increased or decreased in such manner as may be prescribed in the bylaws. The
names and addresses of the persons currently serving as directors are as
follows, and such persons shall serve as directors until the annual meeting of
the shareholders of the corporation or until their successors are duly elected
and qualified.
<TABLE>
<S> <C>
Frederick B. Hegi, Jr. Gerald E. Kimmel
750 North St. Paul 1300 S. University
Suite 1200 Suite 200
Dallas, Texas 75201 Fort Worth, Texas 76107
James A. Johnson Richard Nevins
750 North St. Paul 650 California Street
Suite 1200 29th Floor
Dallas, Texas 75201 San Francisco, California 94108
William L. Estes Peter B. McKee
370 Oak Trail 1430 Waukegan Road
Double Oak, Texas 75067 McGaw Park, Illinois 69985
</TABLE>
Dated day of , 1999
KEVCO, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Its Authorized Officer
A-38
<PAGE> 69
EXHIBIT B
KEVCO, INC.
1999 STOCK OPTION PLAN
1. PURPOSE.
Kevco, Inc., a Texas corporation (herein, together with its successors,
referred to as the "Company"), by means of this 1999 Stock Option Plan (the
"Plan"), desires to afford certain key employees employed by, and certain
persons performing services for, the Company and any direct or indirect
subsidiary or parent corporation thereof now existing or hereafter formed or
acquired (such corporations sometimes referred to herein as "Related Entities")
who are responsible for the continued growth of the Company an opportunity to
acquire a proprietary interest in the Company, and thus to create in such
persons an increased interest in and a greater concern for the welfare of the
Company and any Related Entities. Certain definitions used herein are defined in
Section 19 of this Plan.
The stock options described in Sections 6 and 7 (the "Options"), and the
shares of Common Stock (as hereinafter defined) acquired pursuant to the
exercise of such Options, are a matter of separate inducement and are not in
lieu of any salary or other compensation for services. As used in the Plan, the
terms "parent corporation" and "subsidiary corporation" shall have the meanings
contained in Sections 424(e) and 424(f), respectively, of the Internal Revenue
Code of 1986, as amended (the "Code").
2. ADMINISTRATION.
The Plan shall be administered by the Option Committee, or any successor
thereto, of the Board of Directors of the Company (the "Board of Directors"), or
by any other committee appointed by the Board of Directors to administer the
Plan (the "Committee"); provided, however, that the entire Board of Directors
may act as the Committee if it chooses to do so; and provided, further, that (i)
for purposes of determining any Performance-Based Options (as hereinafter
defined) applicable to Key Employees (as hereinafter defined) who constitute
"covered employees" within the meaning of Section 162(m) of the Code,
"Committee" shall mean the members of the Option Committee of the Board of
Directors who qualify as "outside directors" within the meaning of Section
162(m) of the Code, and such Performance-Based Options shall be subject to
ratification by unanimous approval of the members of the Board of Directors, and
(ii) if, when and for so long as the Company is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Committee shall be composed solely of two or more "Non-Employee
Directors" as defined in Rule 16b-3, as amended ("Rule 16b-3"), promulgated
thereunder; provided, however, that, alternatively, for purposes of granting
Options other than Performance-Based Options hereunder, the Board of Directors
may authorize such grants and may take any other action permitted pursuant to
Section 162(m) of the Code, Rule 16b-3 and applicable law and regulations.
The number of individuals that shall constitute the Committee shall be
determined from time to time by a majority of all the members of the Board of
Directors, and, unless that majority of the Board of Directors determines
otherwise, shall be no less than two individuals. The Chairman of the Board of
Directors of the Company shall be a member of the Committee at all times. A
majority of the Committee shall constitute a quorum (or if the Committee
consists of only two members, then both members shall constitute a quorum), and
subject to the provisions of Section 5, the acts of a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by all members of the Committee, shall be the acts of the Committee. Whenever
the Company shall have a class of equity securities registered pursuant to
Section 12 of the Exchange Act, the Committee shall administer the Plan so as
(i) to comply at all times with the Exchange Act, and (ii) to ensure that
compensation attributable to Options granted under the Plan to Key Employees who
constitute "covered employees" within the meaning of Section 162(m) of the Code
shall (A) meet the deduction limitation imposed by Section 162(m) of the Code,
or (B) qualify as "performance-based compensation" as such term is used in
Section 162(m) of the Code and the regulations promulgated thereunder and thus
be exempt from the deduction limitation imposed by Section 162(m) of the Code.
<PAGE> 70
The members of the Committee shall serve at the pleasure of the Board of
Directors, which shall have the power, at any time and from time to time,
subject to Texas law and the Company's charter and bylaws, to remove members
from or add members to the Committee. Removal from the Committee may be with or
without cause. Any individual serving as a member of the Committee shall have
the right to resign from membership on the Committee by written notice to the
Board of Directors. The Board of Directors, and not the remaining members of the
Committee, shall have the power and authority to fill vacancies on the
Committee, however caused. The Board of Directors shall promptly fill any
vacancy that causes the number of members of the Committee to be less than two
or, if the Company has a class of equity securities registered pursuant to
Section 12 of the Exchange Act, any other number that Rule 16b-3 or other
applicable rules under Section 16(b) of the Exchange Act, Section 162(m) of the
Code, or any successor or analogous rules or laws may require from time to time.
3. SHARES AVAILABLE AND MAXIMUM INDIVIDUAL GRANTS.
Subject to the adjustments provided in Section 11, the maximum aggregate
number of shares of Common Stock, par value $0.01 per share, of the Company
("Common Stock") in respect of which Options may be granted for all purposes
under the Plan shall be 1,500,000 shares. If, for any reason, any shares as to
which Options have been granted cease to be subject to purchase thereunder,
including the expiration of any such Option, the termination of any such Option
prior to exercise, or the forfeiture of any such Option, such shares shall
thereafter be available for grants under the Plan. Options granted under the
Plan may be fulfilled in accordance with the terms of the Plan with (i)
authorized and unissued shares of the Common Stock, or (ii) issued shares of
such Common Stock held in the Company's treasury.
