<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number: 333-49821
MSX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3323099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 REX BOULEVARD AUBURN HILLS, MICHIGAN 48326
(Address of principal executive offices) (Zip Code)
(248) 299-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
<PAGE> 2
MSX INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGES
PART I - FINANCIAL INFORMATION
<S><C>
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheet as of September 27, 1998 and
December 28, 1997....................................................................2
Condensed Consolidated Statement of Operations for the Fiscal Quarters and
Fiscal Nine-Month Periods Ended September 27, 1998 and September 28, 1997...........3
Condensed Consolidated Statement of Cash Flows for the Fiscal Nine-Month
Periods Ended September 27, 1998 and September 28, 1997..............................4
Notes to Condensed Consolidated Financial Statements.................................5 -14
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................15-20
PART II - Other Information and Signature.....................................................21-23
EXHIBITS ........................................................................................24
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
as of September 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,949 $ 11,575
Receivables, net 164,445 178,938
Inventory 1,681 1,239
Prepaid expenses and other assets 9,766 5,638
Deferred income taxes 2,015 2,352
------------- ------------
Total current assets 181,856 199,742
Property and equipment, net of accumulated depreciation
of $68,673 and $58,693, respectively 31,829 34,337
Goodwill, net of accumulated amortization of $1,674 and $892, respectively 34,082 31,934
Other assets 11,610 8,783
Deferred income taxes 15,680 12,380
------------- ------------
Total assets $ 275,057 $ 287,176
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ 4,511 $ 87,930
Accounts payable 77,375 80,366
Accrued payroll and benefits 21,492 16,984
Accrued expenses 18,341 20,907
Deferred income taxes 2,704 984
------------- ------------
Total current liabilities 124,423 207,171
Long-term debt 134,850 65,000
Long-term capital lease obligations 281 316
Long-term deferred compensation liability and other 3,911 5,053
------------- ------------
Total liabilities 263,465 277,540
------------- ------------
Redeemable Series A preferred stock: authorized 500,000 shares;
issued and outstanding, 360,000 shares 36,000 36,000
------------- ------------
Shareholders' equity (deficit):
Common stock, $.01 par: authorized, 2,000,000 shares;
issued and outstanding, 95,004 shares 1 1
Additional paid-in capital (22,251) (22,251)
Accumulated other comprehensive loss (706) (1,141)
Accumulated deficit (1,452) (2,973)
------------- ------------
Total shareholders' equity (deficit) (24,408) (26,364)
------------- ------------
Total liabilities and shareholders' equity (deficit) $ 275,057 $ 287,176
============= ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
<PAGE> 4
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the fiscal quarters and fiscal nine-month periods ended September 27, 1998
and September 28, 1997
<TABLE>
<CAPTION>
FISCAL QUARTERS FISCAL NINE MONTHS
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales $273,383 $143,955 $ 783,749 $ 310,500
Cost of sales (251,934) (131,212) (723,722) (278,150)
-------- -------- --------- ---------
Gross profit 21,449 12,743 60,027 32,350
Selling, general and administrative expenses (14,644) (8,424) (41,069) (22,260)
Michigan Single Business Tax (990) (735) (2,733) (2,150)
Restructuring costs - (2,000) - (2,000)
-------- -------- --------- ---------
Operating income 5,815 1,584 16,225 5,940
-------- -------- --------- ---------
Interest expense, net (4,263) (1,567) (11,936) (3,090)
Interest expense, related parties - (1,685) (1,040) (5,960)
-------- -------- --------- ---------
(4,263) (3,252) (12,976) (9,050)
-------- -------- --------- ---------
Income (loss) before income taxes 1,552 (1,668) 3,249 (3,110)
Income tax provision (benefit) 684 (721) 1,728 (1,090)
-------- -------- --------- ---------
Net income (loss) $ 868 $ (947) $ 1,521 $ (2,020)
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE> 5
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the fiscal nine-month periods ended September 27, 1998
and September 28, 1997
<TABLE>
<CAPTION>
FISCAL NINE MONTHS
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash from (used for) operating activities:
Net income (loss) $ 1,521 $ (2,020)
Adjustments to reconcile net income (loss)
to net cash from (used for) operating activities:
Depreciation 10,431 5,719
Amortization 999 630
Deferred taxes (1,331) -
Net loss on sale of property and equipment 124 -
(Increase) decrease in receivables, net 19,394 (21,446)
(Increase) decrease in inventory (442) (350)
(Increase) decrease in prepaid expenses (4,129) (315)
Increase (decrease) in current liabilities (7,675) 20,528
Other, net (738) 2,910
----------- -----------
Net cash from operating activities 18,154 5,656
----------- -----------
Cash from (used for) investing activities:
Capital expenditures (8,748) (8,220)
Acquisition of business, net of cash received (3,783) (159,219)
Proceeds from sale of property and equipment 686 -
----------- -----------
Net cash (used for) investing activities (11,845) (167,439)
----------- -----------
Cash from (used for) financing activities:
Proceeds from long-term debt issues 99,377 130,655
Repayment of long-term debt (91,548) -
Change in notes payable (24,895) -
Change in book overdraft 2,929 -
Sale of Redeemable Preferred Stock - 36,000
Sale of Common Stock - 3,800
Other, net (233) (402)
----------- -----------
Net cash from (used for) financing activities (14,370) 170,053
----------- -----------
Effect of foreign exchange rate changes on cash 435 (1,960)
----------- -----------
Cash:
Increase (decrease) for the period (7,626) 6,310
Balance, beginning of period 11,575 -
----------- -----------
Balance, end of period $ 3,949 $ 6,310
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 6
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise stated)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements represent the consolidated assets
and liabilities and operations of MSX International, Inc. and its
subsidiaries ("MSXI" or the "Company"). Effective August 31, 1997, the
Company acquired certain service-providing operations of Ford Motor
Company ("Ford") through the acquisition of Geometric Results
Incorporated ("GRI"), a wholly-owned subsidiary of Ford. The results of
operations of GRI have been included in the results of the operations
of the Company from September 1, 1997.
The Company is principally engaged in the business of providing
technical support services, primarily to automobile manufacturers and
suppliers in the United States and Europe.
The Company utilizes a 52-53 week fiscal year.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments which are normal
and recurring in nature necessary to present fairly its financial
position at September 27, 1998, its results of operations for the
fiscal quarter and fiscal nine-month periods ended September 27, 1998
and September 28, 1997 and its cash flows for the fiscal nine-month
periods ended September 27, 1998 and September 28, 1997. The operating
results for the fiscal quarter and fiscal nine-month periods ended
September 27, 1998 and September 28, 1997 are not necessarily
indicative of the results of operations for the entire year. Reference
should be made to the consolidated financial statements included in the
Company's Registration Statement on Form S-4 which was declared
effective by the Securities and Exchange Commission on July 22, 1998.
2. RESTRUCTURING ACTIONS:
As of December 28, 1997, accrued restructuring costs totaled $6.1
million. Approximately $0.6 million and $3.1 million was charged to
MSXI's accrual in the fiscal quarter and fiscal nine-month period ended
September 27, 1998, respectively, primarily for severance payments and
operating lease payments on unused facilities. Remaining accrued
restructuring costs totaled $3.3 million as of September 27, 1998, of
which $0.9 million is expected to be paid in the balance of fiscal
1998.
3. REDEEMABLE SERIES A PREFERRED STOCK:
Dividends on preferred stock are payable in cash at a rate per annum
equal to 12 percent of the stated value plus an amount equal to any
accrued and unpaid dividends. As of September 27, 1998, the Company had
not declared any dividends. Accordingly, no dividends have been paid or
accrued. Dividends accumulated but not declared aggregated
approximately $8.1 million as of September 27, 1998.
5
<PAGE> 7
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
4. DEBT:
On January 22, 1998, the Company issued, in a private placement, $100
million aggregate principal amount of 11-3/8% unsecured senior
subordinated notes maturing January 15, 2008. On August 20, 1998, the
Company consummated an offer to exchange 11-3/8% Senior Subordinated
Notes which had been registered under the Securities Act of 1933 for
any and all outstanding Notes. The Company's Registration Statement on
Form S-4 with the Securities and Exchange Commission became effective
on July 22, 1998. Interest on the Notes is payable semiannually at
11-3/8% per annum and commenced July 15, 1998. The Notes may be
redeemed subsequent to January 15, 2003 at premiums, which begin at
105.6875 percent and decline each year to face for redemptions taking
place after January 15, 2006. In addition, at any time prior to January
15, 2001, the Company may redeem up to 35 percent of the original
aggregate principal amount of the Notes with the proceeds of one or
more public equity offerings at a redemption price of 111.375 percent
plus accrued and unpaid interest, if any. Also, upon the occurrence of
a change of control, as defined in the indenture (the "Indenture"), the
Notes may be redeemed at the option of the note holders at a premium of
one percent, plus accrued and unpaid interest, if any. The Notes
contain covenants which, among others, limit the incurrence of
additional indebtedness and restrict capital transactions,
distributions and asset dispositions of certain subsidiaries.
In connection with the Notes offering, each of the Company's domestic
restricted subsidiaries, as defined in the Indenture (the "Guarantor
Subsidiaries"), irrevocably and unconditionally guarantee the Company's
performance under the Notes as primary obligors.
Concurrently with the private placement, the Company entered into a new
credit facility with Bank One Corporation (the "New Credit Facility"),
with a borrowing base of up to $100 million, as defined, to replace the
prior Credit Facility (the "Old Credit Facility"). Interest on the
loans under the New Credit Facility is payable quarterly or, if
earlier, at the end of each interest period and accrues at an annual
rate equal to, at the option of the Company: (a) a floating rate, as
defined or (b) the London Interbank Offered Rate plus an applicable
margin, as defined.
Each significant domestic subsidiary of the Company guarantees all
obligations of the Company under the New Credit Facility. In addition,
these obligations are secured by a pledge of the stock of such domestic
subsidiaries and a first lien on substantially all assets of such
domestic subsidiaries and a pledge of 65 percent of the stock of the
significant foreign subsidiaries. The obligations of the Company under
the New Credit Facility rank senior to all other indebtedness of the
Company, including the Notes.
6
<PAGE> 8
MSX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
4. DEBT: - (CONTINUED)
The New Credit Facility contains certain reporting covenants and other
customary affirmative covenants and various negative covenants
including, but not limited to, certain limitations on mergers, sales of
assets, acquisitions, liens, investments, indebtedness, contingent
obligations, dividends, subsidiaries' ability to agree to dividend
restrictions, affiliate transactions and changes of business. The New
Credit Facility also contains certain covenants with respect to
employee benefit arrangements and environmental matters and certain
financial covenants including but not limited to a ratio of total debt
to EBITDA, a fixed charge coverage ratio and a minimum net worth
requirement, each as defined.
On April 14, 1998, the Company syndicated the New Credit Facility to
add additional commercial lenders and to amend the New Credit Facility
to add a $30 million term loan portion. Term loan borrowings are
subject to satisfaction of the same borrowing base requirements and
financial reporting and operating covenants as are other borrowings
under the New Credit Facility. As of September 27, 1998, $34.9 million
was outstanding under the New Credit Facility.
5. BOOK OVERDRAFTS:
Book overdrafts represent checks drawn on zero balance accounts that
have not yet been presented to the Company's banks for funding. Such
overdrafts are funded when the related checks are presented and are not
subject to finance charges. Accordingly, there were negative book
balances of $24.8 million and $21.9 million at September 27, 1998 and
December 28, 1997, respectively. Such balances are included in Accounts
Payable in the Condensed Consolidated Balance Sheet.
6 INCOME TAXES:
For the fiscal nine-month period ended September 27, 1998 and September
28, 1997, the effective income tax rate was 53.2% and (35%),
respectively. This change in the effective income tax rate was due to
operations of the acquired GRI business and a change in the projected
mix of foreign earnings which were offset in part by losses from other
foreign businesses and a related valuation allowance. For the
nine-month period ended September 27, 1998 the difference between the
effective income tax rate and the statutory rate for federal income
taxes, as well as the change in the effective income tax rate from the
six-month period ended June 28, 1998, were due to a change in projected
foreign and domestic earnings for the fiscal year ended December 27,
1998.
7
<PAGE> 9
MSX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
7. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
"REPORTING COMPREHENSIVE INCOME":
Effective December 29, 1997, the Company adopted Statement of Financial
Accounting Standards (FASB) No. 130, "Reporting Comprehensive Income."
This statement requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence
as other annual financial statements. This Statement also requires that
an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. Annual financial statements
for prior periods will be reclassified, as required. The Company's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
FISCAL QUARTERS FISCAL NINE MONTHS
--------------------- ------------------------
SEPT. 27 SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net income/(loss) $ 868 $ (947) $ 1,521 $ (2,020)
Other comprehensive income/(loss) 888 (727) 435 (1,960)
---------- -------- --------- ---------
$ 1,756 $ (1,674) $ 1,956 $ (3,980)
Total comprehensive income/(loss) ========== ======== ========= =========
</TABLE>
Other comprehensive income (loss) is comprised of the change in the
accumulated foreign currency translation adjustment.
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
In connection with the Note Offering, the Guarantor Subsidiaries
irrevocably and unconditionally guarantee the Company's performance
under the Notes as primary obligors. The Guarantor Subsidiaries are
direct or indirect wholly-owned subsidiaries of the Company. The
remaining subsidiaries are direct or indirect subsidiaries of the
Guarantor Subsidiaries.
The following condensed consolidated financial data provides
information regarding the financial position, results of operations and
cash flows of the Guarantor Subsidiaries ("Condensed Consolidated
Financial Data"). Separate financial statements of the Guarantor
Subsidiaries are not presented because management has determined those
would not be material to the holders of the notes.
For purposes of the condensed consolidated financial data, the
Guarantor Subsidiaries include substantially all domestic subsidiaries
of the Company. The Guarantor Subsidiaries account for their
investments in the non-guarantor subsidiaries, if any, on the equity
method. The principal elimination entries are to eliminate the
investments in subsidiaries and intercompany balances and transactions.
