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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 333-58675
KEY COMPONENTS, LLC
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3425424
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------ ----------------------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
10 1/2% Senior Notes due 2008
Commission File Number: 333-58675
KEY COMPONENTS FINANCE CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 14-180594
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 10 1/2%
Senior Notes due 20081
Indicate by check mark whether 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /x/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K. / /
At March 29, 1999, the membership interests in Key Components, LLC were
owned by Key Components, Inc.and Keyhold, Inc., both of which are privately held
New York corporations. All of the shares of common stock of Key Components
Finance Corp. were owned by Key Components, LLC.
Documents Incorporated by Reference: None
1
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PART I
Key Components LLC ("KCLLC"), a Delaware limited liability corporation
is a parent holding company for its wholly owned subsidiaries, including Key
Components Finance Corp. ("Finance Corp."). KCLLC, together with such
subsidiaries, including Finance Corp., are collectively referred to herein as
the "Company." Key Components, Inc. ("KCI"), a Delaware corporation, holds the
majority member interest in KCLLC. KCI has no material assets other than its
interest in KCLLC and has no operations. Accordingly, any transactions of KCI or
obligations related to KCI are reflected in the consolidated financials
statements of the Company and are reflected in the disclosures in this Form
10-K.
Item 1. Business
KCLLC, a Delaware limited liability corporation organized on May 15, 1998,
maintains its principal office at 200 White Plains Road, Tarrytown, New
York 10591 and its telephone number is (914) 332-8088.
The Company is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where KCI believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company conducts its
operations through its two business segments, mechanical engineered components
("MEC") and electrical components ("EC"). The Company's mechanical engineered
components products consist primarily of medium security lock products and
accessories, flexible shaft and remote valve control components and
turbo-charger actuators and are manufactured by its subsidiaries Hudson Lock,
LLC ("Hudson"), ESP Lock Products, LLC ("ESP"), B.W. Elliott Manufacturing Co.,
LLC ("BWE") and Gits Manufacturing, LLC ("Gits"). The Company's electrical
components products include specialty electrical components including, but not
limited to, weather- and corrosion-resistant wiring devices and battery chargers
and high-voltage utility switches and are manufactured by its subsidiaries
Marine Industries, LLC ("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner
Electric, LLC ("Turner"). No customer accounted for more than 10% of sales of
the Company or of either of the Company's two business segments.
KCLLC has two additional wholly owned subsidiairies, Heart Interface Corporation
("Heart") and Crusing Equipment Company ("Cruising"), and an approximately 47%
interest in a Dutch enterprise, Mastervolt B.V. ("Mastervolt"), all of which are
in the business of the manufacture and sale of power inverters and related
instrumentation. As of December 31, 1999, the Company had determined to sell its
interests in all three of these entities and have classified the net assets of
and operations related to these entities as discontinued (see Note 2 to the
consolidated financial statements included elsewhere in this Form 10-K).
Acquisition History
In 1992, the Company's management began an acquisition program to acquire small
to medium size manufacturers of essential niche components for use in various
OEM customer products. The 1992 acquisition of BWE from certain individual
shareholders, including the current
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President of BWE, George M. Scherer, marked the first of such acquisitions. In
1993, the Company acquired the flexible shaft division of Stow Manufacturing
Company, Inc., as a consolidation opportunity for BWE. On May 15, 1997, the
Company acquired all of the issued and outstanding capital stock of Hudson from
Jordan Industries, Inc. for a cash purchase price of $39.1 million and assumed
liabilities of $1.2 million. The acquisition of Hudson marked the Company's
entrance into the medium-security lock business. Such acquisition was financed
through the proceeds of certain indebtedness, which was refinanced
during fiscal 1998. On December 10, 1997, the Company acquired all of the issued
and outstanding capital stock of ESP from certain individual shareholders,
including the current President of ESP, August M. Boucher, as a consolidation
opportunity for Hudson. The ESP acquisition price consisted of $16.3 million of
cash and $10.4 million of assumed liabilities, and such acquisition was financed
through additional borrowings under the Company's then existing loan agreement.
Effective January 19, 1999, KCLLC, acquired all of the issued and outstanding
securities of Valley Forge Corporation ("VFC") for approximately $84.0 million
(see Note 2 to the consolidated financial statements contained elsewhere in this
Form 10-K). The acquisition of VFC enabled the company to complement its MEC
business and enter into the manufacture and sale of electrical components.
The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $144.1 million for fiscal 1999.
The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies, but there are no written agreements regarding any such
acquisitions existing as of the date hereof.
Mechanical Engineered Components
The MEC business features three major product lines: (i) flexible shafts for the
transmission of rotary power, (ii) turbocharger wastegate actuators, and (iii)
medium-security locks and security components.
Flexible Shafts
The Company is the leading domestic designer and manufacturer of flexible shaft
products and assemblies. Flexible shafting is constructed utilizing unique wire
winding technology. Flexible shaft assemblies are custom designed for the
transmission of rotary power at low torque levels (less than ten horsepower),
and can be incorporated into almost any machine, product, or device replacing
conventional power transmission components such as rigid shafts, gearboxes,
universal joints, and couplings. Flexible shafts are integrally designed into
the OEM's final product to offer benefits, such as less weight, fewer component
parts, less assembly time, and greater freedom in design, resulting in a lower
cost to manufacture the OEM's final product. The flexible shaft assemblies are
critical components utilized in weed trimmers, concrete vibrators, lawn
tractors, aircraft engines and wings, plant processing equipment, large vessels
such as Navy ships, nuclear power plants, and many other applications in a
variety of industries. The potential applications for flexible shafting are
limited only by the Company's ability to develop new
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solutions to integrate flexible shafts into new OEM designs or to displace
conventional power transmission products in existing applications.