The maximum aggregate number of shares of Common Stock underlying all
Options that may be granted to any single Key Employee, including any Options
that may have been granted to such Key Employee as an Eligible Non-Employee (as
hereinafter defined), during the Term (as hereinafter defined) of the Plan shall
be 350,000 shares, subject to the adjustments provided in Section 11. For
purposes of the preceding sentence, such Options that are cancelled or repriced
shall continue to be counted in determining such maximum aggregate number of
shares of Common Stock that may be granted to any single Key Employee, including
any Options that may have been granted to such Key Employee as an Eligible
Non-Employee, during the Term of the Plan.
4. ELIGIBILITY AND BASES OF PARTICIPATION.
Grants of Incentive Options (as hereinafter defined) and Non-Qualified
Options (as hereinafter defined) may be made under the Plan, subject to and in
accordance with Section 6, to Key Employees. As used herein, the term "Key
Employee" shall mean any employee of the Company or any Related Entity,
including officers and directors of the Company or any Related Entity who are
also employees of the Company or any Related Entity, who are regularly employed
on a salaried basis and who are so employed on the date of such grant, whom the
Committee identifies as having a direct and significant effect on the
performance of the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in accordance
with Section 7, to any Eligible Non-Employee. As used herein, the term "Eligible
Non-Employee" shall mean any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a corporation, a
partnership, a trust, or other entity (collectively, a "Person"), that the
Committee designates as eligible for a grant of Options pursuant to the Plan
because such Person performs bona fide consulting, advisory, or other services
for the Company or any Related Entity (other than services in connection with
the offer or sale of securities in a capital-raising transaction) and the Board
of Directors or the Committee determines that the Person has a direct and
significant effect on the performance of the Company or any Related Entity.
The adoption of the Plan shall not be deemed to give any Person a right to
be granted any Options.
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<PAGE> 71
5. AUTHORITY OF COMMITTEE.
Subject to and consistent with the express provisions of the Plan, the Code
and, if applicable, Rule 16b-3 and Section 162(m) of the Code, the Committee
shall have plenary authority to:
a. determine the Key Employees and Eligible Non-Employees to whom
Options shall be granted, the time when such Options shall be granted, the
number of Options, the purchase price or exercise price of each Option, the
period(s) during which such Options shall be exercisable (whether in whole
or in part, including whether such Options shall become immediately
exercisable upon the consummation of a Change of Control), the restrictions
to be applicable to Options and all other terms and provisions thereof
(which need not be identical);
b. require, as a condition to the granting of any Option, that the
Person receiving such Option agree not to sell or otherwise dispose of such
Option, any Common Stock acquired pursuant to such Option, or any other
"derivative security" (as defined by Rule 16a-1(c) under the Exchange Act)
of the Company for a period of six months following the later of (i) the
date of the grant of such Option or (ii) the date when the exercise price
of such Option is fixed if such exercise price is not fixed at the date of
grant of such Option, or for such other period as the Committee may
determine;
c. provide an arrangement through registered broker-dealers whereby
temporary financing may be made available to an optionee by the
broker-dealer, under the rules and regulations of the Board of Governors of
the Federal Reserve, for the purpose of assisting the optionee in the
exercise of an Option, such authority to include the payment by the Company
of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee to exercise
an Option or a portion thereof by delivering that number of shares of
Common Stock already owned by such optionee and held at least six months
and having an aggregate Fair Market Value which shall equal the desired
Option exercise price; provided, however, that in the case of an Incentive
Option, no shares shall be used to pay the exercise price under this
paragraph unless (A) such shares were not acquired through the exercise of
an Incentive Option, or (B) if so acquired, (x) such shares have been held
for more than two years since the grant of such Incentive Option and for
more than one year since the exercise of such Incentive Option (the
"Holding Period"), or (y) if such shares do not meet the Holding Period,
the optionee elects in writing to use such shares to pay the exercise price
under this paragraph;
e. provide (in accordance with Section 14 or otherwise) the
establishment of a procedure whereby a number of shares of Common Stock or
other securities may be withheld from the total number of shares of Common
Stock or other securities to be issued upon exercise of an Option to meet
the obligation of withholding for income, social security and other taxes
incurred by an optionee upon such exercise or required to be withheld by
the Company or a Related Entity in connection with such exercise unless, as
determined by the Committee in the exercise of its discretion, such
procedure is not permitted by applicable law or would result in a charge to
earnings that otherwise would not have occurred;
f. reduce the number of unvested Options granted to any employee in
the event that such employee is demoted;
g. prescribe, amend, modify and rescind rules and regulations relating
to the Plan; and
h. make all determinations permitted or deemed necessary, appropriate
or advisable for the administration of the Plan, interpret any Plan or
Option provision, perform all other acts, exercise all other powers, and
establish any other procedures determined by the Committee to be necessary,
appropriate, or advisable in administering the Plan or for the conduct of
the Committee's business.
The Committee may delegate to one or more of its members, or to one or more
agents, such administrative duties as it may deem advisable, and the Committee
or any Person to whom it has delegated duties as aforesaid may employ one or
more Persons to render advice with respect to any responsibility the Committee
or such Person may have under the Plan; provided, however, that any such
delegation shall be in writing; and provided, however, that, any determination
of Performance-Based Options applicable to Key
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<PAGE> 72
Employees who constitute "covered employees" within the meaning of Section
162(m) of the Code may not be delegated to a member of the Board of Directors
who, if elected to serve on the Committee, would not qualify as an "outside
director" within the meaning of Section 162(m) of the Code. The Committee may
employ attorneys, consultants, accountants, or other Persons and the Committee,
the Company, and its officers and directors shall be entitled to rely upon the
advice, opinions, or valuations of any such Persons. Any act of the Committee,
including interpretations of the provisions of the Plan or any Option and
determinations under the Plan or any Option, made in good faith, shall be final,
conclusive and binding on all parties. No member or agent of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan and all members and agents of the Committee
shall be fully protected by the Company in respect of any such action,
determination or interpretation.