8
<PAGE> 10
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
as of September 27, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 180 $ 3,769 $ - $ 3,949
Receivables, net 110,185 54,260 - 164,445
Inventory 1,645 36 - 1,681
Prepaid expenses and other assets 3,856 5,910 - 9,766
Deferred income taxes 863 1,152 - 2,015
------------ ---------- --------- -----------
Total current assets 116,729 65,127 - 181,856
Property and equipment, net 20,556 11,273 - 31,829
Goodwill, net 30,323 3,759 - 34,082
Other assets 39,382 4,004 31,776 11,610
Deferred income taxes 13,819 1,861 - 15,680
------------ ---------- --------- -----------
Total assets $ 220,809 $ 86,024 $ 31,776 $ 275,057
============ ========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ - $ 4,511 $ - $ 4,511
Accounts payable 64,479 12,896 - 77,375
Accrued liabilities 31,360 8,506 (33) 39,833
Deferred income taxes 1,477 1,227 - 2,704
------------ ---------- --------- -----------
Total current liabilities 97,316 27,140 (33) 124,423
Long-term debt 133,158 1,692 - 134,850
Intercompany accounts (37,532) 37,532 - -
Long-term capital lease obligations 281 - - 281
Long-term deferred compensation liability and other 3,873 38 - 3,911
------------ ---------- --------- -----------
Total liabilities 197,096 66,402 (33) 263,465
------------ ---------- --------- -----------
Redeemable Series A preferred stock 36,000 33 (33) 36,000
------------ ---------- --------- -----------
Shareholders' equity (deficit):
Common stock 1 2,949 (2,949) 1
Additional paid-in capital (9,442) 28,851 (41,660) (22,251)
Accumulated other comprehensive income/(loss) (1,386) (3,144) 3,824 (706)
Retained earnings (deficit) (1,460) (9,067) 9,075 (1,452)
------------ ---------- --------- -----------
Total shareholders' equity (deficit) (12,287) 19,589 (31,710) (24,408)
------------ ---------- --------- -----------
Total liabilities and shareholders' equity (deficit) $ 220,809 $ 86,024 $ (31,776) $ 275,057
============ ========== ========= ===========
</TABLE>
9
<PAGE> 11
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,449 $ 9,126 $ - $ 11,575
Receivables, net 130,404 48,534 - 178,938
Inventory 1,204 35 - 1,239
Prepaid expenses and other assets 2,106 3,532 - 5,638
Deferred income taxes 863 1,489 - 2,352
------------ ------- -------- ----------
Total current assets 137,026 62,716 - 199,742
Property and equipment, net 23,208 11,129 - 34,337
Goodwill, net 31,934 - - 31,934
Other assets 28,877 489 (20,583) 8,783
Deferred income taxes 11,036 1,344 - 12,380
------------ ------- -------- ----------
Total assets $ 232,081 $75,678 $(20,583) $ 287,176
============ ======= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ 71,280 $16,650 $ - $ 87,930
Accounts payable 73,726 6,640 - 80,366
Accrued liabilities 31,752 6,171 (32) 37,891
Deferred income taxes - 984 - 984
------------ ------- -------- ----------
Total current liabilities 176,758 30,445 (32) 207,171
Long-term debt 65,000 - - 65,000
Intercompany accounts (31,389) 31,389 - -
Long-term capital lease obligations 316 - - 316
Long-term deferred compensation liability and other 4,654 399 - 5,053
------------ ------- -------- ----------
Total liabilities 215,339 62,233 (32) 277,540
------------ ------- -------- ----------
Redeemable Series A preferred stock 36,000 32 (32) 36,000
------------ ------- -------- ----------
Shareholders' equity (deficit):
Common stock 1 2,702 (2,702) 1
Additional paid-in capital (16,263) 19,154 (25,142) (22,251)
Accumulated other comprehensive income/(loss) (23) (3,598) 2,480 (1,141)
Retained earnings (deficit) (2,973) (4,845) 4,845 (2,973)
------------ ------- -------- ----------
Total shareholders' equity (deficit) (19,258) 13,413 (20,519) (26,364)
------------ ------- -------- ----------
Total liabilities and shareholders' equity (deficit) $ 232,081 $75,678 $(20,583) $ 287,176
============ ======= ======== ==========
</TABLE>
10
<PAGE> 12
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES: - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
for the fiscal quarters ended September 27, 1998 and September 28, 1997
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MSI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales $ 228,262 $ 45,121 $ - $ 273,383
Cost of sales (213,176) (38,758) (251,934)
------------ ------------ ----------- -----------
Gross profit 15,086 6,363 - 21,449
Selling, general and administrative expenses (10,216) (4,428) - (14,644)
Michigan Single Business Tax (990) - (990)
------------ ------------ ----------- -----------
Operating income 3,880 1,935 - 5,815
Interest expense, net (3,279) (984) (4,263)
Equity in subsidiary earnings 515 - (515) -
------------ ------------ ----------- -----------
Income before income taxes 1,116 951 (515) 1,552
Income tax provision 248 436 - 684
------------ ------------ ----------- -----------
Net Income $ 868 $ 515 $ (515) $ 868
============ ============ =========== ===========
<CAPTION>
1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 119,356 $ 24,599 $ - $ 143,955
Cost of sales (109,405) (21,807) - (131,212)
------------ ------------ ----------- -----------
Gross profit 9,951 2,792 - 12,743
Selling, general and administrative expenses (5,559) (2,865) - (8,424)
Michigan Single Business Tax (735) - - (735)
Restructuring costs (2,000) - - (2,000)
------------ ------------ ----------- -----------
Operating income (loss) 1,657 (73) - 1,584
Interest income (expense), net (3,386) 134 (3,252)
Equity in subsidiary earnings 25 - (25) -
------------ ------------ ----------- -----------
Income before income taxes (1,704) 61 (25) (1,668)
Income tax provision (benefit) (757) 36 - (721)
------------ ------------ ----------- -----------
Net income (loss) $ (947) $ 25 $ (25) $ (947)
============ ============ =========== ===========
</TABLE>
11
<PAGE> 13
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
for the fiscal nine-month periods ended September 27, 1998
and September 28, 1997
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales $ 663,802 $ 119,947 $ - $ 783,749
Cost of sales (621,523) (102,199) - (723,722)
-------------- ------------- -------- -------------
Gross profit 42,279 17,748 - 60,027
Selling, general and administrative expenses (28,214) (12,855) - (41,069)
Michigan Single Business Tax (2,733) - - (2,733)
-------------- ------------- -------- -------------
Operating income 11,332 4,893 - 16,225
Interest expense, net (10,238) (2,738) - (12,976)
Equity in subsidiary earnings 868 - (868) -
-------------- ------------- -------- -------------
Income before income taxes 1,962 2,155 (868) 3,249
Income tax provision 441 1,287 - 1,728
-------------- ------------- -------- -------------
Net income $ 1,521 $ 868 $ (868) $ 1,521
============== ============= ======== =============
<CAPTION>
1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 245,110 $ 65,390 $ - $ 310,500
Cost of sales (219,368) (58,782) - (278,150)
-------------- ------------- -------- -------------
Gross profit 25,742 6,608 - 32,350
Selling, general and administrative expenses (14,844) (7,416) - (22,260)
Michigan Single Business Tax (2,150) - - (2,150)
Restructuring costs (2,000) - - (2,000)
-------------- ------------- -------- -------------
Operating income (loss) 6,748 (808) - 5,940
Interest expense, net (7,318) (1,732) - (9,050)
Equity in subsidiary loss (1,780) - 1,780 -
-------------- ------------- -------- -------------
Loss before income taxes (2,350) (2,540) 1,780 (3,110)
Income tax benefit (330) (760) - (1,090)
-------------- ------------- -------- -------------
Net loss $ (2,020) $ (1,780) $ 1,780 $ (2,020)
============== ============= ======== =============
</TABLE>
12
<PAGE> 14
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
for the fiscal nine-month period ended September 27, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash from (used for) operating activities:
<S> <C> <C> <C> <C>
Net income $ 653 $ 868 $ - $ 1,521
Equity in earnings of subsidiaries 868 - (868) -
Adjustments to reconcile net income to net cash
from (used for) operating activities:
Depreciation 5,880 4,551 - 10,431
Amortization 975 24 - 999
Deferred taxes (1,306) (25) - (1,331)
(Gain) loss on sale of property and equipment 152 (28) - 124
(Increase) decrease in receivables, net 25,120 (5,726) - 19,394
(Increase) decrease in inventory (442) - - (442)
(Increase) decrease in prepaid expenses and
other assets (1,838) (2,291) - (4,129)
Increase (decrease) in current liabilities (14,520) 6,845 - (7,675)
Other, net (763) (18) 43 (738)
---------- ----------- -------- ----------
Net cash from (used for) operating activities 14,779 4,200 (825) 18,154
---------- ----------- -------- ----------
Cash from (used for) investing activities:
Capital expenditures (3,677) (5,071) - (8,748)
Acquisition of business, net - (3,783) - (3,783)
Proceeds from sale of property and equipment 274 412 - 686
---------- ----------- -------- ----------
Net cash from (used for) investing activities (3,403) (8,442) - (11,845)
---------- ----------- -------- ----------
Cash from (used for) financing activities:
Intercompany (6,143) 6,143 - -
Investment in subsidiaries 602 4,661 (5,263) -
Equity in subsidiaries (1,019) (3,697) 4,716 -
Proceeds from long-term debt issues 99,377 - - 99,377
Payment of long-term debt (81,444) (10,104) - (91,548)
Change in notes payable (24,552) (343) - (24,895)
Change in book overdraft 1,184 1,745 - 2,929
Other, net (300) 36 31 (233)
---------- ----------- -------- ----------
Net cash from (used for) financing activities (12,295) (1,559) (516) (14,370)
---------- ----------- -------- ----------
Effect of foreign exchange rate changes on cash (1,350) 444 1,341 435
---------- ----------- -------- ----------
Cash:
Decrease for the period (2,269) (5,357) - (7,626)
Balance, beginning of period 2,449 9,126 - 11,575
---------- ----------- -------- ----------
Balance, end of period $ 180 $ 3,769 $ - $ 3,949
========== =========== ======== ==========
</TABLE>
13
<PAGE> 15
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES: - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
for the fiscal nine-month period ended September 28, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash from (used for) operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $ (240) $ (1,780) $ - $ (2,020)
Equity in earnings of subsidiaries (1,780) - 1,780 -
Adjustments to reconcile net income (loss) to net cash
from (used for) operating activities:
Depreciation 3,560 2,159 - 5,719
Amortization 630 - - 630
(Increase) decrease in receivables, net (14,242) (7,204) - (21,446)
(Increase) decrease in inventory (352) 2 - (350)
(Increase) decrease in prepaid expenses
and other assets (547) 232 - (315)
Increase (decrease) in current liabilities 24,041 (3,513) - 20,528
Other, net 3,219 (309) - 2,910
------------ ----------- ------------ ---------------
Net cash from (used for) operating activities 14,289 (10,413) 1,780 5,656
------------ ----------- ------------ ---------------
Cash from (used for) investing activities:
Capital expenditures (5,710) (2,510) - (8,220)
Acquisition of business, net (122,046) (37,173) - (159,219)
Investment in foreign subsidiaries (30,936) - 30,936 -
------------ ----------- ------------ ---------------
Net cash from (used for) investing activities (158,692) (39,683) 30,936 (167,439)
------------ ----------- ------------ ---------------
Cash from (used for) financing activities:
Intercompany (25,483) 25,483 - -
Investment in subsidiaries - 30,704 (30,704) -
Equity in subsidiaries 1,780 - (1,780) -
Proceeds from long-term debt issues 128,973 1,682 - 130,655
Sale of redeemable preferred stock 36,000 - - 36,000
Sale of common stock 3,800 232 (232) 3,800
Other, net (387) (15) - (402)
------------ ----------- ------------ ---------------
Net cash from (used for) financing activities 144,683 58,086 (32,716) 170,053
------------ ----------- ------------ ---------------
Effect of foreign exchange rate changes on cash - (1,960) - (1,960)
------------ ----------- ------------ ---------------
Cash:
Increase for the period 280 6,030 - 6,310
Balance, beginning of period - - - -
------------ ----------- ------------ ---------------
Balance, end of period $ 280 $ 6,030 $ - $ 6,310
============ ============= =========== ===============
</TABLE>
14
<PAGE> 16
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
MSXI's net sales for the quarter ended September 27, 1998 increased $129.4
million (90%) from $144.0 million to $273.4 million, as compared to the fiscal
quarter ended September 28, 1997. For the fiscal nine months ended September 27,
1998, net sales increased $473.3 million (152%) from $310.5 million to $783.8
million, as compared to the fiscal nine months ended September 28, 1997. These
increases resulted principally from the GRI acquisition. In addition, net sales
for the quarter and fiscal year to date 1998 increased approximately 10% from
the comparable prior periods throughout the balance of the business.
Operating income for the fiscal quarter ended September 27, 1998 increased $4.2
million (267%) from $1.6 million to $5.8 million, as compared to the fiscal
quarter ended September 28, 1997. As a percent of net sales operating income
increased to 2.1% for the fiscal quarter ended September 28, 1998 from 1.1% for
the fiscal quarter ended September 28, 1997. For the fiscal nine months ended
September 27, 1998 operating income increased $10.3 million (173.1%) from $5.9
million to $16.2 million as compared to the fiscal nine months ended September
28, 1997. As a percent of net sales operating income increased to 2.1% for the
fiscal nine months ended September 27, 1998 from 1.9% for the fiscal nine months
ended September 28, 1997. The changes in operating income and operating income
as a percent of net sales for the 1998 periods as compared to the 1997 periods
are primarily due to the inclusion of the GRI businesses, which operate at a
lower gross profit margin on a higher volume of net sales, offset by the
reduction of selling, general and administrative expenses as a percentage of
sales. In addition, $2.0 million of the increase resulted from restructuring
costs recorded in the fiscal quarter ended September 28, 1997.
Net income for the fiscal quarter ended September 27, 1998 was $0.9 million
(0.3% of net sales) as compared to a net loss of $0.9 million (0.7% of net
sales) for the fiscal quarter ended September 28, 1997. For the fiscal nine
months ended September 27, 1998 net income was $1.5 million (0.2% of net sales)
as compared to a net loss of $2.0 million (0.7% of net sales) for the comparable
prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for the acquisition of
businesses and capital expenditures. These requirements have been met through a
combination of bank debt, issuance of securities and cash from operations.
15
<PAGE> 17
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
During the fiscal nine months ended September 27, 1998 net cash provided from
operating activities was $18.2 million which resulted primarily from improved
accounts receivable collections. The cash provided was used to finance capital
expenditures and acquisitions of business of $12.5 million and repayment of bank
debt.
The Company's total indebtedness as of September 27, 1998 consists of Notes,
borrowings under the New Credit Facility, and borrowings under the Ford
Facility. On April 14, 1998, the Company amended and restated the New Credit
Facility to add a $30 million term loan portion. On the same date, the Company
borrowed the full amount available under the term loan and used the funds to
reduce outstanding bank balances under the revolving loan portion of the New
Credit Facility. The amount is classified as long-term debt as the Company has
both the ability and intent to refinance such amount under the New Credit
Facility.
OTHER MATTERS
On August 20, 1998, the Company consummated an offer to exchange 11-3/8% Senior
Subordinated Notes which had been registered under the Securities Act of 1933
for any and all outstanding Notes. The Company's Registration Statement on Form
S-4 with the Securities and Exchange Commission became effective on July 22,
1998.
On August 4, 1998, the Company acquired Gold Arrow Contract Services, Ltd.
("Gold Arrow"), a U.K. technical and information technology staffing services
company with annual sales of approximately $20 million. Funding for the
transaction was provided by borrowings under the New Credit Facility.
SUBSEQUENT EVENTS
In October 1998, the Company finalized the purchase price of the APX acquisition
dated November 6, 1996. This resulted in a favorable purchase price adjustment
of $4.9 million which was collected in October 1998.