The Company's flexible shaft products serve multiple markets including lawn and
garden market where the company produces products for weed trimmers, lawn
tractors, and turf and ground equipment for John Deere, Wacker, and Poulan Weed
Eater, among others, the aerospace industry where the products and assemblies
are utilized in flap drive systems for regional jets and commuter aircraft,
thrust reverser and sync-lock systems for large commercial aircraft, and other
applications. Additional applications of the Company's products include concrete
vibrators and other end uses for the construction industry. Customers are
primarily OEM's and include Wacker, L.B. Equipment and Racine. In the maritime
industry, the Company's products are used in valve control and flexible shaft
systems for major shipyards in the construction and upgrading of U.S. Navy and
Coast Guard ships. Shipyard customers include Bath Iron Works, United Defense,
and Newport News Shipyard, among others.
Actuators
The Company is a primary outsource supplier of actuation devices and related
componentry to the domestic market for turbocharged diesel engines. Wastegate
actuators are an essential component of a diesel engine turbocharged system
which, through the use of flow valve controls, increases engine power,
efficiency, and economy while reducing emissions. As the primary supplier to
nearly every major OEM turbocharger manufacturer, including Honeywell, Cummins
Engine, and Borg Warner, the Company's products can be found on a variety of
truck, pick-up, and heavy-duty diesel-operated platforms. End-use customers for
the Company's products include blue-chip truck and vehicle manufacturers such as
Ford, DaimlerChrysler, Mack, Nissan, and Caterpillar. The Company holds multiple
patents and is very active in the development of new products to expand the
Company's product line, including related emission control products.
Medium-Security Locks and Locking Systems
The Company competes in the $200 million medium-security segment for cylindrical
lock applications. Medium-security locks are used in applications that involve
non-life-threatening situations or when articles of low to moderate financial
value are being secured. The Company produces highly engineered, custom, and
specialty medium-security locks and locking systems to meet OEM customers'
specifications for use in office furniture, point of sale terminals, bank bags,
post office boxes, storage lockers, and other applications. The Company's lock
products are typically small and low-cost but are precision-engineered and
custom-designed critical components of a larger, more expensive end product. The
Company also produces locking systems, which provide a safety feature used to
prevent multiple drawers from being opened simultaneously in filing cabinets and
desks. The Company is a sole or primary source for locks to leading OEMs
including Herman Miller, Knoll, Haworth, Hon, Block, IBM, NCR and others.
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Electrical Components
The Company's EC business features two major product lines: (i) specialty
electrical components ("SPEC") and (ii) electric utility components.
Specialty Electrical Components
The Company supplies the recreational and industrial markets with products
for both OEM customers and the after-market retail customers. The Company's core
market for SPEC products are in the recreation industry where the Company
commands a strong market position. SPEC products include; (i) weather- and
corrosion-resistant wiring devices, such as ship-to-shore electrical connectors
for marine and vehicle-to-outlet connectors for recreational vehicle
applications; (ii) onboard "potted" (i.e., completely insulated) battery
chargers for outdoor applications including bass boat and other marine
applications; and (iii) various accessory products such as plugs, receptacles,
electrical switches, solar ventilation products, and boat accessories such as
horns, windshield wiper systems, lighting products, and teak accessories. The
SPEC product line enjoys a dominant market position in its core market where the
Company's brands are highly regarded by both OEM and aftermarket customers. The
Company's wiring devices and components are designed to withstand hostile
weather and corrosive environments, while remaining easy to install in less than
ideal conditions.
The Company's SPEC product line, which was acquired during 1999 as part of the
acquisition of VFC, continues to experience strong growth in industrial markets
since these products began to be targeted to the industrial marketplace
approximately five years ago. The primary product offerings include: (i) onboard
"potted" battery chargers for industrial and healthcare applications such as
fork and "scissor" lifts, personal mobility carts, and electric wheelchairs; and
(ii) specialty wiring devices designed for industrial applications where
protection from water, chemicals, dust, or other elements is required. Growth in
this market has resulted from the development of customized products for
applications such as outdoor power generators, movie and theatrical production,
and semiconductor equipment manufacturing.
Within the SPEC market, the Company's core market niches are the recreational
and industrial markets, where the Company sells to both OEM customers and
after-market retail customers under internationally recognized brand names such
as Marinco, Guest, AFI, Nicro, Park Power, and various private labels. In the
recreational marine market, where the Company sells the entire range of its
product offerings, The Company specifically targets the blue water/leisure
boating and inland fishing/bass boat market segments. Customers include OEMs,
such as Bayliner, and Sea Ray, and after-market distributors, such as West
Marine, Boat America, Bass Pro and Boater's World. Customers in the industrial
market include Pride Healthcare, Devilbiss, Coleman and LAM Research. The
Company has distinguished itself by providing complete and readily accessible
customer service and by its ability to customize products for new applications
in existing markets.
Electric Utility Components
The Company dominates the design and manufacture of high-voltage switchgear for
electric utilities in the power transmission segment of the electric utility
industry. The smaller size of
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this segment, relative to the distribution and substation segments, has enabled
the Company to secure its position over time through superior quality and
service while creating high barriers to entry through specialization,
reputation, and investments in machinery and equipment. Significant customers
include TVA, Ameren, Illinova, Alabama Power, and Pacific Gas and Electric. The
EC business switchgear products consist primarily of air break switches, load
break interrupters, and accessory equipment. Air break switches are used for
sectionalizing and routing power from one point to another. Load break
interrupters allow the sectionalizing and routing of power under full load
conditions. Accessory equipment enables the utility operator to program
parameters and related functions that will automatically sectionalize and switch
power flow in the event of a fault. Once switched, the faulted line can be
repaired, re-energized, and returned to service with minimal downtime or loss of
service revenue. Consistent with the Company's systems approach, electric
utility components and accessories are sold together in all-in-one packages.