6. STOCK OPTION GRANTS TO KEY EMPLOYEES.
Subject to the express provisions of the Plan, the Committee shall have the
authority to grant incentive stock options pursuant to Section 422 of the Code
("Incentive Options"), to grant non-qualified stock options (options which do
not qualify under Section 422 of the Code) ("Non-Qualified Options"), and to
grant both Incentive Options and Non-Qualified Options to Key Employees. No
Incentive Option shall be granted pursuant to the Plan after the earlier of ten
years from the date of adoption of the Plan or ten years from the date of
approval of the Plan by the shareholders of the Company. Incentive Options may
be granted only to Key Employees. The terms and conditions of the Options
granted under this Section 6 shall be determined from time to time by the
Committee and shall be reflected in the option grant letter delivered to the Key
Employee in respect thereof; provided, however, that the Options granted under
this Section 6 shall be subject to all terms and provisions of the Plan (other
than Section 7), including the following:
a. Option Exercise Price. The Committee shall establish the Option
exercise price at the time any Option is granted to a Key Employee at such
amount as the Committee shall determine; provided, however, that, in the
case of an Incentive Option, such price shall not be less than the Fair
Market Value per share of Common Stock at the date the Option is granted;
and provided, further, that in the case of an Incentive Option granted to a
person who owns, at the time such Incentive Option is granted, shares of
the Company or any Related Entity which shares represent, in the aggregate,
more than 10% of the total combined voting power of all classes of shares
of the Company or of any Related Entity, the option exercise price shall
not be less than 110% of the Fair Market Value per share of Common Stock at
the date the Option is granted. The Option exercise price shall be subject
to adjustment in accordance with the provisions of Section 11 of the Plan.
b. Payment. The price per share of Common Stock with respect to each
Option exercise by a Key Employee shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other means
acceptable to the Committee, including by the delivery to the Company of
shares of Common Stock owned by the optionee pursuant to a procedure
created pursuant to subsection 5(d) of the Plan (but, with respect to
Incentive Options, subject to the limitations described in such subsection
5(d)). Shares delivered to the Company in payment of the Option exercise
price shall be valued at the Fair Market Value of the Common Stock on the
day preceding the date of the exercise of the Option.
c. Exercisability of Stock Option. At the time of grant, the Committee
shall determine, subject to the provisions of subsections 6(d), (e), (f),
(g) and (i) below, when and under what conditions stock options granted to
Key Employees hereunder shall vest and become exercisable.
No Option by its terms shall be exercisable after the expiration of
ten years from the date of grant of the Option, unless, as to any
Non-Qualified Option, otherwise expressly provided in the option grant
letter reflecting such Option; provided, however, that no Incentive Option
granted to a person who, at the time such Option is granted, owns stock of
the Company, or any Related Entity, possessing more than 10% of the total
combined voting power of all classes of stock of the Company, or any
Related Entity, shall be exercisable after the expiration of five years
from the date such Option is granted.
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<PAGE> 73
d. Death. If an optionee's employment with the Company or a Related
Entity terminates due to the death of such optionee, the estate of such
optionee, or a Person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of the optionee, shall
have the right to exercise the vested portion of such Option in accordance
with its terms at any time and from time to time within 180 days after the
date of death unless a longer or shorter period is expressly provided in
the option grant letter reflecting such Option or established by the
Committee pursuant to Section 9 (but in no event after the expiration date
of such Option), and thereafter such Option shall lapse and no longer be
exercisable.
e. Disability. If the employment of an optionee terminates because of
his or her Disability (as defined in Section 19), such optionee or his or
her legal representative shall have the right to exercise the vested
portion of such Option in accordance with its terms at any time and from
time to time within 180 days after the date of such termination unless a
longer or shorter period is expressly provided in the option grant letter
reflecting such Option or established by the Committee pursuant to Section
9 (but in no event after the expiration date of the Option), and thereafter
such Option shall lapse and no longer be exercisable; provided, however,
that in the case of an Incentive Option, the optionee or his or her legal
representative shall in any event be required to exercise the vested
portion of such Incentive Option within one year after termination of the
optionee's employment due to his or her Disability.
f. Termination for Good Cause; Voluntary Termination. Unless an
optionee's Option expressly provides otherwise, such optionee shall
immediately forfeit all rights under his or her Option, except as to the
shares of stock already purchased thereunder, if the employment of such
optionee with the Company or a Related Entity is terminated by the Company
or any Related Entity for Good Cause (as defined below) or if such optionee
voluntarily terminates employment without the consent of the Company or any
Related Entity. The determination that there exists Good Cause for
termination shall be made by the Committee (unless otherwise agreed to in
writing by the Company and the optionee) and any decision in respect
thereof by the Committee shall be final and binding on all parties in
interest.
g. Other Termination of Employment. If the employment of an optionee
with the Company or a Related Entity terminates for any reason other than
those specified in subsections 6(d), (e) or (f) above, then with the
approval of the Board of Directors, such optionee shall have the right to
exercise the vested portion of his or her Option in accordance with its
terms, within 30 days after the date of such termination, unless a longer
or shorter period is expressly provided in the option grant letter
reflecting such Option or established by the Committee pursuant to Section
9 (but in no event after the expiration date of the Option), and thereafter
such Option shall lapse and no longer be exercisable; provided, that (i) no
Incentive Option shall be exercisable more than three months after such
termination, and (ii) the Committee may, in the exercise of its discretion,
extend the exercise date of any Option upon termination of employment for a
period not to exceed six months plus one day (but in no event after the
expiration date of the Option) if the Committee determines that the stated
exercise date will have an inequitable result under Section 16(b) of the
Exchange Act.
h. Maximum Exercise. To the extent that the aggregate Fair Market
Value of Common Stock (determined at the time of the grant of the Option)
with respect to which Incentive Options are exercisable for the first time
by an optionee during any calendar year under all plans of the Company and
any Related Entity exceeds $100,000, such Incentive Options shall be
treated as Non-Qualified Options.
i. Continuation of Employment. Each Incentive Option shall require the
optionee to remain in the continuous employ of the Company or any Related
Entity from the date of grant of the Incentive Option until at least three
months prior to the date of exercise of the Incentive Option.
j. Interpretation of Plan. Any termination of employment of an
optionee with the Company or any Related Entity shall in no way change or
amend the Company's at-will termination policy.