Effective October 31, 1998 the Company acquired Lexstra International, Inc. and
Lexus Temporaries, Inc., providers of contract computer consultants, systems
analysts and network support personnel. The companies are headquartered in New
York, NY and have offices in Boston, MA, Red Banks, NJ and Silver Spring, MD.
The companies have combined annual sales of approximately $50 million. The
purchase price is $24 million with additional payments contingent on achieving
certain operating results for the years 1998 through 2000. Funding for the
transaction was provided by borrowings under the New Credit Facility.
16
<PAGE> 18
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
On December 27, 1997, Cambridge Industries, Inc. filed a complaint against the
Company in Michigan State Court. This complaint was settled in October, 1998
with no material effect to the Company.
INFLATION
Although the Company cannot anticipate future inflation, it does not believe
that inflation has had, or is likely in the forseeable future, to have a
material impact on its results of operations. While the Company's contracts
typically do not include automatic adjustments for inflation, the Ford Master
Vendor Agreement does provide for automatic adjustments for inflation for
services provided under the Master Vendor Program.
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for services of the Company have historically been lower during the
year-end holidays.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year. Any
of the Company's computers, computer programs and manufacturing and
administrative equipment that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
send and receive electronic data with third parties or engage in similar normal
business activities.
17
<PAGE> 19
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
The Company, on a coordinated basis and with the assistance of consultants, is
addressing the Y2K issue. The Company's Y2K Methodology categorizes its assets
into four areas: applications, facility systems, PCs and peripherals, and third
party providers.
1. Applications have been classified depending on the associated business unit
or corporate sponsor. Managers are in place with responsibility for
prioritization, assessment, remediation planning and implementation, and
testing. Substantially all applications are projected for remediation by the
end of 1998. The balance of remediation and testing will be accomplished in
1999. Although there can be no assurances that the Company will identify and
correct every Y2K issue, the Company believes it has in place a
comprehensive program to identify, remediate and test all applicable
applications.
2. All facility systems (HVAC, Security, Phones etc.) have been inventoried
worldwide. Non-compliance reports will be distributed in the fourth fiscal
quarter of 1998. Business units will replace, retire or repair facility
systems as necessary.
3. PC's and peripherals have been inventoried worldwide. All PC's will be
upgraded to ensure hardware and software compliance by the second fiscal
quarter of 1999. All network operations hardware and software will be
upgraded and compliant by the first fiscal quarter of 1999.
4. Third party providers and key suppliers will be contacted in the fourth
fiscal quarter of 1998 and the first fiscal quarter of 1999 to determine
Y2K status. Contingency plans will be developed based on information
received. Additionally, preliminary contingency planning is
currently underway with emphasis on mission critical facilities and systems.
The ability of key service providers, such as utility companies, to
facilitate the Company's needs is of paramount importance. In some cases,
especially with respect to its utility vendors, alternative suppliers may
not be available.
For its information technology, the Company currently uses a mid-range,
non-mainframe based computer environment which is complemented by a series of
local-area networks ("LANs") that are connected via a wide-area network ("WAN").
Enabled versions of the Company's financial, human resource and business systems
are in place. The Company incorporates limited use of embedded technology.
The Company's most significant risks with respect to Y2K problems are: lost
revenue and damaged relations with Company's customers resulting from a delay in
the delivery of goods and services and the effect of shutting down production or
a customer facility. The Company believes the risks may be somewhat mitigated
as the majority of the Company's revenue is generated from the sale of business
systems, system technology and staffing services as opposed to the delivery of
manufactured product.
18
<PAGE> 20
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
The Company's cost for Y2K compliance in 1998 is estimated at $500,000. Cost for
1999 is expected to reach $2.0 million which includes upgrades, repair and
programming. As the Y2K project continues, the company may discover additional
Y2K problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations. In many cases, the Company must rely on assurances from suppliers
that new and upgraded information systems as well as key services will be Y2K
compliant. While the Company plans to validate supplier representations, it
cannot be sure that its tests will be adequate, or that, if problems are
identified, they will be addressed in a timely and satisfactory manner. Even if
the Company, in a timely manner, completes all of its assessments, implements
and tests all remediation plans believed to be adequate, and develops
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences or business
interruptions to the Company.
EURO CURRENCY
On January 1, 1999 the member states of the European Economic and Monetary Union
have agreed to adopt the Euro as their common legal currency. The existing
member state currencies are scheduled to remain legal tender as denominations of
the Euro until at least January 1, 2002 but not later than July 1, 2002. During
this transition period, monetary transactions may be settled using either the
Euro or the existing member state currencies.
The Company is in the process of implementing system software required for the
Euro currency conversion and does not anticipate the conversion to have a
significant impact on the operations, financial position or liquidity of its
European businesses.
19
<PAGE> 21
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties. Actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, many of which
are beyond the control of management. These factors include, but are not limited
to, the Company's leverage, its reliance on major customers in the automotive
industry, the degree and nature of competition, the Company's ability to recruit
and place qualified personnel, risks associated with its acquisition strategy,
and employment liability risk. They are hereby incorporated by reference from
the risk factors and other factors included in the Company's Registration
Statement on Form S-4.
20
<PAGE> 22
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 1. On December 27, 1997, Cambridge Industries, Inc. filed a complaint
against the Company in Michigan State Court. This complaint was settled
in October, 1998 with no material effect to the Company.
ITEM 2. On August 14, 1998, Ralph L. Miller, Special Assistant to the Chairman
of the Board, completed the acquisition of certain shares of Class A
Common and Series A Preferred Stock from Citicorp Venture Capital, Ltd.
Mr. Miller did not borrow any portion of the purchase price from the
Company, as was indicated in the Company's Registration Statement on
Form S-4 dated July 22, 1998.
On October 1, 1998, the Company issued 1,000 shares of Class A Common
Stock to John Risk, President, Product Development Services Group, for
an aggregate purchase price of $40,000.
On October 31, 1998, the Company issued 1,000 shares of Class A Common
Stock to Don Springer, Vice President, Business and Technology
Services, for an aggregate purchase price of $40,000.
On November 4, 1999, the Company issued 1,000 shares of Class A Common
Stock to Erwin H. Billig, Chief Executive Officer and Chairman of the
Board of Directors, for an aggregate purchase price of $40,000.
ITEM 3. Not applicable.
ITEM 4. Not applicable.
21
<PAGE> 23
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION (CONTINUED)
Item 5. ACQUISITION OR DISPOSITION OF ASSETS
Effective October 31, 1998, the Company consummated its acquisition of
Lexstra International, Inc, and Lexus Temporaries, Inc.
("Lexstra\Lexus") pursuant to an Asset Purchase Agreement dated as of
October 23, 1998. Under the Asset Purchase Agreement, a wholly-owned
subsidiary of MSX International, Inc. purchased substantially all of
Lexstra\Lexus' assets and assumed substantially all operating
liabilities (the "Acquisition"). The Company did not assume any bank
debt. The total purchase price for these net assets was $24 million at
the closing with additional payments contingent on achieving certain
operating results for the years 1998 through 2000. The Acquisition was
initially announced on October 27, 1998 and will be accounted for under
the purchase method of accounting. Funding for the transaction was
provided by borrowings under the New Credit Facility.
Lexus\Lexstra are providers of contract computer consultants, systems
analysts, and network support personnel. The companies are
headquartered in New York, NY and have locations in Boston, MA, Red
Bank, NJ, and Silver Spring, MD. The combined annual revenue of the two
companies is approximately $50 million. Larry Levine, president of
Lexstra International, Inc., and Karen Suss, vice president of Lexus
Temporaries, Inc., who founded the companies in 1991, will continue in
their senior management roles.
It is presently impracticable to provide the financial statements and
the pro forma financial information required to be included herein with
respect to the businesses acquired. Such financial statements and pro
forma information will be filed under cover of Form 8-K as soon as
practicable, and in no event later than January 11, 1999.
22
<PAGE> 24
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION (CONTINUED)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10 - Asset Purchase Agreement dated October 23, 1998
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
1. A Report on Form 8-K dated October 28, 1998 was filed by
MSX International, Inc. reporting under Item 5. "Other
Events" regarding the announcement of the acquisition of
Lexstra International, Inc. and Lexus Temporaries, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSX INTERNATIONAL, INC.
(Registrant)
Date: November 11, 1998
By: /s/ Frederick K. Mintum
Frederick K. Mintum
Executive Vice President and
Chief Financial Officer
(Chief accounting officer
and authorized signatory)
23
<PAGE> 25
MSX INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential Page No.
- ------- -------------------
<S> <C>
Exhibit 10- Asset Purchase Agreement dated October 23,1998 between MSX
International Engineering Services, Inc.; Lexstra International,
Inc.; and Lexus Temporaries, Inc.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
</TABLE>
24
<PAGE> 1
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of October 23, 1998 between MSX
INTERNATIONAL ENGINEERING SERVICES, INC., a Delaware corporation ("Buyer") and
LEXSTRA INTERNATIONAL, INC., a New York corporation ("Lexstra") and LEXUS
TEMPORARIES, INC., a New York corporation ("Lexus") (individually "Seller" or
collectively "Sellers").
WHEREAS, subject to the terms and conditions hereinafter set forth,
Seller desires to sell to Buyer and Buyer desires to purchase from Sellers,
substantially all of Sellers' businesses and assets;
NOW, THEREFORE, in consideration for the representations, warranties,
covenants and agreements contained herein, the parties hereto agree as follows:
I
PURCHASE AND SALE
-----------------
1.01 Assets. At the Closing (as hereinafter defined) Sellers will
convey, transfer and assign to Buyer, and Buyer will purchase, all of the
business, assets and rights of Sellers, whether or not reflected on the books of
Sellers, including without limitation all customer lists, employee lists,
customer agreements and employment contracts (as listed on Schedule 1.02
hereto), trade names (including the names "Lexstra" and "Lexus" and variants
thereof, except as described in Section 1.04 hereof), trademarks, intellectual
property, databases, patents, inventions, accounts receivable, prepaid expenses,
cash, deposits, notes receivable, fixed assets, furniture, fixtures, and office
equipment, excluding, however, (i) the capital stock record books, the corporate
minute books and such other records of the Sellers as are required by law for
Sellers to retain, (ii) insurance policies on the life of any shareholder of
either Seller, and (iii) such other records may be approved by Buyer as not
necessary or useful in connection with the business and assets being acquired.
Such business, rights and assets to be acquired by Buyer are hereinafter
referred to as the "Assets".
1.02 Liabilities. In the case of each Seller, Buyer will assume at
the Closing
(i) all of such Seller's obligations which first arise
after the date of Closing, under all of the
contracts, commitments and obligations listed in
Schedule 1.02 attached hereto, which are being
transferred to Buyer, in any event excluding,
however, (a) obligations resulting from a default
prior to the Closing with respect to such contracts
and commitments; (b) pension, stock option, stock
purchase, bonus, profit sharing or other employee or
executive welfare or benefit plans or other welfare
or benefit agreements, and (c) any agreement with a
stockholder of a Seller; and
<PAGE> 2
(ii) the obligation to pay any liability which is
reflected in a Balance Sheet of the Combined Company
(as defined in Section 2.03) as of the Closing Date,
prepared in accordance with generally accepted
accounting principles, consistently applied with
Sellers' practices, adjusted to exclude (a) any
liability to a stockholder of either Seller, and (b)
any bank debt ("Closing Balance Sheet").
Buyer shall pay, perform and discharge all of such contracts, commitments and
other obligations (the "Liabilities") when due in accordance with their
respective terms.
1.03 Nonassumption. Except as expressly set forth in Section 1.02,
Buyer is not assuming or agreeing to pay or perform any debts, liabilities,
contracts, commitments or obligations of Seller.
1.04 Lexstra, Ltd. Buyer acknowledges that Laurence Levine and Karen
Suss own a 50% interest in Lexstra, Ltd., a corporation which operates solely in
the United Kingdom and Sellers shall use all reasonable efforts (without the
expenditure of funds) to prevent such company from using the name Lexstra
outside the United Kingdom.
II
CLOSING MATTERS; PURCHASE PRICE
-------------------------------
2.01 Closing. On the terms and subject to the conditions of this
Agreement, the conveyance of the Assets by Seller to Buyer and the assumption of
the Liabilities by Buyer (the "Closing") shall take place at the offices of
Solovay Edlin & Eiseman, 845 Third Avenue, New York, N.Y. or at such other place
as is mutually agreed upon by Buyer and Sellers, effective as of the close of
business on October 31, 1998, or as soon as reasonably practicable thereafter
upon the satisfaction of all conditions of Closing, unless this Agreement shall
have been previously terminated as herein provided. Each party hereto agrees to
use its best efforts to cause the Closing to be consummated effective as of such
date and, to the extent not closed on such date, as soon as is reasonably
practicable thereafter.
2.02 Purchase Price. The aggregate purchase price for the Assets (the
"Purchase Price") shall consist of a cash payment in connection with the Closing
plus the potential for further cash consideration to be paid based upon future
levels of performance ("Earnout") as follows:
(i) In connection with the Closing, Buyer shall pay to
Sellers, allocated as hereinafter provided, the sum
of $24 million ($24,000,000) in the lawful money of
the United States (the "Closing Payment") by wire
transfer, subject to offset as set forth in Section
5.04. The Closing Payment shall be adjusted dollar
for dollar upward (or downward) by the amount by
which the Net Tangible Book Value is more than (or
less than) $6.8 million at the date of
2
<PAGE> 3
Closing pursuant to Section 2.04 of this Agreement
(such adjustment being referred to herein as the
"Adjustment Payment"). "Net Tangible Book Value"
means the net book value of stockholders' equity of
the Combined Company (as defined in Section 2.03),
less any goodwill included in any of the Assets.
(ii) Sellers will be eligible to receive an Earnout if the
AEBIT or EBIT (as hereinafter defined) reaches levels
specified below in the calendar years 1998, 1999, and
2000:
(A) In the event that AEBIT of the Combined
Company exceeds $4.0 million in the calendar
year 1998, Buyer shall pay to Sellers
(allocated as hereinafter provided) a sum
which is six times the amount by which such
AEBIT exceeds $4.0 million, subject to
setoff as set forth in Section 5.04.
(B) In the event that EBIT of the Combined
Company in calendar year 1999 exceeds the
greater of $4.0 million or AEBIT of the
Combined Company achieved in the calendar
year 1998, Buyer shall pay to Sellers
(allocated as hereinafter provided) a sum
which is the product of five and one-half
times the amount by which 1999 EBIT exceeds
the greater of $4.0 million or 1998 AEBIT.
(C) In the event that EBIT of the Combined
Company in calendar year 2000 exceeds the
greater of 1998 AEBIT or EBIT of the
Combined Company achieved in the calendar
year 1999, Buyer shall pay to Sellers
(allocated as hereinafter provided) a sum
which is the product of five times the
amount by which 2000 EBIT exceeds the
greater of 1998 AEBIT or 1999 EBIT.