Sales and Marketing
The Company employs both salaried and commission-based sales personnel, as well
as independent sales representatives, to facilitate the marketing and sales of
its products. The Company's sales and marketing teams have adopted an integrated
approach to product development, marketing and sales. They seek to work closely
with the Company's engineers to address customers' specific design requirements
and the hurdles associated therewith, as well as potential product
profitability. In addition, the sales team is responsible for keeping the
Company's engineering, manufacturing and management personnel advised of
possible future trends and requirements of customers. The Company's sales and
marketing personnel also focus on bringing customers a level of personal service
the Company believes to be superior to its competitors.
Raw Materials and Suppliers
The primary raw materials used by the Company are copper, brass, zinc, stainless
steel, steel wire and rubber, all of which are commodity items, readily
available from a wide range of sources. The Company has enjoyed and continues to
enjoy good relations with its suppliers and has not suffered any material
interruptions in the delivery of its required materials. Additionally, the
Company is not dependent on any single supplier. In the event a supply
arrangement is terminated, the Company would be forced to look elsewhere for its
raw materials. Management believes these can be obtained with minimal, if any,
business interruption. However, the prices for such materials can fluctuate, and
such fluctuations can be material. A significant increase in raw material prices
could adversely affect the results of operations of the Company.
Competition
While the Company faces competition in each of its business segments, management
believes that its products are able to achieve a significant share of their
related market niches due to a variety of factors. The Company's strategy
attempts to differentiate its products from its competitors by providing
unmatched product quality, customer service, superior design capabilities and
proprietary, vertically integrated manufacturing processes. The Company's
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strategy of providing custom engineered solutions and high level of service to
its customer base has protected and strengthened its market share in the markets
that it serves. Although it is possible other competitors may seek to serve
these markets, the Company believes significant barriers to entry exist,
including the unwillingness of OEMs to expand their vendor relationships for the
same products purchased, the availability of customized processes which the
Company possesses and enables the Company to service its customers needs on an
efficient basis and the capital investment required to purchase the equipment
needed to manufacture products of similar quality.
Environmental and Safety Regulations
The Company's operations are subject to federal, state and local environmental
laws and regulations, which impose limitations on the discharge of pollutants
into the air and water and establish standards for treatment, storage and
disposal of solid and hazardous wastes. The Company believes that it is in
substantial compliance with applicable environmental laws and regulations.
Employees
As of December 31, 1999, the Company employed 1,176 persons on a full-time
basis. Of these employees, 801 are employed in the MEC business and 369 are
employed in the EC business. The Company's corporate office had 6 employees as
of December 31, 1999. Heart and Cruising employed 160 employees on a full-time
basis as of December 31, 1999. Only one of the Company's subsidiaries has a
collective bargaining agreement, which covered 72 employees as of December 31,
1999. In addition, neither the Company nor any of its subsidiaries has ever had
a work stoppage and each of the KCLLC and its subsidiaries considers their
relationship with their employees to be satisfactory.
Item 2. Properties
At December 31, 1999 the Company's principal properties consisted of:
<TABLE>
<CAPTION>
Square
Facility Principal Manufacturing Location Footage Owned/Leased
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<S> <C> <C> <C> <C>
KCLLC Corporate office Tarrytown, NY 3,000 Leased
Mechanical Engineered
Components:
BWE Flexible shaft products Binghamton, NY 250,000 Owned
Gits Actuators Creston, Iowa 60,400 Owned
Gits Actuators Chonburi, Thailand 17,200 Leased
Hudson Lock products Hudson, MA 218,000 Leased
ESP Lock products Leominster, MA 55,000 Leased
Electrical Engineered
Components:
Specialty electrical
Marinco components Napa, CA 77,000 Leased
Specialty electrical
Guest components Meriden, CT 33,000 Owned
Turner Utility Fairview Heights, IL 52,000 Owned
Turner Utility Milstadt, IL 28,000 Leased
</TABLE>
Item 3. Legal Proceedings
There are no pending material legal proceedings to which the Company or its
properties is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year ended
December 31, 1999.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
KCLLC's membership interests are not publicly traded.
Item 6. Selected Financial Data
The following selected financial data has been derived from the consolidated
financial statements of the Company included elsewhere in this Form 10-K. For
the two fiscal years ended December 31, 1996, the financial data set forth
represents the results and the balance sheet data of BWE (predecessor to the
Company). The financial data set forth includes the results of operations of
Hudson, ESP, G&H and the subsidiaries acquired as part of the acquisition of VFC
(see Note 2 to the consolidated financial statements) from their respective
acquisition dates. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the Company's consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
Year ended December 31,
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1999 1998 1997 1996 1995
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(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue $144,125 $61,862 $27,318 $13,449 $13,185
Income from operations 21,471 11,953 5,115 447 2,372
Income from continuing operations 4,843 4,619 1,250 490 1,247
Net income (a)(b)(c) 4,815 3 1,250 490 1,247
Total assets 180,558 93,144 79,757 11,454 10,709
Long term obligations (including
current maturities) (d)(e) 149,807 81,278 66,856 3,428 3,608
</TABLE>
(a) Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as
a subchapter S corporation, which caused the stockholders of their then
parent company, KCI, to be personally liable for the taxes due on the
income of the Company. Through August 31, 1999, VFC was a C corporation
and was responsible for paying taxes on its income. Effective August 31,
1999, VFC was merged into KCLLC and most of VFC's subsidiaries, as well as
BWE, Hudson and ESP, were converted to limited liability company ("LLC")
status. Corporations which elect subchapter S corporation or LLC status
are no longer liable for the majority of taxes due on their income since
the shareholders then become personally liable for most taxes on the
income of the Company. Accordingly, subsequent to May 31, 1997 through
December 31, 1998, the provision for income taxes includes only those
taxes applicable to certain states.