7. STOCK OPTION GRANTS TO ELIGIBLE NON-EMPLOYEES.
Subject to the express provisions of the Plan, the Committee shall have the
authority to grant Non-Qualified Options (and not Incentive Options) to Eligible
Non-Employees; provided, however, that whenever
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<PAGE> 74
the Company has any class of equity securities registered pursuant to Section 12
of the Exchange Act, no Eligible Non-Employee then serving on the Committee (or
such other committee then administering the Plan) shall be granted Options
hereunder if the grant of such Options would cause such Eligible Non-Employee to
no longer be a "Non-Employee Director" as set forth in Section 2 hereof. The
terms and conditions of the Options granted under this Section 7 shall be
determined from time to time by the Committee; provided, however, that the
Options granted under this Section 7 shall be subject to all terms and
provisions of the Plan (other than Section 6), including the following:
a. Option Exercise Price. The Committee shall establish the Option
exercise price at the time any Non-Qualified Option is granted to an
Eligible Non-Employee at such amount as the Committee shall determine. The
Option exercise price shall be subject to adjustment in accordance with the
provisions of Section 11 of the Plan.
b. Payment. The price per share of Common Stock with respect to each
Option exercise by an Eligible Non-Employee shall be payable at the time of
such exercise. Such price shall be payable in cash or by any other means
acceptable to the Committee, including by the delivery to the Company of
shares of Common Stock owned by the optionee for at least six months
pursuant to a procedure created pursuant to subsection 5(d) of the Plan.
Shares delivered to the Company in payment of the Option exercise price
shall be valued at the Fair Market Value of the Common Stock on the day
preceding the date of the exercise of the Option.
c. Exercisability of Stock Option. At the time of grant, the Committee
shall determine, subject to the provisions of subsections 6(d), (e), (f),
(g) and (i) below, when and under what conditions stock options granted to
Key Employees hereunder shall vest and become exercisable.
No Option shall be exercisable after the expiration of ten years from
the date of grant of the Option, unless otherwise expressly provided in the
option grant letter reflecting such Option.
d. Death. If the retention by the Company or any Related Entity of the
services of any Eligible Non-Employee that is a natural person terminates
because of his or her death, the estate of such optionee, or a Person who
acquired the right to exercise the vested portion of such Option by bequest
or inheritance or by reason of the death of the optionee, shall have the
right to exercise such Option in accordance with its terms, at any time and
from time to time within 180 days after the date of death unless a longer
or shorter period is expressly provided in the option grant letter
reflecting such Option or established by the Committee pursuant to Section
9 (but in no event after the expiration date of such Option), and
thereafter such Option shall lapse and no longer be exercisable.
e. Disability. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee that is a natural person
terminates because of his or her Disability, such optionee or his or her
legal representative shall have the right to exercise the vested portion of
such Option in accordance with its terms at any time and from time to time
within 180 days after the date of the optionee's termination unless a
longer or shorter period is expressly provided in the option grant letter
reflecting such Option or established by the Committee pursuant to Section
9 (but in no event after the expiration of the Option), and thereafter such
Option shall lapse and no longer be exercisable.
f. Termination for Good Cause; Voluntary Termination. If the retention
by the Company or any Related Entity of the services of any Eligible
Non-Employee is terminated (i) for Good Cause, (ii) as a result of removal
of the optionee from office as a director of the Company or of any Related
Entity for cause by action of the shareholders of the Company or such
Related Entity in accordance with the charter or the bylaws of the Company
or such Related Entity, as applicable, and the corporate law of the
jurisdiction of incorporation of the Company or such Related Entity, or
(iii) as a result of the voluntary termination by such optionee of the
optionee's service without the consent of the Company or any Related
Entity, then such optionee shall immediately forfeit his, her or its rights
under such Option except as to the shares of stock already purchased. The
determination that there exists Good Cause for termination shall be made by
the Committee (unless otherwise agreed to in writing by the Company and
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<PAGE> 75
the optionee) and any decision in respect thereof by the Committee shall be
final and binding on all parties in interest.
g. Other Termination of Relationship. If the retention by the Company
or any Related Entity of the services of any Eligible Non-Employee
terminates for any reason other than those specified in subsections 7(d),
(e) or (f) above, then with the approval of the Board of Directors, such
optionee shall have the right to exercise the vested portion of his, her or
its Option in accordance with its terms within 30 days after the date of
such termination, unless a longer or shorter period is expressly provided
in the option grant letter reflecting such Option or established by the
Committee pursuant to Section 9 (but in no event after the expiration date
of the Option), and thereafter such Option shall lapse and no longer be
exercisable; provided, however, that the Committee may, in the exercise of
its discretion, extend the exercise date of any Option upon termination of
retention of an Eligible Non-Employee's services for a period not to exceed
six months plus one day (but in no event after the expiration date of the
Option) if the Committee determines that the stated exercise date will have
an inequitable result under Section 16(b) of the Exchange Act.