2.03 Definitions. As used herein, the following terms have the
respective meanings set forth below:
"Combined Company" shall mean the Assets, Liabilities, and the
business associated with the Assets, whether maintained as a
separate company or a division, and if it has subsidiaries,
with all of its subsidiaries, if any, all on a consolidated
basis after eliminating all intercompany items; provided that
in the case of an acquisition of a business, the opening of a
new office or the entry into a new line of business, in each
case, placed under the ownership or control of the Combined
Company, the Combined Company shall include such business only
if so agreed in writing by Buyer and Laurence Levine and Karen
Suss.
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"EBIT," for any period, shall mean the income of the Combined
Company, without deduction for interest on borrowed money,
considered as an independent corporate entity (whether or not
the Combined Company is one or more corporations and/or one or
more divisions, prior to any deduction for federal and state
taxes measured by earnings (other than any such taxes as have
heretofore been deducted by the Sellers in determining EBIT)
and prior to reflecting the inclusion of any tax credits, all
determined in accordance with generally accepted accounting
principles consistently applied but with the following
adjustments:
(1) The amount by which any extraordinary gain and gain
from the sale, exchange or other disposition of property
(other than inventory sold in the ordinary course of business)
exceeds the sum of any extraordinary loss and any loss from
the sale, exchange or other disposition of such property shall
be excluded in determining EBIT.
(2) Depreciation and amortization valuations shall be
based on asset valuation as though the acquisition by Buyer of
the Assets had not been effected.
(3) Any management fee, corporate overhead allocation or
similar general cost charged by Buyer to the Combined Company
and agreed to by Laurence Levine and Karen Suss shall be
deemed an expense in determining EBIT but not otherwise.
(4) Charges not above market rates (i.e., rates
attainable from unrelated third parties) for specific services
rendered or paid by or on behalf of Buyer for the Combined
Company shall be deemed an expense of the Combined Company for
the period in which such services were rendered if (i) agreed
to in writing by Laurence Levine and Karen Suss, (ii) they are
covered on Exhibit 2.03(ii), (iii) such services would have
been required if the Combined Company had continued as an
independent entity, or (iv) such services are in accordance
with prudent business practice and Buyer has consulted with
Laurence Levine and Karen Suss.
(5) Any item of income or charge against income which is
realized or incurred in a period which deviates from normal
business practice of the Sellers (if not inconsistent with
GAAP) and has the effect of increasing or decreasing EBIT
shall be allocated to the period to which it properly belongs.
(6) One-half of the revenues paid to a Seller by
Silverline Industries, Inc. shall be excluded from income
"AEBIT" means EBIT adjusted (i) to eliminate the nonrecurring
gains and/or expenses set forth on Schedule 2.03; (ii) to
assume for periods prior to the Closing, that Karen Suss and
Laurence Levine have each been compensated at a rate of
$175,000 per year; (iii) to eliminate any amounts received in
payment of accounts
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receivable which relate to invoices issued in 1997, (iv) to
deduct the actual amount of accounts receivable relating to
invoices issued prior to the Closing during 1998 which are not
collected from the original obligors thereof prior to February
28, 1999, and (v) to establish a reserve for accounts
receivable relating to November and December, 1998 in the
amount of one percent.
2.04 Determination of Adjustment Payment. On or before April 30, 1999,
Buyer or its representatives shall perform a review as of the date of Closing of
the Sellers' accounts for purposes of determining the Net Tangible Book Value as
of the date of Closing and the amount of the Adjustment Payment. The Adjustment
Payment shall be paid by Buyer to Sellers if Net Tangible Book Value is greater
than $6.8 million, and shall be paid by Sellers to Buyer if Net Tangible Book
Value is less than $6.8 million; provided, however, that any amount payable by
Buyer to Seller shall be subject to setoff as set forth in Section 5.04 of this
Agreement. Seller or its representatives shall be entitled to be present at and
to assist in such review. Not later than April 30, 1999, Buyer shall furnish
Seller with its written report with respect to such determinations and Buyer's
calculation of the Adjustment Payment based thereon. Buyer's determinations and
report shall be conclusive and binding on Sellers unless Sellers shall give
written notice of objection thereto to Buyer within fifteen days after Sellers'
receipt of such report. If Sellers give such notice of objection, the matter
will be resolved in accordance with the dispute resolution mechanism set forth
in Section 2.08 hereof (the "Dispute Resolution Mechanism").
2.05 Payments. The Purchase Price paid in connection with the Closing
(allocated as hereinafter provided) shall be payable as follows: (i) the Closing
Payment of $24 million shall be paid by wire transfer by Buyer to Sellers at the
Closing, and (ii) the Adjustment Payment shall be paid within ten days after a
final determination has been made pursuant to Section 2.04.
2.06 Determination of Earnout Payments. All determinations of EBIT and
AEBIT for the Combined Company, including all adjustments thereto to prevent any
such distortion in EBIT or AEBIT and other determinations in accordance with the
terms of this Agreement, shall be made and reported to Buyer and the Sellers by
the internal accounting staff utilized by Buyer by April 30, 1999 for the
determination of 1998 AEBIT and thereafter within 60 days after the end of the
period for which such determination is being made. The determination of such
internal accounting staff shall be conclusive and binding upon the parties
hereto on the thirtieth day thereafter (or such earlier date as Buyer is advised
by the Sellers that the Sellers accept such determination as conclusive and
binding) unless the Sellers within such thirty-day period provide to Buyer
written notice of objection to such determination, in which event the matter
shall be resolved by the Dispute Resolution Mechanism. Subject to the
adjustments set forth above, Buyer's accounting policies and practices shall be
utilized in determining EBIT or AEBIT as long as such policies are in accordance
with generally accepted accounting principles consistently applied. Any Earnout
payments owed shall be paid within 10 days after the determination has become
conclusive and binding on the parties that such payment is due to the Sellers.
Such payment shall be made by check and mailed to the Sellers at their
respective addresses set forth herein, and shall be subject to setoff with
respect to the fees
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owed by Sellers to Acquest (as hereinafter defined) following Sellers' approval
of the amount thereof.
2.07 Allocation of Purchase Price. The parties agree that the Purchase
Price to be paid by Buyer to Sellers shall be allocated 56.54% to Lexstra and
43.46% to Lexus and that the allocation to Section 5.02 of this Agreement shall
be consistent with the Letter of Intent among the parties dated as of August 11,
1998. Not later than six months after the Closing, Buyer shall in good faith
prepare a schedule (the "Allocation Schedule") and deliver it to Seller setting
forth the allocation of the consideration paid by Buyer among the Assets. The
Allocation Schedule shall be determined in accordance with the relative fair
market values of the items included in the Assets. Buyer and Sellers shall have
30 days from the date of such delivery to resolve any disagreements regarding
the Allocation Schedule. At the end of such period, any remaining disagreements
shall be resolved by the Dispute Resolution Mechanism.
2.08 Dispute Resolution Mechanism. Buyer and Seller shall submit any
dispute concerning the Purchase Price or the allocation thereof to a jointly
selected accounting firm (the "Settlement Firm") for resolution. If Buyer and
Seller cannot jointly agree on an accounting firm to serve as the Settlement
Firm, each Party shall submit the name of a national accounting firm (which firm
shall not be either party's accountants) to Buyer's and Sellers' counsel, who
shall select one of such firms by lot. The decision of the Settlement Firm shall
be final and binding on the parties and the award of the Settlement Firm (as
arbitrator) may be entered in any court of competent jurisdiction. The fees and
expenses of the Settlement Firm shall be borne equally by Buyer and Sellers.
2.09 Sellers' Deliveries. At the Closing, Sellers shall deliver to
Buyer bills of sale and other documents or instruments as Buyer shall reasonably
request to vest in or to confirm in Buyer full, unencumbered and complete title
to all of the Assets (including any assignments necessary to transfer the
Rights), subject only to the Liabilities, and to transfer any governmental
licenses and permits required for the operation of the business of the Sellers
as heretofore conducted. Sellers shall also deliver certificates from each
Seller, signed by its President, to the effect that the representations and
warranties of such Seller contained herein are true and correct on the date of
Closing as if made on and as of such date. Subsequent to the Closing, Sellers
will execute and deliver from time to time at the request of Buyer all such
further instruments as, in the reasonable opinion of Buyer's counsel, may be
required in order to vest in Buyer full and complete title to and the right to
use the business, assets, properties and contracts hereby agreed to be conveyed
by Sellers to Buyer. On or within five days after the Closing Date, Sellers will
cause their corporate names to be changed to exclude the names "Lexstra" and
"Lexus" or any similar name. If any of the Assets, properties or contracts of a
Seller are not unilaterally assignable to Buyer, such Seller will use its best
efforts to effect a practical substitution of Buyer for Seller with respect
thereto. To the extent that such a substitution cannot be made, such Seller will
use its best efforts to grant to Buyer a subcontract with respect thereto, on
terms and conditions such that the effect will be, so far as is reasonably
possible, the same as though such substitution had been made.
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2.10 Buyer's Deliveries. At the Closing, Buyer shall (i) cause a wire
transfer to be made to Sellers of $24 million, (ii) deliver to Sellers all
instruments as Sellers shall reasonably request for Buyer to assume and become
subject to the Liabilities, and (iii) deliver to Seller the certificate of Buyer
signed by one of its officers, to the effect that the representations and
warranties of Buyer contained herein are true and correct on the date of Closing
as if made on and as of such date.
2.11 Earnout Obligations. Buyer's obligations to pay an Earnout
hereunder shall not detract from Buyer's rights to operate the Combined Company
in such manner as Buyer shall in good faith determine. Buyer and Sellers do not
owe a fiduciary duty to each other in connection with the conduct of business as
it affects the Earnout. However, the parties will always act in good faith and
give reasonable consideration to both the short term and long term good of the
Combined Company.
III
REPRESENTATIONS AND WARRANTIES
OF SELLERS
----------------------
3.00 Sellers represent and warrant to Buyer as follows:
3.01 Corporate. Each of Sellers is a corporation duly organized,
existing and in good standing under the laws of the State of New York, has full
power and authority to own its properties and to carry on its business as now
conducted, and is in good standing and duly qualified to conduct business as a
foreign corporation in each of the jurisdictions (which will be set forth in
Exhibit 3.01) in which the ownership or leasing of its properties or the conduct
of its business requires such qualification. Lexstra's outstanding capital stock
consists of 100 shares, which is held and owned as follows: L. Levine 47.5, K.
Suss 47.5, both being voting shares, and J. Diehl 5 shares non-voting. This will
be adjusted to reflect 3 additional shares to J. Diehl as of September 30, 1997.
The adjustment will provide for Levine and Suss to hold 46 shares each of voting
stock and Diehl to hold 8 shares of non-voting. Lexus's outstanding capital
stock consists of 100 shares which is held and owned as follows: L. Levine 50
and K. Suss 50. All corporate action of each Seller has been duly authorized and
adopted in accordance with applicable law and its By-laws and charter documents.
3.02 Conflict of Interest. Except for the ownership of non-controlling
interests in securities of corporations the shares of which are publicly traded
or as otherwise set forth on Exhibit 3.02, neither Sellers nor their respective
stockholders and, to the best of Sellers' knowledge, none of either Seller's
directors, officers or other key employees (including purchasing agents and
departmental managers) owns directly or indirectly any interest or has any
investment or profit participation in any corporation or other entity which is a
competitor of or which directly or indirectly does business with the Sellers.
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3.03 Financial Statements. Exhibit 3.03(a) consists of copies of the
Sellers' audited balance sheets as of December 31, 1997 and 1996 and the related
audited statements of income, stockholders' equity and changes in financial
position for the fiscal years then ended and will include the notes thereto,
additional or supplemental information supplied therewith, and the report
prepared in connection therewith by the independent certified public accountants
reviewing such financial statements. Exhibit 3.03(b) consists of copies of the
Sellers' separate and combining balance sheets as of September 30, 1998, and the
related statements of income, stockholders' equity and changes in financial
position for the respective months and fiscal year-to-date periods then ended
(and as of the corresponding dates and for the corresponding periods in the
preceding fiscal year) and include the notes thereto and all additional or
supplemental information supplied therewith. Exhibits 3.03(a) and 3.03(b)
(hereinafter collectively referred to as the "Financial Statements"):
(i) are true, complete and correct in all material respects;
(ii) fairly present the properties, assets, financial
position and results of operations of the Sellers as of the respective
dates and for the respective periods stated above; and
(iii) have been prepared pursuant to and in accordance with
generally accepted accounting principles applied on a consistent basis
and, in the case of the financial statements included as part of
Exhibit 3.03(a), have been audited in accordance with generally
accepted auditing standards.
Adequate provision has been made in the Financial Statements for doubtful
accounts or other receivables; sales are stated in the Financial Statements net
of discounts, returns and allowances; and Sellers has not had any liability or
obligation, whether accrued, absolute, or contingent, arising out of
transactions entered into or any state of facts existing as of the dates of the
Financial Statements, except to the extent reflected therein and except for
contractual or other obligations of performance (other than obligations arising
by reason of a default in performance) not required to be reflected in the
Financial Statements under generally accepted accounting principles consistently
applied. No provision in the Financial Statements is necessary, under generally
accepted accounting principles, for liability on account of product warranties
or with respect to the design, development, manufacture or sale of defective
products or the delivery of faulty services. Any items of income which are
unusual or of a nonrecurring nature are separately disclosed in the Financial
Statements or are disclosed supplementally in Exhibit 3.03(c).
3.04 Taxes. There has been, and will be, in effect from the inception
of each of the Sellers until Closing an effective election under Subchapter S of
the Internal Revenue Code, and the Company has no liability for federal income
taxes for any period. Exhibit 3.04 consists of copies of income tax returns
filed for years ended on and after December 31, 1995. Each of the Sellers has
filed all federal, state or local returns and provided for or paid in full all
Taxes to the extent Tax Returns and payments are required prior to the date
hereof (including extensions). "Tax" or "Taxes" means all taxes, charges, fees,
imposts, levies or other assessments, including, without limitation, all net
income tax (including, without limitation, all income or corporate franchise
taxes) governed
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under the Internal Revenue Code, gross receipts, capital, sales, use, ad
valorem, value added, transfer, transfer gains, franchise, profits, inventory,
capital stock, license, withholding, payroll, employment, social security,
unemployment, excise, severance, stamp, occupation, property and estimated
taxes, customs duties, fees, assessments and charges of any kind whatsoever,
together with any interest and any penalties, fines, additions to tax or
additional amounts thereon imposed by any taxing authority (federal, state,
local or foreign) and shall include any transferee liability in respect of
Taxes. "Tax Return" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes.
Neither Seller has any deficiencies with respect to any tax period and neither
Seller is or will be subject to any current or deferred liability with respect
to taxes or penalties or interest thereon, or related charges and fees, whether
or not assessed, which are not adequately provided for in the Financial
Statements as of December 31, 1997. The United States federal income tax returns
of the Sellers have not been audited nor have the returns of any stockholder of
either Seller been audited with respect to income or loss attributable to either
Seller. There are not in effect any waivers of statutes of limitations or
deadlines for assessments by either Seller, or any stockholder of either Seller,
with respect to issues related to either Seller.