For the year ended December 31, 1999, the Company's provision for income
taxes relates primarily to VFC's consolidated taxable income (as a C
corporation) and the taxable income of the subsidiaries not converted to
LLC status.
(b) Effective January 1, 1996, BWE changed the composition of costs included
in inventory. Accordingly, BWE recorded an adjustment to inventory cost at
January 1, 1997 as the cumulative effect of a change in accounting
principle. Had BWE applied this new accounting principle in the
year ended December
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31, 1995, the Company's income before income taxes and net income would
not have been materially affected.
(c) Net income for the year ended December 31, 1998 reflects an extraordinary
loss on early extinguishment of debt of approximately $4.6 million.
(d) Does not include approximately $5.9 million related to accrued stock
appreciation rights as of December 31, 1999.
(e) Includes approximately $13.1 million for redeemable member's equity as of
December 31, 1999.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
KCLLC is a parent holding company of wholly and majority owned subsidiaries.
KCLLC was formed on April 1, 1998 to facilitate an offering of senior notes.
Upon its formation, KCLLC became the parent holding company of the wholly-owned
subsidiaries of KCI, and KCI then held the sole membership interest in KCLLC at
that time. The consolidated financial statements included elsewhere in this Form
10-K are prepared as though KCLLC was formed on January 1, 1997. KCI's results
of operations from January 1, 1997 to April 1, 1998 are included in KCLLC's
financial statements. KCI holds no other assets other than its investment in
KCLLC and has no operations. As a result, all transactions of or obligations
related to KCI are reflected in the consolidated financial statements of KCLLC
and its subsidiaries. Through its operating subsidiaries, the Company is a
leading manufacturer of custom-engineered essential componentry for application
in a diverse array of end-use products. The Company targets original equipment
manufacturer ("OEM") markets where the Company believes its value-added
engineering and manufacturing capabilities, along with its timely delivery,
reliability and customer service, enable it to differentiate the Company from
its competitors and enhance profitability. Through 1998, the Company operated in
two business segments, both of which were involved in the manufacture of
mechanical engineered components. These businesses were comprised of the
manufacturing of specialty locks and related accessories and of flexible shaft
products.
On January 19, 1999, the Company consummated the acquisition of all the
outstanding shares of VFC, a public company with over $100.0 million in annual
revenues, for a purchase price of approximately $84.0 million (including stock
appreciation rights of approximately $1.4 million) and assumed liabilities of
approximately $21.7 million. The Company recorded the excess purchase price over
net assets acquired of approximately $52.5 million as goodwill. The Company
ascribed a useful life of thirty-five years to the goodwill. At the time of the
acquisition, the Company decided to sell two VFC subsidiaries, Force 10 Marine
Company ("Force 10") and Multiplex Technology, Inc. ("Multiplex"). The sale of
Force 10 was completed on February 26, 1999 for $1.7 million in cash, before
taxes. Multiplex was sold on May 28, 1999 for of approximately $4.3 million,
before taxes. The tax liability for the sales of Force 10 and Multiplex was
approximately $144,000. The results of operations of Force 10 and Multiplex
during the holding period (date of acquisition to date of sale) were included in
goodwill.
On November 30, 1999, the Company sold the stock of Glendinning Marine Products,
Inc.
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("Glendinning"), a former subsidiary of VFC, for approximately $3.0 million. The
Company received approximately $2.1 million in cash and the new owners assumed
the outstanding mortgage of the Glendinning facility.
In November 1999, management of the Company decided to withdraw from the
business of manufacturing and selling power inverters and related
instrumentation by selling its interests in Heart, Cruising and Mastervolt, all
of which were acquired as part of the acquisition of VFC. In accordance with
Accounting Principles Board Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," the Company
recorded the net assets of Heart, Cruising and Mastervolt as net assets of
discontinued operations and reported the results of operations as income from
operations of discontinued operations. The Company has made no accrual of costs
of disposal related to the sale of their interests since it is management's
estimate that the Company will record gains from the sales.
Concurrent with the VFC acquisition, the Company reorganized its operating
segments into the mechanical engineered components business and electrical
components business. The acquisition of VFC resulted in the Company expanding
its mechanical engineered components business from its two original business
lines to include the manufacturing of turbocharger actuators and related
accessories. Further, the VFC acquisition resulted in the Company entering into
the business of manufacturing electrical components. The electrical components
business produces an array of electrical component products for recreational and
industrial applications. It also produces switches for utility companies.
Simultaneously with the acquisition of VFC, the Company amended its former
acquisition and revolving loan commitment with a new $60-million term loan and a
$40-million revolving credit facility with Societe Generale, an affiliate of SG
Capital LLC, as administrative agent for the lenders. The term loan is payable
in quarterly installments through January 19, 2005. The current maturities of
long-term debt at December 31, 1999 included approximately $4.5 million related
to the term loan. The revolving credit facility commitment, which had no
borrowings outstanding as of December 31, 1999, is for six years. The Company
has temporarily waived $5 million of the revolving credit facility commitment.