8. PERFORMANCE-BASED OPTIONS.
The Committee, in its sole discretion, may designate and design Options
granted under the Plan as Performance-Based Options, recognizing that due to the
deduction limitation imposed by Section 162(m) of the Code, compensation
attributable to such Options might not otherwise be tax deductible by the
Company. Accordingly, Options granted under the Plan may be granted in such a
manner that the compensation attributable to such Options is intended by the
Committee to qualify as "performance-based compensation" as such term is used in
Section 162(m) of the Code and the regulations promulgated thereunder and thus
be exempt from the deduction limitation imposed by Section 162(m) of the Code
("Performance-Based Options").
Options granted under the Plan to Key Employees who constitute "covered
employees" within the meaning of Section 162(m) of the Code shall be deemed to
qualify as Performance-Based Options only if:
a. The Option exercise price is not less than the Fair Market Value
per share of Common Stock at the date the Option is granted; provided,
however, that in the case of an Incentive Option, such price is subject to
the limitations described in subsection 6(a); provided, further, that the
Option exercise price shall be subject to adjustment in accordance with the
provisions of Section 11 of the Plan; or
b. With respect to a Non-Qualified Option granted at an exercise price
that is below the Fair Market Value per share of the Common Stock on the
date of grant, such Option satisfies the following requirements:
(i) the granting or vesting of such Non-Qualified Option is subject
to the achievement of a performance goal or goals based on one or more
of the following performance measures (either individually or in any
combination): net sales; pre-tax income before allocation of corporate
overhead and bonus; budget; cash flow; earnings per share; net income;
division, group or corporate financial goals; return on stockholders'
equity; return on assets; attainment of strategic and operational
initiatives; appreciation in and/or maintenance of the price of the
Common Stock or any other publicly-traded securities of the Company;
market share; gross profits; earnings before interest and taxes;
earnings before interest, taxes, depreciation and amortization; economic
value-added models; comparisons with various stock market indices;
increase in number of customers; and/or reductions in costs;
(ii) the Committee establishes in writing (A) the objective
performance-based goals applicable to a given performance period, and
(B) the individual employees or class of employees to which such
performance-based goals apply no later than ninety days after the
commencement of such performance period (but in no event after
twenty-five percent of such performance period has elapsed);
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<PAGE> 76
(iii) no compensation attributable to Performance-Based Options
will be paid to or otherwise received by a Key Employee who constitutes
a "covered employee" within the meaning of Section 162(m) of the Code
until the Committee certifies in writing that the performance goal or
goals (and any other material terms) applicable to such performance
period have been satisfied;
(iv) after the establishment of a performance goal, the Committee
shall not revise such performance goal (unless such revision will not
disqualify compensation attributable to the Performance-Based Options as
"performance-based compensation" under Section 162(m) of the Code) or
increase the amount of compensation payable with respect to such
Performance-Based Options upon the attainment of such performance goal;
and
(v) as required by the regulations promulgated under Section 162(m)
of the Code, the material terms of performance goals as described in
subsection 8(b)(i) shall be disclosed to and reapproved by the Company's
shareholders no later than the first shareholder meeting that occurs in
the fifth year following the year in which the Company's shareholders
previously approved such performance goals.
9. CHANGE OF CONTROL.
If (i) a Change of Control shall occur, (ii) the Company shall enter into
an agreement providing for a Change of Control, or (iii) any member of the
Original Shareholder Group shall enter into an agreement providing for a Change
of Control, then the Committee may declare any or all Options outstanding under
the Plan to be exercisable in full at such time or times as the Committee shall
determine, and under such conditions as the Committee shall determine,
notwithstanding the express provisions of such Options. Each Option accelerated
by the Committee pursuant to the preceding sentence shall terminate,
notwithstanding any express provision thereof or any other provision of the
Plan, on such date (not later than the stated exercise date) as the Committee
shall determine.
10. PURCHASE OPTION.
a. Except as otherwise expressly provided in the option grant
letter reflecting any particular Option, if (i) any optionee's
employment (or, in the case of any Option granted under Section 7, the
optionee's relationship) with the Company or a Related Entity terminates
for any reason at any time or (ii) a Change of Control occurs, the
Company and/or its designee(s) shall have the option (the "Purchase
Option") to purchase, and if the option is exercised, the optionee (or,
the optionee's assignee, or the optionee's executor or the administrator
of the optionee's estate, in the event of the optionee's death, or the
optionee's legal representative in the event of the optionee's
incapacity (hereinafter, collectively with such optionee, the
"Grantor")) shall sell to the Company and/or its assignee(s), all or any
portion (at the Company's option) of the shares of Common Stock and/or
Options held by the Grantor (such shares of Common Stock and Options
collectively being referred to as the "Purchasable Shares").
b. The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within one year after the earlier of the
date of the termination of the optionee's employment or engagement or
such Change of Control. Such notice shall state the number of
Purchasable Shares to be purchased and the purchase price of such
Purchasable Shares. If no notice is given within the time limit
specified above, the Purchase Option shall terminate.
c. The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the case of any
Common Stock, the Fair Market Value per share as of the date of the
notice of exercise of the Purchase Option times the number of shares
being purchased, and in the case of any Option, the Fair Market Value
per share times the number of vested shares (including by acceleration)
subject to such Option which are being purchased, less the applicable
per share Option exercise price. The purchase price shall be paid in
cash. For purposes hereof, if the Purchase Option shall be exercised
within six months after a Change of Control, the Fair Market Value shall
be deemed to be that price per share of Common Stock received by
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members of the Original Shareholder Group as a result of such Change of
Control. The closing of such purchase shall take place at the Company's
principal executive offices within ten days after the purchase price has
been determined. At such closing, the Grantor shall deliver to the
purchaser(s) the certificates or instruments evidencing the Purchasable
Shares being purchased, duly endorsed (or accompanied by duly executed
stock powers) and otherwise in good form for delivery, against payment
of the purchase price by check of the purchaser(s). In the event that,
notwithstanding the foregoing, the Grantor shall have failed to obtain
the release of any pledge or other encumbrance on any Purchasable Shares
by the scheduled closing date, at the option of the purchaser(s) the
closing shall nevertheless occur on such scheduled closing date, with
the cash purchase price being reduced to the extent of, and paid to the
holder of, all unpaid indebtedness or other obligation for which such
Purchasable Shares are then pledged or encumbered.
d. To assure the enforceability of the Company's rights under this
Section 10, each certificate or instrument representing Common Stock or
an Option held by him or it shall bear a conspicuous legend in
substantially the following form:
"THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE PURSUANT TO THIS
AGREEMENT] ARE SUBJECT TO AN OPTION TO REPURCHASE PROVIDED UNDER THE
PROVISIONS OF THE COMPANY'S 1999 STOCK OPTION PLAN AND A STOCK OPTION
AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF SUCH OPTION PLAN AND
OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT
ITS PRINCIPAL EXECUTIVE OFFICES."