3.05 Absence of Financial Changes. Except as set forth in Schedule
3.05, since December 31, 1997, there have not been:
(i) Any material adverse changes, either individually or in
the aggregate, in the general affairs, business, prospects, properties,
financial position, results of operations, or net worth of the Sellers;
(ii) Its business affairs have since such date been conducted
in the same manner as theretofore conducted and in the usual and
ordinary course;
(iii) after the close of business on such date no transaction
has taken place or contract entered into by the Sellers other than in
the usual and ordinary course of business except for transactions
arising out of this Agreement; and
(iv) specifically, without limitation of the foregoing, since
such date no material sales, removals or deliveries of machinery,
fixtures or other tangible or intangible assets of any nature have been
made.
3.06 Casualties. Since December 31, 1997, there have not been any
material casualties affecting the Sellers or material loss, damage or
destruction to any of its properties.
3.07 Absence of Certain Actions. Except as described in Exhibit 3.07,
since December 31, 1997, Sellers have not:
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(i) raised salaries, hourly rates or the rate of bonuses or
commissions or other compensation of its personnel or agents, except
for normal increases therein consistent with past practice which is
described in Exhibit 3.07;
(ii) varied insurance coverage except in the ordinary course
of business; or
(iii) entered into, materially amended or terminated any
material contract, agreement, franchise, permit or license.
(iv) paid or declared any dividend or other distribution of
any nature or on or in respect of any capital stock or surplus of the
Company, or issued, redeemed, retired, purchased or otherwise acquired
shares of its stock except for cash dividends;
(v) waived a right or canceled a material contract, debt or
claim, or assumed or entered into a material contract, lease, license,
obligation, indebtedness, commitment, purchase or sale, except in the
ordinary course of business consistent with past practices;
(vi) acquired or disposed of a capital asset having an
initial cost of $5,000 or more, or paid or performed an obligation or
liability other than (i) a liability or obligation reflected in the
Financial Statements, and (ii) a current liability or obligation
incurred in the usual and ordinary course of business; and
(vii) entered into any transaction with any stockholders of
either Seller or any of their relatives or entities in which they have
an interest ("Interested Person").
3.08 No Undisclosed Liabilities. Except with respect to liabilities
incurred in the usual and ordinary course of Sellers' businesses since December
31, 1997, Sellers do not have knowledge of any fact, circumstance or condition
which might reasonably give rise to any material liability of any kind or nature
whatsoever which is not adequately reflected or specifically disclosed in the
Financial Statements.
3.09 Full Disclosure. Neither this Agreement nor any Exhibit or other
document furnished to Buyer pursuant hereto contain or will contain, any untrue
statement of a material fact or omit to state a material fact necessary to make
the factual statements contained herein or therein, in light of the
circumstances under which they were made, not misleading. Sellers do not have
knowledge of any events, transactions or other facts, other than matters
affecting the economy generally, which, either individually or in the aggregate,
might reasonably give rise to circumstances or conditions which might have a
material adverse effect on the general affairs, business, prospects, properties,
financial position, results of operations or net worth of either of the Sellers.
3.10 Personal Property Title. Each of Sellers has a valid leasehold
interest in all leases of personalty, has good and unencumbered marketable title
to all personalty of any kind or nature included in the Assets, and has a valid
legal right to use all other personalty used by it in its business,
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free and clear of all liens, encumbrances, claims or other conditions affecting
title or use except for (i) liens for nondelinquent ad valorem taxes, (ii) liens
described in Exhibit 3.10 which will be released at or prior to the Closing, and
(iii) such non-monetary liens or encumbrances as do not significantly detract
from or interfere with the present or reasonably foreseeable use of the
properties subject thereto. All of the liens or encumbrances referred to in
clause (iii) above are set forth in Exhibit 3.10. At the Closing, title to the
Assets will be transferred to Buyer free of all liens, other than those liens
referred to in clause (iii) above.
3.11 Asset Condition. All buildings and improvements and all of the
machinery and equipment owned or used by the Sellers are in good repair and
operating condition and are adequate to carry on the Sellers' businesses as
presently conducted.
3.12 Real Property; Environmental. Neither Seller owns, or has at any
time in the past owned, any real property. Seller's only present or past leased
real property consists of leases of space in office buildings in which Sellers
occupy no more than 40% of the rentable space. Exhibit 3.12 lists by common
address all real property leased or used by each Seller in its business or in
which a Seller may have an interest (collectively, the "Properties") and lists
all real property previously leased or used by a Seller or in which it had an
interest (collectively, the "Prior Properties"). Each Seller has a valid
leasehold interest in all real property leased by it, free and clear of all
easements, restrictions, occupancy agreements, assessments, liens, encumbrances,
claims or other matters affecting title, use or occupancy except for (i) liens
for nondelinquent ad valorem taxes, and (ii) such easements, liens and
encumbrances as do not detract from or interfere with the present or reasonably
foreseeable use of the Properties subject thereto. The Properties and
improvements thereon are fully accessible by public roads. The Properties, the
use of such Properties and the conduct of the business of each Seller thereon or
on the Prior Properties have not violated, and based upon present and
foreseeable uses of such Properties and Prior Properties are not expected to
violate, any law, rule, regulation or ordinance of any governmental authority
(including provisions of law, rule or regulation scheduled for future
implementation), including but not limited to, environmental laws, zoning
ordinances and building codes, or the common law. The Properties are served by
utilities, including but not limited to, water, sewage, gas, waste disposal,
electricity and telephone, and neither Seller has Knowledge (as defined in
Section 10.12 hereof) of any inadequacies with respect to such utilities. Each
Seller has utilized, stored, delivered for disposal, disposed of and transported
all wastes, whether hazardous or not, in full compliance with all laws, rules,
regulations and ordinances (including provisions of any law, rule, regulation or
ordinance scheduled for future implementation) and the common law and so as not
to contaminate any of the Properties, the Prior Properties or any other
properties and so as not to give rise to any reporting, remediation or clean-up
obligation under any law, rule, regulation or ordinance (including provisions of
any law, rule, regulation or ordinance scheduled for future implementation) or
the common law. The Properties, the Prior Properties and each Seller's personal
property, including its land, buildings, equipment and inventory (whether now or
previously owned or leased by each Seller), have not been contaminated, tainted
or polluted, nor will such property become contaminated, tainted or polluted,
from activities conducted by each Seller. Sellers have not generated any waste
required to be disposed of as hazardous waste at any time in their businesses.
The provisions of this Section 3.12 shall also apply
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to the real property of, and actions taken by, each person controlled by either
Seller during all periods in which such person was controlled by each Seller.
3.13. Customers; Suppliers; Contracts. Exhibit 3.13(a) will list the
ten largest customers of each Seller during the nine months ended September 30,
1998 (stating for each the approximate dollar volume of the sales), and Exhibit
3.13(b) lists all of the existing contracts and commitments of Sellers of any
kind or nature whatsoever whether written or unwritten, whether or not assumed
by Buyer under Section 1.02 herein (including, without limiting the generality
of the foregoing, all supply contracts; collective bargaining agreements;
leases; notes and all other evidences of indebtedness; mortgages; guarantee
agreements; pension, stock option, stock purchase, bonus, profit sharing and
other employee or executive welfare or benefit plans or agreements; sales
representation and distribution agreements; purchase orders and commitments;
product warranties; and powers of attorney); except only:
(i) each contract with a customer made (A) in the usual and
ordinary course of business on or after the date hereof, or (B) prior
to the date hereof whereby the Seller is obligated to deliver less than
$2,000 in invoice value of services in each transaction or series of
related transactions; and
(ii) each purchase commitment made (A) in the usual and
ordinary course of business at prevailing prices on or after the date
hereof, or (B) prior to the date hereof which is not in excess of
$2,000 in each transaction or series of related transactions; and
The forms of written purchase and sales orders used by each Seller are also
included as part of Exhibit 3.13(b). The aggregate purchase orders or purchase
commitments outstanding on the date hereof from Sellers do not exceed $2,000.
Such purchase orders and purchase commitments may be canceled at any time
without penalty. Concurrently with the delivery and as a part of Exhibit
3.13(b), Buyer will be given copies of any existing written instruments
evidencing the items listed in Exhibit 3.13(b).
3.14 Concerning Contracts and Relationships. All of the agreements,
contracts and commitments listed in Exhibit 3.13(b) and all of the agreements,
contracts and commitments not required to be listed by reason of clauses (i) or
(ii) of Section 3.13, are valid and binding obligations of the parties thereto
in accordance with their respective terms and there has occurred no event which
would constitute any breach of or default in any provision of any such
agreement, contract or commitment or which would permit the acceleration of any
obligation of any party thereto or the creation of a lien or encumbrance upon
any asset of a Sellers or which would give rise to any such liabilities upon the
giving of notice or lapse of time. No information has been brought to the
attention of Sellers which might reasonably lead it to believe that any customer
or supplier intends to cease dealing with the Sellers, or intends to alter in
any material respect the amount of such customer's or supplier's dealings with
the Sellers or would alter in any material respect dealings in the event of the
consummation of the transactions contemplated hereby with the exception of
Silverline
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Industries, Inc. The circumstances relating to Silverline Industries,
Inc. are fully and fairly described in Exhibit 3.14.
3.15 Business Practices. All of Sellers' transactions have been
conducted on an arms-length basis except for transactions between a Seller and
any entity owned or controlled by a Seller or an Interested Person (all of which
transactions will be described in Exhibit 3.15); such described transactions
have been fair to the Sellers and on terms comparable to those which would have
prevailed in an arms-length transaction. No portion of a Seller's sales or other
ongoing business relationships is dependent upon the friendship or the personal
relationships (other than those customary within business generally) of the
stockholders of Sellers or any of a Seller's officers, directors or other key
employees. To the knowledge of the Sellers and the stockholders of Sellers, no
employee of a Seller has violated the published business policies of any third
party with respect to gifts, services or corporate business practices. Except as
described in Exhibit 3.15, neither Seller has outstanding loans or other
advances directly or indirectly to or from any stockholder, officer, director or
employee of either Seller or any entity in which any Interested Person has a
direct or indirect interest, other than travel advances in the usual and
ordinary course of business. Neither Seller nor any person acting on behalf of
the a Seller have engaged in any business practice of the nature referred to in
the Report of the Securities and Exchange Commission ("SEC") dated May 12, 1976,
on Questionable and Illegal Corporate Payments & Practices.
3.16 Compliance with Laws; Litigation; Claims. Each of Sellers, with
regard to its business, assets, business practices and products and services,
has complied with all applicable laws, regulations, orders and other
requirements of governmental authorities; it is not subject to any judicial,
governmental or administrative order, judgment or decree; and no investigation,
governmental or administrative proceeding or other litigation of any kind or
nature to which it may be a party is now pending, has been threatened in writing
or, to Sellers' Knowledge, otherwise threatened; no claim which has not ripened
into litigation or other proceeding has been made, threatened in writing or, to
Sellers' Knowledge, otherwise threatened against it, and, no facts,
circumstances or conditions are within Sellers' Knowledge, which might
reasonably give rise to such claims, investigations, proceedings or litigation,
in each case whether or not covered by insurance. Each of Sellers has obtained
all governmental licenses, permits, approvals, authorizations, exemptions,
classifications and certificates material to the conduct of its business or to
the ownership of its properties (collectively referred to herein as "Licenses").
Exhibit 3.16 lists and includes copies of all Licenses. There is no liability of
either Seller on account of product or service warranties or arising out of
working conditions in the manufacture or sale of its products or services or
with respect to the manufacture or sale by the Sellers of defective products or
with respect to services performed.
3.17 Employment. Exhibit 3.17(a) lists any officer or other key
employee of the Seller who terminated employment with a Seller since January 1,
1997. Sellers have no knowledge that any key employee is considering the
termination of employment. Except as described in Exhibit 3.17(b), no employees
of a Seller are represented by a union or other labor organization and no
representation question exists respecting the employees of the Seller; each
Seller has complied with all applicable laws affecting employment and employment
practices (including, but not limited to,
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laws relating to immigration into the United States), terms and conditions of
employment and wages and hours, and has not engaged in any unfair labor
practice; there has been no complaint alleging unfair labor practices against a
Seller filed with the National Labor Relations Board; there has been no labor
strike, dispute, slowdown or stoppage pending or threatened against or affecting
a Seller; there has been no grievance or arbitration proceeding against a Seller
arising out of or under a collective bargaining agreement and no basis therefor
exists; no agreement which is binding on a Seller restricts it from relocating
or closing any of its operations; and neither Seller has experienced any work
stoppage or other labor difficulty since January 1, 1998.
3.18 Employee Benefit Plans. Exhibit 3.18(a) lists all Employee Benefit
Plans (whether or not subject to ERISA) maintained by or contributed to by
either Seller. Neither Seller has (a) ever contributed to any multiemployer plan
(as defined in ERISA Section 3137 or 4001(a)(3)), or (b) maintained any defined
benefit plan subject to Title IV of ERISA, nor does either Seller maintain any
retiree medical or retiree life insurance programs. With respect to employee
plans:
(i) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
respects with its governing documents and the applicable requirements
of ERISA and the Code.
(ii) All contributions and premium payments (including all
employer contributions and employee salary reduction contributions)
which are due have been paid and will be timely paid through the date
of Closing to each such Employee Benefit Plan which is an Employee
Pension Benefit Plan or Employee Welfare Benefit Plan.
(iii) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan has received a current determination letter from
the Internal Revenue Service to the effect that it meets the
requirements of Code Section 401(a), and Buyer is unaware of any event
that has occurred, whether by action or failure to act, which has
resulted in or could cause the loss of such qualification, and each
trust thereunder is exempt from tax pursuant to Code Section 501(a);
true complete and accurate copies of the aforementioned termination
letters have been provided to Buyer as Exhibit 3.17(c).
(iv) As used herein:
"Code" means the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder.
"Employee Benefit Plan" means any (i) nonqualified deferred
compensation or retirement plan or arrangement which is an
Employee Pension Benefit Plan, (ii) qualified defined contribution
retirement plan or arrangement which is an Employee Pension
Benefit Plan, (iii) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including
any Multiemployer Plan), or (iv) Employee Welfare Benefit Plan or
material fringe benefit plan or program.
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"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(1).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated
thereunder.
"PBGC" means the Pension Benefit Guaranty Corporation.
No Employee Welfare Benefit Plans and Employee Pension Benefit Plans have been
terminated since January 1, 1991. The terminations of all such Employee Pension
Benefit Plans have been approved by the Internal Revenue Service and, in the
case of any defined benefit pension plan, by the PBGC. Neither Seller has
employees resident outside the United States while employed by a Seller. Copies
of all determination letters relating to any Employee Benefit Plans are included
as Exhibit 3.18(b).