The term loan and revolving credit facility bear interest at fluctuating
interest rates determined by reference to a base rate plus an applicable margin
which will vary from 1.50% to 2.25%.
On February 5, 1999, the Company acquired G&H Technology, Inc. ("G&H") for
approximately $4.0 million in cash. The acquired assets and product lines are
compatible with, and were integrated into, the Company's existing mechanical
engineered components business.
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Results of Operations
The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The financial data set forth
includes the result of operations of Hudson, ESP, G&H and the subsidiaries
acquired as part of the acquisition of VFC (see Note 2 to the consolidated
financial statements) from their respective acquisition dates. The data set
forth below should be read in conjunction with the Company's consolidated
financial statements and notes thereto contained elsewhere in this Form 10-K.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
Amount % of Amount % of Amount % of
Net Sales Net Sales Net Sales
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 144,125 100.0% $ 61,862 100.0% $ 27,318 100.0%
Cost of Goods Sold 85,079 59.0 39,130 63.3 15,798 57.8
-------------------------------------------------------------------
Gross Profit 59,046 41.0 22,732 36.7 11,520 42.2
Selling, general and
administrative expenses (a) 33,364 23.1 10,779 17.4 6,405 23.5
Stock appreciation rights
compensation 4,211 3.0 -- -- -- --
-------------------------------------------------------------------
Income from operations 21,471 14.9 11,953 19.3 5,115 18.7
Other income 465 0.3 404 0.7 31 0.1
Interest expense (14,542) (10.1) (7,641) (12.4) (3,007) (11.0)
-------------------------------------------------------------------
Income before provision for
taxes 7,394 5.1 4,716 7.6 2,139 7.8
Provision for income taxes 2,551 1.7 97 0.1 889 3.2
-------------------------------------------------------------------
Income from continuing
operations 4,843 3.4 4,619 7.5 1,250 4.6
Extraordinary loss on early
extinguishment of debt -- -- 4,616 7.5 -- --
Loss from discontinued
operations (28) -- -- -- -- --
-------------------------------------------------------------------
Net Income $ 4,815 3.3% $ 3 0.0% $ 1,250 4.6%
===================================================================
</TABLE>
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of the Company.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Net Sales: Net sales were approximately $144.1 million for the year ended
December 31, 1999, an increase of approximately $82.2 million, or 133.0%, from
approximately $61.9 million for the year ended December 31, 1998. Net sales of
the mechanical engineered components business were approximately $81.7 million
for the year ended December 31, 1999, an increase of
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approximately $19.8 million or 32.0%, from approximately $61.9 million for the
year ended December 31, 1998. Net sales of the electrical components business,
which was acquired in the first quarter of fiscal 1999, were approximately $62.5
million for the year ended December 31, 1999. The increases in the total and
segment net sales are primarily attributable to the acquisitions of VFC and G&H.
Gross Profit: Gross profit was approximately $59.0 million for the year ended
December 31, 1999, an increase of approximately $36.3 million, or 159.7%, from
approximately $22.7 million for the year ended December 31, 1998. Gross profit
for the mechanical engineered components business was approximately $31.1
million for the year ended December 31, 1999, an increase of approximately $8.4
million, or 37.0% from approximately $22.7 million for the year ended December
31, 1998. Gross profit for the electrical components business was approximately
$27.9 million for the year ended December 31, 1999.
Gross profit, as a percentage of net sales, was 41.0% and 36.7% for the years
ended December 31, 1999 and 1998, respectively. Gross profit, as a percentage of
net sales, for the mechanical engineered components business were 38.1% and
36.7% for the year ended December 31, 1999 and 1998, respectively. Gross profit,
as a percentage of net sales, for the electrical component business was 44.7%
for the year ended December 31, 1999. The increase in total gross profit and
total gross profit percentage are primarily related to the acquisition of VFC
and the correlated entry into the electrical components business, which
historically experiences higher gross margins than in the mechanical components
business. The margins for the electrical components business are generally
higher as a result of the nature of the target markets to which these businesses
sell their products.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses were approximately $33.4 million for the year
ended December 31, 1999, an increase of approximately $22.6 million, or 209.5%,
from approximately $10.8 million for the year ended December 31, 1998.
Depreciation and amortization expense increased by approximately $2.1 million
for the year ended December 31, 1999. The increase in depreciation and
amortization is primarily related to the acquisition of VFC. Corporate expenses
also increased for the year ended December 31, 1999 by approximately $2.2
million. The increase in corporate expenses is primarily related to the
redundant costs of the VFC corporate office and the training and travel costs
associated with closing that office. The corporate office of VFC closed on
September 30, 1999. In addition, the Company experienced unusual increases in
professional fees, primarily as a result of the subsidiaries' reorganization to
LLC status and the additional tax planning and reporting requirements, which
resulted from the VFC acquisition. The Company's continuing acquisition
activities were also a factor in professional fees increasing approximately
$1.1 million for the year ended December 31, 1999. The remainder of the increase
in SG&A expenses is predominantly attributable to the acquisition of VFC, which
added approximately $20.1 million (or 88.9% of the total increase in SG&A
expenses) to SG&A for the year ended December 31, 1999. SG&A expenses for the
mechanical engineered components business were approximately $12.0 million for
the year ended December 31, 1999, an increase of approximately $3.0 million, or
33.0%, from approximately $9.0 million for the year ended December 31, 1998.