The Company's rights under this Section 10 shall terminate upon the
consummation of a Qualifying Public Offering.
11. ADJUSTMENT OF SHARES.
Except as otherwise contemplated in Section 9, and unless otherwise
expressly provided in the option grant letter reflecting a particular Option, in
the event that, by reason of any merger, consolidation, combination,
liquidation, recapitalization, stock dividend, stock split, split-up, split-off,
spin-off, combination of shares, exchange of shares or other like change in
capital structure of the Company (collectively, an "Adjustment Event"), the
Common Stock is substituted, combined, or changed into any cash, property, or
other securities, or the shares of Common Stock are changed into a greater or
lesser number of shares of Common Stock, the number and/or kind of shares and/or
interests subject to this Plan and to any Option and the per share price or
value thereof shall be appropriately and equitably adjusted by the Committee to
give appropriate effect to such Adjustment Event. Any fractional shares or
interests resulting from such adjustment shall be eliminated. Notwithstanding
the foregoing, (i) each such adjustment with respect to an Incentive Option
shall comply with the rules of Section 424(a) of the Code to an Incentive
Option, (ii) in no event shall any adjustment be made which would render any
Incentive Option granted hereunder other than an "incentive stock option" for
purposes of Section 422 of the Code, and (iii) no adjustment shall be made under
this Section 11 as a result of the issuance of shares of Common Stock for
consideration in cash or in property.
In the event the Company is not the surviving entity of an Adjustment Event
and, following such Adjustment Event, any optionee will hold Options issued
pursuant to the Plan which have not been exercised, cancelled, or terminated in
connection therewith, the Company shall cause such Options to be assumed (or
cancelled and replacement Options issued) by the surviving entity or a Related
Entity. In the event of any perceived conflict between the provisions of Section
9 and this Section 11, the Committee's determinations under Section 9 shall
control.
12. ASSIGNMENT OR TRANSFER.
Except as otherwise expressly provided in the option grant letter
reflecting any Non-Qualified Option, no Option granted under the Plan or any
rights or interests therein shall be assignable or transferable by an optionee
except by will or the laws of descent and distribution, and during the lifetime
of an optionee, Options
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granted to him or her hereunder shall be exercisable only by the optionee or, in
the event that a legal representative has been appointed in connection with the
Disability of an optionee, such legal representative.
13. COMPLIANCE WITH SECURITIES LAWS.
The Company shall not in any event be obligated to file any registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or any applicable state or foreign securities laws, to permit exercise of any
Option or to issue any Common Stock in violation of the Securities Act or any
applicable securities laws. Each optionee (or, in the event of his or her death
or, in the event a legal representative has been appointed in connection with
his or her Disability, the Person exercising the Option) shall, as a condition
to his or her right to exercise any Option, deliver to the Company an agreement
or certificate containing such representations, warranties and covenants as the
Company may deem necessary or appropriate to ensure that the issuance of shares
of Common Stock pursuant to such exercise is not required to be registered under
the Securities Act or any applicable securities laws.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
In the event that shares are issued to U.S. residents:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES
EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE
ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER)
THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS."
In the event that shares are issued to non-U.S. residents:
THE SECURITIES COVERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF OTHER JURISDICTIONS AND MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, "U.S.
PERSONS" (AS DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES
ACT), EXCEPT IN ACCORDANCE WITH REGULATIONS UNDER THE SECURITIES ACT,
PURSUANT TO REGISTRATION OF THE SECURITIES UNDER THE SECURITIES ACT, OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT.
In the event that shares are issued to a party to the Stockholders
Agreement (as defined).
THIS SECURITY IS SUBJECT TO RESTRICTIONS ON TRANSFER, VOTING AND OTHER
TERMS AND CONDITIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF
, 1999, A COPY OF WHICH MAY BE OBTAINED FROM
INSLOGICHOLDING.COM CORPORATION AT ITS PRINCIPAL EXECUTIVE OFFICES.
For all shares:
THE ISSUER IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND TO
ISSUE SHARES IN MORE THAN ONE SERIES OF AT LEAST ONE CLASS. THE ISSUER
WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A
STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH
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CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
No legend relating to exemptions from registration under the Securities Act
shall be required for shares of Common Stock issued pursuant to an effective
registration statement under the Securities Act and in accordance with
applicable state or foreign securities laws.
14. WITHHOLDING TAXES.
By acceptance of the Option, the optionee will be deemed to (i) agree to
reimburse the Company or any Related Entity by which the optionee is employed
for any federal, state, or local taxes required by any government to be withheld
or otherwise deducted by such corporation in respect of the optionee's exercise
of all or a portion of the Option; (ii) authorize the Company or any Related
Entity by which the optionee is employed to withhold from any cash compensation
paid to the optionee or on the optionee's behalf, an amount sufficient to
discharge any federal, state and local taxes imposed on the Company or the
Related Entity by which the optionee is employed, and which otherwise has not
been reimbursed by the optionee, in respect of the optionee's exercise of all or
a portion of the Option; and (iii) agree that the Company may, in its
discretion, hold the stock certificate to which the optionee is entitled upon
exercise of the Option as security for the payment of the aforementioned
withholding tax liability, until cash sufficient to pay that liability has been
accumulated, and may, in its discretion, effect such withholding by retaining
shares issuable upon the exercise of the Option having a Fair Market Value on
the date of exercise which is equal to the amount to be withheld.