3.19 Personal Property List, Etc. Exhibit 3.19(a) lists all of the
tangible personal property and the ownership thereof which is either owned or
used by either Seller except for (i) items having an initial unit cost of
$10,000 or less, (ii) items listed on Exhibit 3.19(c), and (iii) items to be
acquired after the date hereof to the extent the acquisition thereof is not
prohibited under Section V hereof. Except as described in Exhibit 3.19(b), all
tangible personal property owned or used by Sellers is situated at the business
premises of the Sellers and is currently used by one of the Sellers in
connection with its business. Exhibit 3.19(c) lists or describe all tangible
personal property owned by or an interest in which is claimed by any other
person (whether a customer, supplier or other person) for which Sellers are
responsible, together with copies of all agreements relating thereto, and all
such property is in the actual possession of Sellers and is in such physical
condition that upon the return of such property in its present condition to its
owner, Sellers will not be liable in any amount to such owner as a result of
such condition.
3.20 Intellectual Property. The copyrights, patents, invention
disclosures, trademarks, trade names and service marks, whether registered or
common law, and all applications therefor that are pending or in the process of
preparation, and trade secrets, secret processes and other proprietary rights of
every kind and nature, in the United States and in foreign countries (the
"Rights") to the extent directly or indirectly owned, licensed, used, required
for use or controlled in whole or in part by either Seller or any of the
officers, directors, stockholder or other employees of a Seller, listed (or in
the case of trade secrets and secret processes, generally described) in Exhibit
3.20. Exhibit 3.20 also lists all licenses and other agreements allowing a
Seller to use Rights of third parties in the United States or other foreign
countries. Except as set forth in Exhibit 3.20, Seller is the sole and exclusive
owner of the Rights listed in Exhibit 3.20, free and clear of any claims, liens,
licenses, sublicenses, charges or encumbrances and no governmental registration
of any of the Rights has lapsed, expired or been canceled, abandoned, opposed or
the subject of a re-examination request. There have been no claims, and there is
no basis for any claim challenging the scope, validity or
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enforceability of any of the copyrights, patents, trademarks, trade names or
service marks. There are no instances where it has been held, claimed, or
alleged, whether directly or indirectly, and neither Seller or the officers,
directors, stockholder or other employees of a Seller has any knowledge of any
basis upon which a claim may be made, that any of the Rights of a Seller
infringe the Rights of any third party, or that any activity of any third party
infringes upon any of the Rights of a Seller. Each Seller has been and is now
conducting its business in a manner which has not been and is not in violation
of any Right of another and does not require a license or other proprietary
right to so operate its business. The trade secrets, "know-how" and other like
data of Sellers are in such form and of such quality and will be so maintained
so that the Buyer can, following the Closing, provide the services heretofore
provided by the Sellers so that such services meet applicable specifications and
conform with the standards of quality and cost heretofore met by them.
3.21 Compensation, Etc. Exhibit 3.21 sets forth the names, positions
and annual salaries of all officers and other non-hourly rated employees of the
Sellers receiving compensation at an annual rate (including bonuses, commissions
and other compensation) in excess of $25,000, together with the amount of
bonuses and description of agreements or arrangements, both oral and written,
formal and informal, for commissions and other compensation or benefits of any
nature to be paid or provided to any of such persons pursuant to agreement or
custom or present understanding. Except for group policies included in Exhibit
3.13(b), there are no insurance policies on the lives of any of such officers or
such other persons, other than under a Seller's group policies and life
insurance policies covering a stockholder of a Seller, the premiums of which
have been paid or contributed by a Seller.
3.22 Insurance. Exhibit 3.22 contains a full and complete list of all
policies of insurance insuring the real and personal property of the Sellers and
policies insuring the Sellers against risks, and such policies provide adequate
coverage for all risks normally insured against. All of the policies of
insurance described therein (copies of which are to be delivered as part of
Exhibit 3.22) are in full force and effect as stated therein and the premiums
therefor have been paid as they became due and payable.
3.23 EBIT 1998 and 1999. There are no facts, circumstances or
conditions known to the Sellers or any stockholder of Sellers which lead any of
them to believe that the EBIT of the Sellers for calendar year 1999 will be less
than $6.5 million, it being understood that such results are not certain or
guaranteed.
3.24 Authority; Binding Effect. Each of the Sellers has full power and
authority to enter into this Agreement and to consummate the transactions
contemplated herein, and this Agreement has been duly executed and delivered by
each Seller and is a valid and legally binding obligation of each Seller and is
enforceable in accordance with its terms. Each of the Seller's stockholders has
full power and authority to enter into the Stockholder's Guarantee annexed
hereto and the agreements referred to in Sections 7.09 and 7.11 to which each is
signatory. The Stockholder's Guarantee has been duly executed and delivered by
each of them, and upon execution, the agreements referred to in Section 7.09 and
7.11 will have been duly executed and delivered. Each such agreement will be,
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upon execution, the valid and binding obligation of the Sellers and each of the
stockholders in accordance with its terms. Except as described on Exhibit 3.24,
neither the execution of this Agreement nor the consummation of the transactions
contemplated herein will constitute or cause a breach or violation of the
charter, By-laws or other covenants or obligations binding upon either Seller or
affecting any of its properties, or cause a lien or other encumbrance to attach
to any of its properties, or result in the acceleration of or the right to
accelerate any obligation under or the termination of or the right to terminate
any license, franchise, lease, permit, approval or agreement to which a Seller
is a party, or require a consent of any person to prevent any such breach,
default, violation, lien, encumbrance, acceleration, right or termination.
3.25 Approvals. Neither Karen Suss nor Laurence Levine have total
investment assets, voting securities and income producing properties of
$10-million or more within the meaning of ss. 7A of the Clayton Act, 15 U.S.C.
ss. 18A as amended by Section 201 of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, Pub. L. No. 94-435, 90 Stat. 1390, and the rules
promulgated thereunder as set forth at 16 CFR Parts 801-03 (the "HSR Act"),
based upon the assumptions that (i) each such person owns all the assets of
Lexus, valued at book value according to Lexus's last regularly prepared balance
sheet, and (ii) other investments, securities and properties are valued
according to their respective investments therein. No approval of or filing with
any federal, state or local court, authority or administrative agency is
necessary to authorize the execution and delivery of this Agreement by Sellers
or the consummation by Sellers of the transactions contemplated herein.
3.26 Title to Assets. Each of the Sellers has complete and unrestricted
power to sell, assign and deliver to Buyer or its assignee good and unencumbered
marketable title to the Assets, and at the Closing, such title will vest in
Buyer.
3.27 Year 2000 Compliance. To Sellers' Knowledge, the software and
hardware used by each of the Sellers correctly performs without any defects and
without any need for human intervention, reprogramming or correction every
date-related or date-dependent operation, regardless of whether such date falls
before, on or after January 1, 1999, September 9, 1999, January 1, 2000 or any
other date ("Year 2000 Compliant"). Any failure of Sellers' hardware and
software to be Year 2000 Compliant does not create a material risk to the
operation of Sellers' businesses.
IV
REPRESENTATIONS AND WARRANTIES
OF BUYER
-----------------
4.00 Buyer represents and warrants to Sellers as follows:
4.01 Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
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4.02 Corporate. Buyer has full corporate power to enter into this
Agreement and to consummate the transactions contemplated herein, and neither
the execution of this Agreement nor the consummation of the transactions
contemplated herein will constitute or cause a breach or violation of the
charter or By-laws of Buyer or of any covenants or obligations binding upon it
or affecting any of its properties.
4.03 Approvals. No approval of or filing with any federal, state, or
local court, authority or administrative agency is necessary to authorize the
execution of this Agreement or the consummation by Buyer of the transactions
contemplated herein, assuming the accuracy of the Sellers' warranty appearing in
the first sentence of Section 3.25 hereof.
V
COVENANTS
---------
5.01 Covenants Pending Closing. Sellers covenant and agree that after
the date hereof until Closing:
(i) Conduct of Business. Each of the Sellers will carry on its
business in a good and diligent manner consistent with prior practice
in the usual and ordinary course, will not introduce any new method of
management or operation, and will use its best efforts to preserve its
business organization intact and conserve the good will and
relationships of its customers, suppliers and others having business
relations with it and the services of all officers, employees, agents
and representatives.
(ii) Existence and Good Standing. Each of the Sellers will
maintain its corporate existence and good standing in the state of New
York and in each jurisdiction in which it is qualified to do business.
(iii) Compensation Changes. Except with Buyer's prior written
consent or as described in Exhibit 3.07 with respect to normal
increases consistent with past practice, no increase will be made in
the compensation or rate of compensation payable or to become payable
to the employees of either Seller and no new bonus, profit sharing,
retirement, insurance, death, fringe benefit or other extraordinary or
indirect compensation shall accrue, be set aside or be paid for or on
behalf of any of such employees, and no agreement or plan with respect
to the same shall be adopted or committed for.
(iv) New Obligations. Except with Buyer's prior written consent,
Sellers will not waive any material right or cancel any material
contract, debt or claim, or assume or enter into any material contract,
lease, license, obligation, indebtedness, commitment, purchase or sale,
and except in the usual and ordinary course of business, Seller will
not enter into or assume any other contract, lease, license,
obligation, indebtedness, purchase or sale. For purposes of this
Section 5.01, all indebtedness for borrowed money, and commitments or
agreements having a duration in excess of three months (other than
sales contracts with customers
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in the usual and ordinary course of business), are deemed to be
material and not in the usual and ordinary course of business.
(v) Acquisitions and Dispositions. Except with Buyer's prior
written consent, neither Seller will acquire or dispose of any assets
having an initial cost of $5,000 or more or make any material
commitment other than in the ordinary course of business.
(vi) Encumbrances. Except with Buyer's prior written consent,
neither Seller will voluntarily enter into or assume any mortgage,
pledge, conditional sale, security agreement or other title retention
agreement, permit any lien, encumbrance or claim of any kind to attach
to any of its assets, whether now owned or hereafter acquired.
(vii) Access, Etc. Each of the Sellers shall:
(a) maintain and keep in good order, consistent with
past practice, all of its buildings, offices, shops and other
structures, and keep all machinery, tools, equipment, fixtures
and other property in good condition, repair and working
order;
(b) not merge or consolidate with any corporation,
business or other entity or acquire any asset of any other
corporation, business or other person (other than as otherwise
specifically permitted by this Agreement);
(c) not do any act or omit any act or permit any
omission to act, within its control, which will cause a breach
or default in any of its contracts, commitments or
obligations;
(d) from the date hereof on reasonable notice afford
Buyer, its counsel and accountants, full access during normal
business hours throughout the period prior to the Closing to
all of its plants, offices, properties and records including
such access as may be necessary to allow Buyer at its expense
to make an audit or otherwise satisfy itself of the accuracy
of the representations contained in this Agreement and that
the conditions contained in this Agreement have been satisfied
or complied with and Sellers will furnish documents and all
such other information concerning its properties and business
as Buyer may reasonably request; provided, however, that any
investigation or inquiry made by Buyer shall not affect the
representations and warranties contained in this Agreement or
their survival of the Closing.
(viii) Maintain Representations and Warranties. Sellers shall
not take any action or omit to take any action within its reasonable
control to the extent such action or omission might result in any
representation or warranty contained in this Agreement being inaccurate
or incorrect in any material respect on and as of the date of Closing.
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(ix) Non-Disclosure, Etc. Sellers will use all reasonable efforts
to prevent the disclosure of any of the terms or conditions hereof by
either Seller to any person, other than its stockholders, counsel or as
may be required in connection with Sellers' tax planning with respect
hereto, and as long as this Agreement shall remain effective, neither
Seller will negotiate with any other person with respect to the sale of
its business.
(x) Fulfill Conditions. Sellers shall use all reasonable efforts
to cause the conditions contained in Section 7 to be fulfilled at or
prior to the Closing.
5.02 Agreement To Preserve Corporate Opportunity. Each Seller hereby
acknowledges and recognizes the highly competitive nature of the Sellers'
businesses and accordingly agrees that the such Seller will not, during and for
the period commencing with the date hereof and ending on the date which is ten
years after the Closing Date, directly or indirectly, (i) engage in the business
(whether or not for profit) of recruiting for, design, development, sale or
marketing of on-site contract personnel services or personnel placement for the
type of technical personnel or other types of temporary staffing or other
activities engaged in by a Seller (the "Business Activities"), whether such
engagement by a Seller is as a partner, investor, consultant, advisor, agent, or
other participant in another business, in any geographic area in which the
services of either of the Sellers have been performed or marketed, or as a
supplier to any customer with whom either Seller, directly or through any other
entities has done any business, (ii) assist others in engaging in any of the
Business Activities in the manner described in the foregoing clause (i), or
(iii) induce any employee of the Buyer or any of its subsidiaries or affiliated
companies to engage in any activities hereby prohibited to the either Seller or
to terminate employment. Although the Sellers and Buyer consider the
restrictions contained in this Section 5.02 to be reasonable for the purpose of
preserving for Buyer the good will, proprietary rights and going business value
of the Sellers, if a final judicial determination is made by a court having
jurisdiction that the time or territory or any other restriction contained
herein is an unreasonable or otherwise unenforceable restriction against a
Seller, the provisions hereof shall not be rendered void but shall be deemed
amended to apply to such maximum time and territory and to such other extent as
such court may judicially determine to be reasonable. Alternatively, if the
court referred to above finds that any restriction contained in clauses (i)
through (iii) or any remedy provided herein is unenforceable, and such
restriction or remedy cannot be amended so as to make it enforceable, such
finding shall not affect the enforceability of any of the other restrictions
contained herein or the availability of any other remedy. Each Seller
acknowledges and agrees that Buyer's remedy at law for a breach or threatened
breach of any of the provisions of this Section 5.02 would be inadequate and, in
recognition of that fact, in the event of a breach or threatened breach by such
Seller of the provisions of this Section 5.02, it is agreed that, in addition to
its remedy at law, Buyer shall be entitled to, without posting any bond, and the
undersigned Seller agrees not to oppose Buyer's request for, equitable relief in
the form of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy which may then be available.
Nothing herein contained shall be construed as prohibiting Buyer from pursuing
any other remedies available to it for such breach or threatened breach.
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5.03 Sellers' Employees. Sellers will use its best efforts to persuade
all of Sellers' employees and agents as are currently employed or retained by
Sellers to become employees or agents of Buyer or the subsidiary of Buyer to
which its rights have been assigned, provided, however, that Buyer shall have no
obligation to hire any of such employees. However, it is Buyer's intent to offer
regular employment beginning at Closing Date to all employees of Sellers at not
less than their current base salaries and with benefits customary for new
employees of Buyer extended to them. In the case of Sellers' sales personnel
designated by Sellers on Exhibit 5.03, Buyer will enter into agreements with
such persons providing sales incentives no less favorable than those provided by
Sellers; provided that Buyer may change the method of calculating the commission
percentage against amounts actually collected rather than amounts invoiced. The
terms and conditions of such employment are at Buyer's discretion including the
right to discipline and terminate such employees on the same basis as other
employees of Buyer except that in the case of persons offered positions by Buyer
such employees will be entitled to credit for vacation days accrued as of the
Closing Date for service with a Seller. Nothing herein shall be construed to be
a contract of employment as to any of a Seller's employees.