This increase was partially related to the integration of G&H but was
predominantly related to the expansion of the mechanical engineered components
business as a
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result of the VFC acquisition. The electrical components business had SG&A
expenses of approximately $20.9 million for the year ended December 31, 1999.
SG&A, as a percentage of net sales, was 23.1% for the year ended December 31,
1999, an increase of 5.7% from 17.4% for the year ended December 31, 1998. SG&A,
as a percentage of net sales, for the mechanical engineered components business
was 14.7% and 14.5% for the years ended December 31, 1999 and 1998,
respectively. SG&A, as a percentage of net sales, for the electrical components
business was 33.5% for the year ended December 31, 1999. The overall increase in
the percentage of SG&A is directly related to the electrical components
business, which maintains higher levels of sales and marketing expenses due to
the nature of the target markets to which these businesses sell their products.
SAR Valuation Compensation: For the year ended December 31, 1999, based on an
independent appraisal of KCI stock (see Note 9 to the consolidated financial
statements), the Company recorded a non-cash charge of approximately $4.2
million related to outstanding stock appreciation rights. The stock appreciation
rights ("SARS") were issued in conjunction with the VFC acquisition in lieu of
cash consideration for the purchase of equity held by VFC line management who
continued with the Company. The Company is required to report any change in the
valuation of the SARS as a charge against earnings.
Income from Operations: Income from operations was approximately $21.5 million
for the year ended December 31, 1999, an increase of approximately $9.5 million,
or 79.6%, from approximately $12.0 million for the year ended December 31, 1998.
This increase is related primarily to the acquisition of VFC.
Interest Expense: Interest expense was approximately $14.5 million for the year
ended December 31, 1999, an increase of approximately $6.9 million, or 90.3%,
from approximately $7.6 million for the year ended December 31, 1998. This
increase is due to a full year of interest expense in 1999 related to the
issuance of $80.0 million of 10 1/2% senior notes in May 1998 as well as the
interest expense recorded in 1999 related to the issuance of debt outstanding
under the Company's new credit facilities.
Provision for Income Taxes: The provision for income taxes was approximately
$2.6 million for the year ended December 31, 1999, an increase of approximately
$2.5 million, from approximately $97,000 for the year ended December 31, 1998.
Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as a
subchapter S corporation, which caused the stockholders of their then parent
company, KCI, to be personally liable for the taxes due on the income of the
Company. Through August 31, 1999, VFC was a C corporation and was responsible
for paying taxes on its income. Effective August 31, 1999, VFC was merged into
KCLLC and most of VFC's subsidiaries, as well as BWE, Hudson and ESP, were
converted to limited liability company ("LLC") status. These conversions were
accomplished by merging each of the existing subsidiaries into a newly organized
Delaware LLC. Upon election of LLC status by the subsidiaries, two members of
KCLLC, Keyhold, Inc. ("Keyhold"), a New York C Corporation, and KCI became
responsible for the taxes due on the income of the Company, apart from the
subsidiaries that remained C corporations. Since KCI is currently an S
corporation, the shareholders of KCI are personally responsible for income taxes
on the income of KCLLC that is allocated to KCI.
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For the year ended December 31, 1999, the Company's provision for income taxes
relates primarily to VFC's consolidated taxable income (as a C corporation) and
the taxable income of the subsidiaries not converted to LLC status.
Income from continuing operations: Income from continuing operations was
approximately $4.8 million for the year ended December 31, 1999, an increase of
approximately $224,000 from income from operations of approximately $4.6 million
for the year ended December 31, 1998. This increase is the result of an increase
in income from operations of approximately $9.5 million, which was offset by
increases in interest expense of approximately $6.9 million and the provision
for income taxes of $2.5 million, all due to the factors discussed above.
Loss from discontinued operations: As described above, the Company recorded the
net assets of Heart, Cruising and Mastervolt as net assets of discontinued
operations and reported the after tax results of operations as loss from
discontinued operations. The net loss discontinued operations was approximately
$28,000 for the year ended December 31, 1999. The Company has made no accrual of
costs of disposal related to the sale of their interests since it is
management's estimate that the Company will record gains from the sales.
Net Income: Net income was approximately $4.8 million for the year ended
December 31, 1999, an increase of approximately $4.6 million from approximately
$3,000 for the year ended December 31, 1998. This increase is the result of an
increase in income from continued operations of approximately $224,000 and the
loss from discontinued operations of approximately $28,000. Additionally, the
results of operations for the year ended December 31, 1998 were negatively
impacted by an extraordinary charge of approximately $4.6 million resulting from
the early repayment of debt in connection with the Company's senior notes, which
were issued in May 1998.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net Sales: Net sales were approximately $61.9 million for the year ended
December 31, 1998, an increase of approximately $34.6 million, or 126.5%, from
approximately $27.3 million for the year ended December 31, 1997. This increase
was primarily attributable to the Company's expansion of its mechanically
engineered components business into medium security locks and locking systems.
Approximately $32.5 million of the 1998 net sales increase resulted from the
inclusion of net sales from the Company's lock business from the dates of its
acquisition. The remaining increase in net sales is primarily attributable to
customer consolidation, increased penetration and new product acceptances.
Gross Profit: Gross profit was approximately $22.7 million for the year ended
December 31, 1998, an increase of approximately $11.2 million, or 97.3%, from
approximately $11.5 million for the year ended December 31, 1997. Approximately
$10.8 million of this increase is attributable to the inclusion of the Company's
lock business from their dates of acquisition.