15. COSTS AND EXPENSES.
The costs and expenses of administering the Plan shall be borne by the
Company and shall not be charged against any Option nor to any employee
receiving an Option.
16. FUNDING OF PLAN.
The Plan shall be unfunded. The Company shall not be required to make any
segregation of assets to assure the payment of any Option under the Plan.
17. OTHER INCENTIVE PLANS.
The adoption of the Plan does not preclude the adoption by appropriate
means of any other incentive plan for employees.
18. EFFECT ON EMPLOYMENT.
Nothing contained in the Plan or any agreement related hereto or referred
to herein shall affect, or be construed as affecting, the terms of employment of
any Key Employee except to the extent specifically provided herein or therein.
Nothing contained in the Plan or any agreement related hereto or referred to
herein shall impose, or be construed as imposing, an obligation on (i) the
Company or any Related Entity to continue the employment of any Key Employee,
and (ii) any Key Employee to remain in the employ of the Company or any Related
Entity.
19. DEFINITIONS.
In addition to the terms specifically defined elsewhere in the Plan, as
used in the Plan, the following terms shall have the respective meanings
indicated:
"Adjustment Event" shall have the meaning set forth in Section 11 hereof.
"Affiliate" shall mean, as to any Person, a Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, such Person.
"Board of Directors" shall have the meaning set forth in Section 2 hereof.
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"Change of Control" shall mean the first to occur of the following events:
(i) any sale, lease, exchange, or other transfer (in one transaction or
series of related transactions) of all or substantially all of the assets
of the Company to any Person or group of related Persons as determined
pursuant to Section 13(d) of the Exchange Act and the regulations and
interpretations thereunder (a "Group") other than one or more members of
the Original Shareholder Group, (ii) a majority of the Board of Directors
of the Company shall consist of Persons who are not Continuing Directors;
or (iii) the acquisition by any Person or Group other than one or more
members of the Original Shareholder Group of the power, directly or
indirectly, to vote or direct the voting of securities having more than 50%
of the ordinary voting power for the election of directors of the Company.
"Code" shall have the meaning set forth in Section 1 hereof.
"Committee" shall have the meaning set forth in Section 2 hereof.
"Common Stock" shall have the meaning set forth in Section 3 hereof.
"Company" shall have the meaning set forth in Section 1 hereof.
"Continuing Director" shall mean, as of the date of determination, any
Person who (i) was a member of the Board of Directors of the Company on the
date of adoption of the Plan, (ii) was nominated for election or elected to
the Board of Directors of the Company with the affirmative vote of a
majority of the Continuing Directors who were members of such Board of
Directors at the time of such nomination or election, or (iii) is a member
or designee of a member of the Original Shareholder Group.
"Disability" shall mean (i) permanent disability as defined under the
appropriate provisions of the applicable long-term disability plan
maintained for the benefit of employees of the Company or any Related
Entity who are regularly employed on a salaried basis or (ii) if no such
long-term disability plan exists, an inability to perform a participant's
employment duties and responsibilities by reason of any physical or mental
condition for a period of 26 consecutive weeks or a period of 26 weeks
during any 12-month period in connection with the same physical or mental
condition or (iii) another meaning agreed to in writing by the Committee
and the optionee; provided, however, that in the case of the optionee
holding an Incentive Option "disability" shall have the meaning specified
in Section 22(e)(3) of the Code.
"Eligible Non-Employee" shall have the meaning set forth in Section 4
hereof.
"Exchange Act" shall have the meaning set forth in Section 2 hereof.
"Fair Market Value" shall, as it relates to the Common Stock, mean the
average of the high and low prices of such Common Stock as reported on the
principal national securities exchange on which the shares of Common Stock
are then listed or The Nasdaq Stock Market, as applicable, on the date
specified herein for such a determination; or if there were no sales on
such date, on the next preceding day on which there were sales; or, if such
Common Stock is not listed on a national securities exchange, the last
reported bid price in the over-the-counter market; or, if such shares are
not traded in the over-the-counter market, the per share cash price for
which all of the outstanding Common Stock could be sold to a willing
purchaser in an arms length transaction (without regard to minority
discount, absence of liquidity, or transfer restrictions imposed by any
applicable law or agreement) at the date of the event giving rise to a need
for a determination. Except as may be otherwise expressly provided in the
option grant letter reflecting a particular Option, Fair Market Value shall
be determined in good faith by the Committee, whose determination shall be
final and binding.
"Good Cause", with respect to any Key Employee, shall mean (unless another
definition is agreed to in writing by the Company and the optionee)
termination by action of the Board of Directors because of: (A) the
optionee's conviction of, or plea of nolo contendere to, a felony or a
crime involving moral turpitude; (B) the optionee's personal dishonesty,
willful misconduct, willful violation of any law, rule, or regulation
(other than minor traffic violations or similar offenses) or breach of
fiduciary duty which involves personal profit; (C) the optionee's willful
commission of material mismanagement in the
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<PAGE> 81
conduct of his or her duties as assigned to him by the Board of Directors
or the optionee's supervising officer or officers of the Company; (D) the
optionee's willful failure to execute or comply with the policies of the
Company or his or her stated duties as established by the Board of
Directors or the optionee's supervising officer or officers of the Company,
or the optionee's intentional failure to perform the optionee's stated
duties; or (E) substance abuse or addiction on the part of the optionee.