5.04 Receivables. Sellers guarantee that all accounts receivable and
notes receivable ("Receivables") reflected in the Closing Balance Sheet will be
paid after the Closing Date. Any such Receivable which is outstanding at
February 28, 1999, is referred to herein as a "Doubtful Account." With respect
to any Doubtful Account, Buyer may, at its option, concurrent with the final
determination of Net Tangible Assets and 1998 AEBIT, transfer any such Doubtful
Account to Sellers. The Adjustment Payment and, if necessary, the Earnout
Payment for 1998 shall be reduced by the amount of such Doubtful Accounts
transferred to Sellers. In the event the Adjustment Payment and 1998 Earnout
Payment are less than the amount of the Doubtful Accounts, Sellers will promptly
pay to Buyer the amount of such shortfall.
VI
THE SELLERS' CONDITIONS PRECEDENT
---------------------------------
6.00 All of the following shall be conditions precedent to Sellers'
obligation to consummate the transactions contemplated by this Agreement.
6.01 Opinion of Counsel. Sellers shall have been furnished with an
opinion of Buyer's General Counsel, dated as of the Closing, to the effect that:
(i) Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware; and
(ii) this Agreement has been duly authorized, executed and
delivered by Buyer, and constitutes its valid and binding obligation.
6.02 Compliance With Agreement. Buyer shall have complied in all
material respects with all of its obligations under this Agreement.
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6.03 Approvals. The parties hereto will have received all approvals,
orders and exemptions from the appropriate governmental agencies and authorities
as may be necessary to effect the transaction contemplated hereby.
6.04 Representations and Warranties. The representations and warranties
made by Buyer contained in this Agreement or in any written document (including
the Exhibits and schedules referred to herein) delivered to Sellers pursuant
thereto shall be accurate and correct in all material respects on and as of the
date of Closing as if made on and as of that date.
6.05 Covenants. Consent to assignment of material contracts (including
leases) shall have been obtained by the Sellers.
VII
BUYER'S CONDITIONS PRECEDENT
----------------------------
7.00 All of the following shall be conditions precedent to Buyer's
obligations to consummate the transactions contemplated by this Agreement:
7.01 Representations and Warranties. The representations and warranties
made by Sellers contained in this Agreement or in any written document
(including the Exhibits and schedules referred to herein) delivered to Buyer
pursuant thereto shall be accurate and correct in all material respects on and
as of the date of Closing as if made on and as of that date.
7.02 Opinion of Counsel. Buyer shall have been furnished with the
opinion of Solovay Edlin & Eiseman and Herbert Guston, co-counsel to Sellers,
dated as of the Closing and in the form of Schedule I hereto.
7.03 Covenants. Sellers shall have complied in all material respects
with all of their obligations under this Agreement, including, but not limited
to, all of the covenants contained in Section V.
7.04 Litigation. No suit, action, or other proceeding shall be pending
or threatened before any court or governmental agency seeking to restrain,
prohibit or to obtain damages or other relief in connection with this Agreement
or the consummation of the transactions contemplated herein and there shall have
been no investigation or inquiry made or commenced by any governmental agency in
connection with this Agreement or the transactions contemplated hereby.
7.05 Accurate Deliveries. There shall not have been any material error,
misstatement or omission in any Exhibit or other document or schedule delivered
in connection herewith.
7.06 No Adverse Events; Certificates. During the period from the date
hereof to the Closing there shall not have been any adverse effect, either
individually or in the aggregate, on the
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general affairs, business, prospects, properties, financial position, results of
operations or net worth of the Sellers as a result of any casualty or disaster,
accident, labor dispute, exercise of the power of eminent domain or other
governmental act, or any other event or circumstance; the Sellers shall not have
sustained any loss or damage to its properties, whether or not insured, which
affects its ability to conduct its business; and Buyer shall have received a
certificate dated the date of Closing signed by Seller to the foregoing effect
and representing to the further effect that (i) all liabilities of the Sellers
at the Closing which are not reflected in the Financial Statements are only
liabilities incurred since the date of the most recent Financial Statements in
the ordinary and usual course of business, none of which were incurred in
violation or contravention of any provision of this Agreement, and (ii) the
conditions precedent provided in Sections 7.01, 7.03, 7.04, (other than approval
by Sellers' Board of Directors) and 7.05 have been satisfied. The delivery of
such certificate shall in no way diminish or supersede the warranties and
representations of Sellers made in this Agreement.
7.07 Accountant Assurances. Buyer shall receive from the independent
certified public accountants of the Sellers assurances satisfactory to Buyer
that such accountants will provide consents, opinions or such other action as
may be reasonably necessary for Buyer to fulfill financial disclosure and
reporting obligations in the future in connection with a public offering or
otherwise.
7.08 AEBIT for Year Ended June 30, 1998. Buyer shall have received
satisfactory evidence that AEBIT of the Sellers in the 12-month period from July
1, 1997 through June 30, 1998 was no less than $3.7 million.
7.09 Employment Agreements. The employment agreements between (i) Buyer
and Laurence Levine and (ii) Buyer and Karen Suss initialed by the parties to
each agreement for identification shall have been executed and delivered and
become effective.
7.10 Approvals. The parties hereto will have received all approvals,
orders and exemptions from the appropriate governmental agencies and authorities
as may be necessary to effect the transaction contemplated hereby.
7.11 Agreement to Preserve Corporate Opportunity. The Agreements to
Preserve Corporate Opportunity between Buyer and Laurence Levine and Buyer and
Karen Suss initialed by all parties to each agreement for identification, shall
have been executed and delivered and become fully effective.
7.12 Consents. Consent to assignment of material contracts (including
leases) shall have been obtained by the Sellers.
7.13 Board Approval. The transaction shall have been approved by the
Board of Directors of MSX International, Inc..
7.14 Transition Services Agreement. The parties shall have entered into
a Transition Services Agreement on mutually agreeable terms and conditions.
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VIII
EXAMINATION PERIOD AND TERMINATION
----------------------------------
8.01 Buyer Review. At the date hereof Buyer has not yet had an
opportunity to complete its investigation or analysis of the business, assets,
liabilities, properties and affairs of Sellers and the parties acknowledge that
certain of the Exhibits, Schedules, information and other documents to be
delivered pursuant to this Agreement and relating to Sellers' assets,
liabilities, commitments, properties and business have not been delivered.
Sellers shall complete the preparation of all such Exhibits, schedules,
information and documents and use its best efforts to deliver them to Buyer as
soon as possible after the date hereof but not later than October 15, 1998.
Buyer shall have all of the period to the date which is 30 days after the date
of receipt of it of the last of such Exhibits, schedules, information and other
documents, in which to investigate, ascertain and verify, all of the facts,
information and other matters contained in or referenced to therein, and
otherwise to investigate, in any manner which it may choose, the business and
affairs of Seller. If in Buyer's good faith judgment there is any inaccuracy in
any representation or breach of any warranty contained herein, or any failure of
Sellers to perform any of its commitments, covenants or conditions contained in
this Agreement, or if there exists any error, misstatement or omission with
regard to any of the Exhibits, Schedules, information or other documents
referred in herein or if Buyer in its sole judgment is not satisfied with the
results of its investigation or the contents of any of the Exhibits, Schedules,
information or other documents, or with the results of its examination of the
business and condition (financial or otherwise) of the Sellers, Buyer may
terminate this Agreement at any time prior to the end of such period by written
notice to Seller.
8.02 Latest Closing Date. This Agreement may be abandoned or terminated
on or before the Closing by mutual agreement of Buyer and Sellers. If the
Closing hereinafter referred to shall not have taken place on or prior to
November 30, 1998, other than as a result of a breach by either party hereto,
this Agreement shall automatically terminate.
8.03 Termination For Breach. In addition to Buyer's rights provided
elsewhere in this Section VIII, Buyer or Sellers may terminate this Agreement at
any time prior to the Closing by giving the other party written notice thereof,
if and only if:
(i) there is any breach of or failure by the party not
terminating to perform any commitment, covenant and condition under
this Agreement; or
(ii) there exists any material error, misstatement or omission on
the part of the party or parties not terminating which renders an
Exhibit, representation, warranty, document or schedule delivered in
connection herewith misleading to the party terminating this Agreement.
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Such notice shall clearly specify the breach or failure of such notified party
to perform any of its warranties, representations, commitments, covenants and
conditions, or the error, misstatement or omission of the notified party or
parties.
8.04 Waiver of Conditions, etc. By instrument in writing delivered to
the other party Buyer or Sellers may waive any condition precedent, covenant or
condition contained herein for the benefit of the party delivering such waiver,
and upon the exercise of such right of waiver, the transactions shall be closed
in accordance with the terms contained in this Agreement as modified by said
writing.
8.05 Effect of Certain Terminations. In the event this Agreement is
abandoned or terminated as provided in Sections 8.01 or 8.02, this Agreement
shall forthwith become wholly void and of no effect, without liability of any
party to the other.
8.06 Transaction Expenses. Regardless of whether the transactions
contemplated by this Agreement are consummated, each of the parties hereto shall
pay all of the expenses incurred by such party in connection herewith
(including, in the case of Sellers, expenses related to the services of Sellers'
counsel and accountants with respect hereto).
IX
INDEMNIFICATION
---------------
9.01 Indemnification By Sellers Generally. Without limiting any other
rights or remedies available to Buyer, Sellers, jointly and severally, shall
indemnify, defend and hold harmless Buyer, Buyer's subsidiaries and other
affiliates and their respective officers, directors, employees and shareholders
from, against and with respect to any claim, liability, obligation, loss,
damage, assessment, judgment, cost and expense (including, without limitation,
reasonable attorney's and accountant's fees and costs and expenses reasonably
incurred in investigating, preparing, defending against or prosecuting any
litigation or claim, action, suit, proceeding or demand), of any kind or
character, arising out of or in any manner incident, relating or attributable to
(and without giving effect to any tax benefit to the indemnified party) (i) any
inaccuracy in any representation or breach of warranty of Sellers contained in
this Agreement or in any certificate, instrument of transfer or other document
or agreement executed by Sellers or any stockholder of Sellers in connection
with this Agreement or otherwise made or given in connection with this Agreement
if written notice of a claim hereunder is given by Buyer to Sellers within the
time period specified in Section 10.03 hereof, (ii) any failure by Sellers or
any stockholder of Sellers to perform or observe, or to have performed or
observed, in full, any covenant, agreement or condition to be performed or
observed by Sellers under this Agreement or under any certificates or other
documents or agreements executed by Sellers or any stockholder of Seller in
connection with this Agreement, (iii) the allocation of the Purchase Price
between Sellers, (iv) Sellers' handling, storage, use, disposal, delivery for
disposal or generation of hazardous or toxic substances, wastes of any kind or
similar materials at any time prior to the Closing, or the contamination of the
Properties or the Prior Properties with or by pollutants, wastes, or
25
<PAGE> 26
any other substances, (v) the activities of, services rendered, and products
manufactured or sold by, Sellers prior to the Closing, (vi) a claim asserted
against Buyer for a liability or obligation which Buyer has not assumed and
become responsible for under this Agreement, and (vii) any agreements,
contracts, negotiations or other dealings by a Seller or any stockholder of a
Seller with any person concerning the sale of the capital stock or business or
assets of a Sellers.
9.02 Limits on Indemnification by Sellers. Notwithstanding the
provisions of Section 9.01, Buyer shall have no right to make a claim under
clause (i) thereof until the amount of all claims thereunder exceed $100,000,
whereupon Buyer shall be entitled to make all such claims without regard to this
limitation. Buyer shall not have the right to make any claim under Section
9.01(i) after Sellers have paid Buyer an amount equal to $15 million; provided,
however, the foregoing exclusions shall not apply to any claim for
indemnification arising out of or in any manner incident, relating or
attributable to an inaccurate or incorrect representation or warranty which,
when made by Seller was to Sellers' Knowledge inaccurate or incorrect (whether
or not Buyer had actual knowledge of such inaccuracy or incorrectness).
9.03 Right of Setoff for Indemnification by Sellers. Buyer shall have a
right to setoff any amount owed or claimed to be owed to Buyer by any Seller
pursuant to this Agreement against any amount payable or to become payable to
any Seller. In the event that Buyer effects setoff for an indemnity claim which
is later determined to be a claim that should have been satisfied by Buyer,
Buyer will pay interest at the rate of seven percent per annum on amounts
wrongfully withheld from a Seller under this Section 9.03.
9.04 Indemnification Generally by Buyer. Without limiting any other
rights or remedies available to Sellers, Buyer shall indemnify, defend and hold
harmless Sellers and other affiliates and their respective officers, directors,
employees and shareholders from, against and with respect to any claim,
liability, obligation, loss, damage, assessment, judgment, cost and expense
(including, without limitation, reasonable attorney's and accountant's fees and
costs and expenses reasonably incurred in investigating, preparing, defending
against or prosecuting any litigation or claim, action, suit, proceeding or
demand), of any kind or character, arising out of or in any manner incident,
relating or attributable to (and without giving effect to any tax benefit to the
indemnified party) (i) any inaccuracy in any representation or breach of
warranty of Buyer contained in this Agreement or in any certificate, instrument
of transfer or other document or agreement executed by Buyer in connection with
this Agreement or otherwise made or given in connection with this Agreement if
written notice of a claim hereunder is given by Sellers to Buyer within the time
period specified in Section 10.03 hereof, (ii) any failure by Buyer to perform
or observe, or to have performed or observed, in full, any covenant, agreement
or condition to be performed or observed by Sellers under this Agreement or
under any certificates or other documents or agreements executed by Buyer in
connection with this Agreement, (iii) a claim asserted against a Seller for a
liability or obligation which Buyer has assumed and become responsible for under
this Agreement, and (iv) the activities of, services rendered, and products
manufactured or sold by, the business acquired by Buyer hereunder after the
Closing.
26
<PAGE> 27
X
GENERAL
-------
10.01 Brokers. Sellers represent and warrant to Buyer that the services
of a broker or finder other than Acquest International, L.P. ("Acquest") have
not been used by Sellers in connection with any of the matters pertaining to
this transaction and that except as provided herein with respect to Acquest, no
broker's or finder's fee will become payable by Buyer by reason of the execution
of this Agreement or the consummation of the transactions contemplated herein
and arising out of the acts or omissions of Sellers. Except as provided herein
with respect to Acquest, Sellers will hold harmless and indemnify Buyer and
Buyer's officers, directors, other employees and shareholders from and against
any claim for broker's, finder's or financial advisor's fees, including any cost
or expense incurred in connection with the defense of any suit claiming such
fees, or in any other manner pertaining to claims for such fees, which may
become payable by reason of the acts or omissions of Sellers. Buyer represents
and warrants to Sellers that the services of a broker or finder other than
Acquest have not been used by Buyer in connection with any of the matters
pertaining to this transaction and that except as provided herein with respect
to Acquest, no broker's or finder's fee will become payable by Sellers by reason
of the execution of this Agreement or the consummation of the transactions
contemplated herein and arising out of the acts or omissions of Buyer. Except as
provided herein with respect to Acquest, Buyer shall hold harmless and indemnify
Sellers from and against any claim for broker's, finder's or financial advisor's
fees, including any cost or expense incurred in connection with the defense of
any suit claiming such fees, or in any other manner pertaining to claims for
such fees, which may become payable by Sellers solely by reason of the acts or
omissions of Buyer and not the acts or omissions of Sellers. Buyer will pay
Acquest at Closing the sum of $500,000 with respect to fees due Acquest from
Buyer or Sellers on account of the transactions contemplated by this Agreement.