Gross profit, as a percentage of net sales, was 36.7% and 42.2% for the year
ended December 31,
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1998 and 1997, respectively. This decrease was primarily attributed to the
inclusion of the Company's lock business for a full year in 1998 as opposed to
1997, which only reflects the results of the lock business from the respective
dates of acquisition, which were May and December for Hudson Lock, Inc. and ESP
Lock Products, Inc., respectively. The Company's expansion of its mechanically
engineered components business into medium security locks resulted in lower
overall gross margins due to the nature of the lock business. Decreased gross
profit percentages were also the result from changes in product mix.
Selling, General and Administrative Expenses: SG&A was approximately $10.8
million for the year ended December 31, 1998, an increase of approximately $4.4
million, or 68.3%, from approximately $6.4 million for the year ended December
31, 1997. Included in SG&A for fiscal 1998 is $2.1 million of amortization of
goodwill and other intangibles associated with the acquisition of the lock
business. The comparable amortization for the same period in 1997 was $665,000.
The remaining increase is primarily attributable to the inclusion of SG&A of the
Company's lock business for the full 1998 period. In addition, the Company
experienced increased corporate expenses primarily from the incurrence of
corporate level professional fees. Management fees increased by $140,000 in
accordance with a new management agreement entered into as of May 28, 1998.
SG&A, as a percentage of net sales, was 17.4% for the year ended December 31,
1998, a decrease of 6.1% from 23.5% for the year ended December 31, 1997. This
decrease is primarily attributable to the inclusion for the full fiscal year in
1998 of the Company's lock business, which has lower SG&A expenses as a
percentage of net sales.
Income from Operations: Income from operations was approximately $12.0 million
for the year ended December 31, 1998, an increase of $6.9 million, or 133.7%
from approximately $5.1 million for the year ended December 31, 1997. This
increase is primarily attributable to the inclusion for the full fiscal year in
1998 of the Company's lock business, which experienced an increase of $7.0 in
income from operations from 1997.
Interest Expense: Interest expense was approximately $7.6 million for the year
ended December 31, 1998, an increase of approximately $4.6 million or 154.1%
from $3.0 million for the year ended December 31, 1997. This increase is
primarily due to the incurrence of debt issued in connection with the
acquisition of the Company's lock business and the issuance of senior notes in
May 1998.
Provision for Income taxes: Effective May 31, 1997, each of the subsidiaries of
KCI, as of that date, elected to be treated as a subchapter S corporation, which
caused the stockholders of their then parent company, KCI, to be personally
liable for the taxes due on the income of the Company. The provision for income
taxes for fiscal 1998 of $97,000 is for taxes on income due in certain states.
Income from continuing operations: Income from continuing operations was
approximately $4.6 million for the year ended December 31, 1998, an increase of
approximately $3.3 million or 269.5% from approximately $1.3 million for the
year ended December 31, 1997. This increase
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is partially the result of an increase in income from operations of
approximately $6.9 million, which was partially offset by increase in interest
expense of approximately $4.6 million due to the factors discussed above. The
Company also experienced a decrease in its tax provision from the prior year as
a result of the subchapter S elections.
Net Income: Net income was approximately $3,000 for the year ended December 31,
1998, a decrease of approximately $1.3 million from approximately $1.3 million
for the year ended December 31, 1997. The decrease in net income of
approximately $1.3 million resulted from the increase in continuing operations
of approximately $3.3 million, as described above, being offset by an
extraordinary charge in 1998 of $4.6 million resulting from the early repayment
of debt. The extraordinary charge was in excess of the Company's increase in
income of continuing operations by approximately $1.3 million.
Liquidity and Capital Resources
The Company has historically generated funds from its operations, and its
working capital requirements generally have not materially fluctuated from
quarter to quarter. The Company's other main sources of liquidity generally are
derived from the Company's term loan and revolving credit facility described
above. At December 31, 1999 the Company had $55.0 million outstanding under the
term loan and no borrowings outstanding under the revolving credit facility. At
December 31, 1999 the Company had $35.0 million of availability under the
revolving credit facility.
On August 12, 1999, KCLLC entered into agreements (the "SG Agreements") with
Keyhold, Inc. ("Keyhold"), a wholly owned subsidiary of SGC Partners II LLC
("SGCP"), an entity controlled by SG Capital Partners LLC, and SGCP, to sell up
to $20.0 million of membership equity interests in KCLLC. On September 1, 1999,
SGCP (through Keyhold) made a capital contribution to KCLLC of $10.0 million,
before expenses of approximately $997,000. Keyhold received approximately an 11%
membership equity interest in KCLLC. Prior to August 12, 2000, KCLLC may require
SGCP (through Keyhold) to purchase up to an additional $10.0 million membership
equity interests (the "Additional Investment"), constituting the balance of
SGCP's membership equity investment commitment. KCLLC can require the Additional
Investment be in one installment of $10.0 million or in two installments of $5.0
million each. The Additional Investment currently represents an additional 9.3%
membership equity interest in KCLLC. Pursuant to the SGCP Agreements, under
certain circumstances, KCLLC is also restricted from selling additional
membership equity interests unless all or a portion of the Additional Investment
is made. The SGCP Agreements also provide that upon the earlier of a change in
control of the Company, as defined therein, or August 31, 2004, SGCP and Keyhold
have the right to require KCLLC to repurchase Keyhold's outstanding investment
in KCLLC at the then current market value.