"Good Cause", with respect to any Eligible Non-Employee, shall mean (unless
another definition is agreed to in writing by the Company and the optionee)
termination by action of the Board of Directors because of: (A) the
optionee's conviction of, or plea of nolo contendere to, a felony or a
crime involving moral turpitude; (B) the optionee's personal dishonesty,
willful misconduct, willful violation of any law, rule, or regulation
(other than minor traffic violations or similar offenses) or breach of
fiduciary duty which involves personal profit; (C) the optionee's willful
commission of material mismanagement in providing services to the Company
or any Related Entity; (D) the optionee's willful failure to comply with
the policies of the Company in providing services to the Company or any
Related Entity, or the optionee's intentional failure to perform the
services for which the optionee has been engaged; (E) substance abuse or
addiction on the part of the optionee; or (F) the optionee's willfully
making any material misrepresentation or willfully omitting to disclose any
material fact to the board of directors of the Company or any Related
Entity with respect to the business of the Company or any Related Entity.
"Grantor" has the meaning set forth in Section 10 hereof.
"Holding Period" shall have the meaning set forth in subsection 5(d)
hereof.
"Incentive Options" shall have the meaning set forth in Section 6 hereof.
The term "including" when used herein shall mean "including, but not
limited to".
"Key Employee" shall have the meaning set forth in Section 4 hereof.
"Non-Qualified Options" shall have the meaning set forth in Section 6
hereof.
"Original Shareholder Group" shall mean Jerry E. Kimmel and Wingate
Partners II, L.P., their respective Affiliates, and their respective
employees, officers, partners and directors (and members of their
respective families and trusts for the primary benefit of such family
members).
"Options" shall have the meaning set forth in Section 1 hereof.
"Performance-Based Options" shall have the meaning set forth in Section 8
hereof.
"Person" shall have the meaning set forth in Section 4 hereof.
"Plan" shall have the meaning set forth in Section 1 hereof.
"Purchasable Shares" shall have the meaning set forth in Section 10 hereof.
"Purchase Option" shall have the meaning set forth in Section 10 hereof.
"Qualifying Public Offering" shall mean a firm commitment underwritten
public offering of Common Stock where the proceeds to the Company (prior to
deducting any underwriters' discounts and commissions) exceed $30 million.
"Related Entities" shall have the meaning set forth in Section 1 hereof.
"Rule 16b-3" shall have the meaning set forth in Section 2 hereof.
"Securities Act" shall have the meaning set forth in Section 13 hereof.
"Term" shall have the meaning set forth in Section 21 hereof.
20. AMENDMENT OF PLAN.
The Board of Directors shall have the right to amend, modify, suspend or
terminate the Plan at any time; provided, however, that no amendment shall be
made which shall increase the total number of shares of the
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<PAGE> 82
Common Stock which may be issued and sold pursuant to Options granted under the
Plan or decrease the minimum Option exercise price in the case of an Incentive
Option, or modify the provisions of the Plan relating to eligibility with
respect to Incentive Options unless such amendment is made by or with the
approval of the shareholders. The Board of Directors shall be authorized to
amend the Plan and the Options granted thereunder, without the consent or
joinder of any optionee or other Person, in such manner as may be deemed
necessary or appropriate by the Board of Directors in order to cause the Plan
and the Options granted thereunder (i) to qualify as "incentive stock options"
within the meaning of Section 422 of the Code, (ii) to comply with Rule 16b-3
(or any successor rule) under the Exchange Act (or any successor law) and the
regulations (including any temporary regulations) promulgated thereunder or
(iii) to comply with Section 162(m) of the Code (or any successor section) and
any regulations (including any temporary regulations) promulgated thereunder.
Except as provided above, no amendment, modification, suspension or termination
of the Plan shall materially impair the value of any Options previously granted
under the Plan, without the consent of the holder thereof.
21. EFFECTIVE DATE.
The Plan shall be effective as of November 1, 1999, subject to approval by
the shareholders of the Company, and shall be void retroactively as to any
Incentive Option if not approved by the shareholders of the Company within
twelve months thereafter. The Plan shall terminate on the tenth anniversary of
the date of adoption of the Plan or the date of approval of the Plan by the
shareholders of the Company, whichever is earlier, unless sooner terminated by
the Board of Directors (the "Term").
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PROXY CARD
PLEASE SIGN, DATE AND RETURN YOUR
PROXY CARD AS SOON AS POSSIBLE
ANNUAL MEETING OF SHAREHOLDERS
KEVCO, INC.
NOVEMBER 22, 1999
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PLEASE MARK YOUR VOTES
[X] AS IN THIS EXAMPLE
NOMINEE FOR WITHHELD
1. PROPOSAL NO. 1 - William L. Estes [ ] [ ]
ELECTION OF DIRECTORS Peter B. McKee [ ] [ ]
FOR AGAINST ABSTAIN
2. PROPOSAL NO. 2 - [ ] [ ] [ ]
CHARTER AMENDMENT
FOR AGAINST ABSTAIN
3. PROPOSAL NO. 3 - [ ] [ ] [ ]
1999 STOCK OPTION PLAN
I PLAN TO ATTEND MEETING [ ]
</TABLE>
The undersigned acknowledges receipt of (a) Notice of Annual Meeting of
Shareholders, (b) the accompanying proxy statement and (c) the company's 1998
Annual Report to Shareholders.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED IN
ACCORDANCE WITH THE SPECIFICATIONS MADE ABOVE. YOU ARE URGED TO COMPLETE, SIGN,
DATE AND RETURN THIS PROXY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU DECIDE TO ATTEND THE MEETING, YOU MAY,
IF SO DESIRED, REVOKE THIS PROXY AND VOTE YOUR SHARES IN PERSON.
<TABLE>
<S> <C> <C>
SIGNATURE DATE , 1999
---------------------- -------------
SIGNATURE DATE , 1999 (Signature if held jointly)
---------------------- -------------
</TABLE>
PROXY INSTRUCTIONS:
1. Please sign exactly as your name or names appear on your stock certificate
(as indicated hereon).
2. If the shares are issued in the name of two or more persons, all of them
must sign the proxy.
3. A proxy executed by a corporation must be signed in its name by an
authorized officer. Executors, administrators, trustees and partners
should indicate their capacity when signing.