Sellers shall pay any other amounts which may come due to Acquest on account of
the transactions contemplated by this Agreement.
10.02 Governing Law. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State of
Michigan.
10.03 Survival. The representations, warranties and other agreements
herein contained other than those contained in Section 3.23 shall survive the
Closing, and notwithstanding any investigation by a party hereto, shall continue
in full force and effect after the Closing subject, however, to the following
limitations upon survival of the representations and warranties: (a) the
representations and warranties of Sellers contained in Sections 3.01, 3.02,
3.10, 3.12 (as to leasehold title), 3.24, and 3.26 shall survive without limit;
(b) the representations and warranties of Sellers with respect to environmental
matters contained in Section 3.12 shall expire on the eighth anniversary of the
Closing; (c) the representations and warranties of Sellers contained in Section
3.04, 3.14, 3.16, 3.17, 3.20 and 3.25 shall expire 90 days after the expiration
of the relevant statute of limitations; (d) the representations and warranties
of Sellers contained in Section 3.27 shall expire on the third anniversary of
the Closing Date; (e) all other representations and warranties of Sellers shall
expire eighteen months after the Closing; and (f) the representations and
warranties of Buyer shall survive
27
<PAGE> 28
without limit except that the representations and warranties contained in
Section 4.03 shall expire 90 days after the expiration of the relevant statute
of limitations.
10.04 Entire Agreement; Waiver. Except for agreements referred to in
Sections 7.09 and 7.11 and the Confidentiality Agreement between the parties
dated June 1, 1998, this Agreement (including the Schedule and Exhibits referred
to herein) constitutes the entire agreement among the parties pertaining to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties, and there are no warranties, representations or other agreements
between the parties in connection with the subject matter hereof except as set
forth specifically herein. No amendment, supplement, modification, waiver or
termination of this Agreement shall be implied or be binding (including, without
limitation, any alleged waiver based on a party's knowledge of any inaccuracy in
any representation or warranty contained herein) unless in writing and signed by
the party against which such amendment, supplement, modification, waiver or
termination is asserted. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly therein provided.
10.05 Assignment. All of the terms and provisions of this Agreement by
or for the benefit of the parties shall be binding upon and inure to the benefit
of their successors, assigns, heirs and personal representatives provided that
the rights and obligations provided by this Agreement shall not be assignable by
any party, other than by Buyer to a wholly-owned subsidiary or affiliate or a
successor to its business.
10.06 No Third Party Rights. Except as expressly provided herein,
nothing herein is intended to confer upon any person, other than the parties and
their successors, any rights or remedies under or by reason of this Agreement.
10.07 Counsel Approval; Exhibits, etc. All instruments or documents to
be delivered by any party to this Agreement shall be in form and content
reasonably satisfactory to the counsel for the party receiving such instrument
or document. Each Exhibit shall be identified by a cover page and initialed on
each page on behalf of Sellers by an officer of or counsel for Sellers. Buyer's
authorized representative (for purposes of identification and to acknowledge
receipt only) shall likewise initial each page thereof. Each Exhibit shall be
deemed an integral part of this Agreement.
10.08 Record Retention. Buyer and Sellers each agree with the other
that the original sales and accounting records of Sellers to be conveyed to
Buyer pursuant to the terms hereof shall be retained by Buyer within the United
States for a period of five years after the date hereof and that Buyer shall
afford to Sellers reasonable access thereto as may be necessary for purposes of
preparing tax returns, financial statements or for such other purposes as such
other party may reasonably request.
28
<PAGE> 29
10.09 Bulk Sales Law. Sellers have requested Buyer to waive the
requirements, if any, of all applicable bulk sales laws, and Buyer agrees to
this request. Sellers agree, jointly and severally, to indemnify and hold
harmless Buyer against any and all claims made by creditors of Sellers asserted
against Buyer (but only to the extent not expressly to be assumed or paid by
Buyer hereunder).
10.10 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
10.11 Notices. All notices, requests, demands and other communications
hereunder shall be in writing, shall be sufficient to preserve the rights of the
party giving notice and shall be deemed to have been duly given (except as may
otherwise be specifically provided herein to the contrary) if delivered by hand
and receipted for by the party to whom said notice or other communication shall
have been directed or mailed by certified or registered mail with postage
prepaid or shipped by express courier service, charges prepaid by shipper
addressed as follows (or to such other address as may be designated by notice
given pursuant hereto):
(a) If to Buyer to
MSX International, Inc.
275 Rex Boulevard
Auburn Hills, MI 48326
Attention: General Counsel
(b) If to Sellers to
260 W. 44th Street
Fourth Floor
New York, NY 10036
Attention: Ms. Karen Suss and Mr. Laurence
Levine
With a copy to:
Solovay Edlin & Eiseman, P.C.
845 Third Avenue
New York, New York 10022
Attention: Michael B. Solovay, Esq.
29
<PAGE> 30
and Herbert M. Guston, Esq.
55 Harristown Road
Glen Rock, New Jersey 07452
10.12 Knowledge. The term "Knowledge" (which applies only to a Seller)
means that either Seller has in its possession a writing with the information in
question or that the information, after due investigation, is known by one of
the following individuals: Laurence Levine, Karen Suss, JoAnne Diehl, Leon
Levitis or Julie Levine.
10.13 Further Assurances. At any time or from time to time after the
Closing, upon request and without further consideration, the Buyer and Sellers
shall execute and deliver to one another, such instruments of sale, transfer,
conveyance, assignment, assumption and confirmation, provide such materials and
information and take such other actions as the requesting party may reasonably
deem necessary or desirable, including the obtaining of all necessary consents
of third parties, in order to more effectively fulfill their obligations under
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
WITNESSES: MSX INTERNATIONAL ENGINEERING
SERVICES, INC.
- ------------------------- By:
-----------------------------
Title:
--------------------------
LEXUS TEMPORARIES, INC.
- ------------------------- By:
-----------------------------
Title:
--------------------------
LEXSTRA INTERNATIONAL, INC.
- ------------------------- By:
-----------------------------
Title:
--------------------------
30
<PAGE> 31
STOCKHOLDERS' GUARANTY
The undersigned stockholders of Lexstra International, Inc. or Lexus
Temporaries, Inc., New York corporations (the "Companies"), as consideration for
the agreement of MSX International Engineering Services, Inc., a Delaware
corporation ("Buyer"), to purchase from the Companies substantially all of the
business and assets of the Companies, agree as follows:
1. Each of the undersigned consents to all of the terms and conditions
of the Asset Purchase Agreement between the Buyer and the Companies of even date
(the "Asset Purchase Agreement"), and the transactions contemplated thereby,
and, jointly and severally, hereby unconditionally guarantees the performance by
each of the Companies of its obligations under the Asset Purchase Agreement.
Laurence Levine and Karen Suss each agree to execute and deliver to Buyer at the
Closing the Employment Agreement and the Agreement to Preserve Corporate
Opportunity referred to in Sections 7.09 and 7.11 of the Asset Purchase
Agreement to which each is to be a party.
2. Each of the undersigned, jointly and severally, shall indemnify,
defend and hold harmless Buyer and Buyer's respective officers, directors,
employees and shareholders, to the same extent as the Companies have so agreed
in Section 9 of the Asset Purchase Agreement.
3. The undersigned hereby waive notice of acceptance of this guaranty,
presentment and demand for payment, protest or other notice of any kind, and any
requirement of diligence or promptness on the part of Buyer in the enforcement
of Buyer's rights under the provisions of the Asset Purchase Agreement. No act
or omission of any kind on Buyer's part shall in any event affect or impair this
guaranty, nor shall the same be affected by any change in or loss of legal
status by Buyer or by the Companies.
4. The obligations of the undersigned hereunder shall be absolute and
unconditional under any and all circumstances and shall not be affected by any
action taken under the Asset Purchase Agreement in the exercise of any right or
power therein conferred, or by any failure or omission to enforce any right
conferred thereby, or by the exchange, release, surrender and/or other disposal
of any collateral security which is now or may hereafter be held by Buyer in
connection with the Asset Purchase Agreement, or by any extension or renewal of
the obligations under the Asset Purchase Agreement in whole or in part, or by
any modification, alteration of or amendment to the Asset Purchase Agreement or
by any other circumstance whatsoever (with or without notice to or knowledge of
the undersigned) which may or might in any manner or to any extent vary the
risks of the undersigned or might otherwise constitute a legal or equitable
discharge of surety or guarantor.
5. The undersigned further agree that this Guaranty shall continue to
be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any obligation hereby guaranteed is rescinded or must
otherwise be restored or returned by Buyer upon the insolvency,
<PAGE> 32
bankruptcy or reorganization of one of the Companies or otherwise, all as though
such payment had not been made.
6. The Guarantors hereby agree that this is a continuing Guaranty,
which shall remain in full force and effect until written notice shall have been
received from Buyer that all the Sellers' obligations under the Asset Purchase
Agreement and any and all expenses which may have been incurred by Buyer in
collecting any or all of such obligations or in enforcing any rights hereunder
have been paid in full. This Guaranty shall be binding upon the undersigned,
shall inure to the benefit of and be enforceable by the Buyer's successors and
assigns, shall be deemed to have been made under and shall be governed by and
construed in accordance with the laws of the State of Michigan, and shall not be
waived, altered, modified or amended as to any of its terms or provisions except
in writing duly signed by Buyer.
Executed on , 1998.
------------------------
-------------------------
Karen Suss
-------------------------
Laurence Levine
<PAGE> 33
Schedule I
Text of Counsel Opinion
-----------------------
(Note: Capitalized words have their respective
meanings assigned to them in the Asset
Purchase Agreement)
1. Each Seller is a corporation duly incorporated under the laws of the
State of New York, and has full power and authority to own its properties and to
carry on its business as now conducted. Each Seller is in good standing and duly
qualified to conduct business as a foreign corporation in each jurisdiction, as
set forth on Exhibit 3.01 to the Agreement, in which the ownership or leasing of
its properties or the conduct of its business requires such qualification.
2. To the best knowledge of such counsel, there is not now pending or
threatened any investigation, judicial, governmental or administrative
proceeding or other litigation of any kind or nature to which a Seller is or may
be a party except as disclosed in the Exhibits to the Agreement.
3. Neither the execution of the Agreement by Sellers nor the
consummation of the transactions contemplated therein will constitute or cause a
breach or violation of the charter or by-laws of Sellers, or to the best of such
counsel's knowledge, any covenants or obligations to which either of the Sellers
is a party or by which it is bound or to which its properties are subject.
4. The Agreement has been duly executed and delivered by Sellers, and
is the valid and legally binding agreement of each of them in accordance with
its terms.
5. No approval of or filing with any federal, state or local court,
authority or administrative agency, which has not been obtained or made, is
necessary to authorize the execution and delivery of the Agreement by Sellers or
the consummation by Sellers of the transactions contemplated by the Agreement.
6. Each of the agreements referred to in Sections 7.09 and 7.11 of the
Agreement and the Stockholder's Guarantee annexed to the Agreement has been duly
executed and delivered by the parties signatory thereto, and constitutes a valid
and legally binding obligation of such parties.
7. To the best of such counsel's knowledge, each Seller has complete
and unrestricted power to sell, assign and deliver to Buyer or its assignee the
Assets.
<PAGE> 1
EXHIBIT 12
MSX INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
PREDECESSOR FISCAL
-------------------------------------------------------- YEAR
YEAR ENDED DECEMBER 31 ENDED
-------------------------------------------------------- DECEMBER 28,
1993 1994 1995 1996 1997
----------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and
fixed charges:
Income from continuing operations
before income taxes $ 6,997 $ 8,540 $ 10,240 $ 6,620 $ (2,748)
Add interest on indebtedness, net 308 920 1,470 1,310 12,400
Add amortization of debt expense - - - - -
Add estimated interest factor
for rentals 2,054 1,800 2,733 1,800 5,867
----------- ------------ ----------- ---------- ------------
Earnings before income taxes and
fixed charges $ 9,359 $ 11,260 $ 14,443 $ 9,730 $ 15,519
=========== ============ =========== ========== ============
Fixed charges:
Interest on indebtedness $ 308 $ 920 $ 1,470 $ 1,310 $ 12,400
Amortization of debt expense - - - - -
Estimated interest factor for rentals 2,054 1,800 2,733 1,800 5,867
----------- ------------ ----------- ---------- ------------
$ 2,362 $ 2,720 $ 4,203 $ 3,110 $ 18,267
=========== ============ =========== ========== ============
Ratio of earnings to fixed charges 4.0 4.1 3.4 3.1 (a)
<CAPTION>
FISCAL
NINE MONTHS
ENDED
SEPTEMBER 28,
1998
--------------
<S> <C>
Earnings before income taxes and
fixed charges:
Income from continuing operations
before income taxes $ 3,249
Add interest on indebtedness, net 12,666
Add amortization of debt expense 310
Add estimated interest factor
for rentals 4,528
--------------
Earnings before income taxes and
fixed charges $ 20,753
--------------
Fixed charges:
Interest on indebtedness $ 12,666
Amortization of debt expense 310
Estimated interest factor for rentals 4,528
--------------
$ 17,504
--------------
Ratio of earnings to fixed charges 1.2
</TABLE>
(a) Earnings were insufficient to cover fixed charges by $2.7 million for the
fiscal year ended December 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
27, 1998 MSX INTERNATIONAL, INC. 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> SEP-27-1998
<CASH> 3,949
<SECURITIES> 0
<RECEIVABLES> 164,445
<ALLOWANCES> 0
<INVENTORY> 1,681
<CURRENT-ASSETS> 181,856
<PP&E> 100,502
<DEPRECIATION> (68,673)
<TOTAL-ASSETS> 275,057
<CURRENT-LIABILITIES> 124,423
<BONDS> 134,850
36,000
0
<COMMON> 1
<OTHER-SE> (24,409)
<TOTAL-LIABILITY-AND-EQUITY> 275,057
<SALES> 783,749
<TOTAL-REVENUES> 783,749
<CGS> 723,722
<TOTAL-COSTS> 723,722
<OTHER-EXPENSES> 43,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,976
<INCOME-PRETAX> 3,249
<INCOME-TAX> 1,728
<INCOME-CONTINUING> 3,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,521
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