The Company's primary liquidity demands will be for capital expenditures,
general corporate purposes, and principal and interest payments on its
outstanding debt. The Company's $80.0 million of senior notes require semiannual
interest payments on the outstanding principal. The senior notes have no
requirement for principal payments until they are due in June 2008. The term
loan requires quarterly principal and interest payments. Under the term loan and
revolving credit facility, the Company has the option to lock in a specified
interest rate by entering into a contract, which
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rolls over at different time intervals ranging from 30 to 180 days. As the
underlying contract comes up for renewal, the interest associated with the
contract becomes due.
As of December 31, 1999, the Company had no outstanding commitments for capital
expenditures. To the extent cash flow from operations is insufficient to cover
the Company's capital expenditures, debt service, and other general
requirements, the Company would seek to utilize its borrowing availability under
its existing revolving credit facility. Capital expenditures for the year ended
December 31, 2000 are expected to be approximately $4.5 million.
Cash flows provided by operating activities were approximately $20.5 million,
$8.7 million and $4.0 million for the years ended December 31, 1999, 1998 and
1997, respectively. The net increases of approximately $11.8 million in 1999 and
$4.7 million in 1998 over prior periods resulted primarily from the increase in
net income plus non-cash charges of approximately $7.7 million in 1999 and
approximately $5.6 million in 1998. The increases in the non-cash charges in
1999 primarily relate to increased depreciation and amortization as well as the
$4.2 million charge recorded in connection with the SARS discussed above. These
increases in non-cash charges in 1999 were partially offset by the decrease in
non-cash charges related to the $4.6 million extraordinary charge taken in 1998.
The increased non-cash charges in 1998 relate primarily to the $4.6 million
extraordinary charge taken in connection with the early retirement of debt and
increased depreciation and amortization expense. Depreciation and amortization
expense increased in 1999 over 1998 primarily as a result of the VFC
acquisition. The increase in depreciation and amortization expense in 1998 over
1997 was primarily the result of the expansion of the mechanical engineered
components business into the medium security lock business, which occurred
during May and December of 1997.
During the year ended December 31, 1999 the Company's accrued expenses primarily
accounted for the remainder of the increase of cash flows from operations over
1998. The increase in accrued expenses is related to increased accrued interest
related to the Company's new term loan and revolving credit facilities as well
as increased accrued professional fees primarily related to tax compliance in
connection with the subsidiaries' reorganization to LLC status (See Note 1 to
the consolidated financial statements elsewhere in this Form 10-K). Further, the
Company had increased compensation accruals as a result of the additional
employees acquired as part of the VFC acquisition.
Cash flows from operations of discontinued operations generated approximately
$1.4 million for the year ended December 31, 1999.
Cash flows used in investing activities were approximately $83.0 million, $2.7
million and $56.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The 1999 increase over 1998 cash flows used in investing
activities of approximately $80.1 million resulted the acquisitions of VFC and
G&H described above. The Company also divested Force 10, Multiplex and
Glendinning, which it had acquired as part of VFC, for a total of approximately
$7.4 million. The 1998 decrease of $53.4 million over 1997 cash flows used in
investing activities was primarily attributable to the acquisition of the
Company's lock business of $55.4 million, which occurred during the year ended
December 31, 1997. Capital expenditures for the years ended
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December 31, 1999, 1998 and 1997 were approximately $2.7 million, $2.2 million
and $695,000, respectively.
Cash flows from financing activities provided net cash of approximately $53.4
million, $5.7 million and $53.2 million for the years ended December 31, 1999,
1998 and 1997, respectively. The 1999 net increase over 1998 cash flows provided
by financing activities of approximately $47.7 million was primarily due to the
new term loan and credit facility, whose proceeds were used to finance the
Valley Forge acquisition during the year ended December 31, 1999. An aggregate
of approximately $82.6 million of proceeds were received under this new term
loan and credit facility. The repayment of approximately $37.1 million on
long-term debt and other long-term obligations offset this, the most significant
portions being the repayment of approximately $8.9 million of VFC's long-term
debt, which was made in conjunction with the VFC acquisition and the subsequent
repayments of all amounts outstanding under the revolving credit facility
throughout the course of 1999. During the year ended December 31, 1999 the
Company was the recipient of approximately $12.3 million in capital
contributions. Simultaneous with the closing of the VFC acquisition, the Company
was the recipient of approximately $3.3 million in capital from KCI in January
1999. This capital was raised by KCI through the sale of new stock in KCI. The
Company also received net proceeds of approximately $9.0 million related to the
capital contribution by SGCP as described above. The proceeds of the SGCP
contribution, divestitures of subsidiaries and cash from operations enabled the
Company to repay all amounts outstanding under the revolving credit facility. In
addition, the Company prepaid its $1.5 million term loan installment, due in
January 2000, during December 1999. In connection with the new debt facilities,
the Company incurred approximately $2.2 million of deferred financing costs
during the year ended December 31, 1999. The Company paid capital withdrawals
during 1999 of approximately $2.3 million to cover estimated tax payments of the
members.
The 1998 net decrease over 1997 cash flows provided by financing activities of
approximately $47.5 million was primarily due to the Company's debt facility
that was put in place during 1997, which resulted in cash flows of approximately
$67.3 million. While the Company received $80.0 million of proceeds from the
issuance of the senior notes during 1998, this was offset by the repayment of
the pre-existing debt facilities and related costs of approximately $68.2 and
the payment approximately $4.9 million of deferred financing costs, which is
being amortized over the life of the senior notes.
In December 1999, the Company consummated the acquisition of the outstanding
minority interest in Guest, which is one of the subsidiaries acquired as part of
the VFC acquisition. The minority shareholders agreed to sell their 7% share of
Guest to the Company for a combination of cash and KCI stock. KCI received
additional membership interest as consideration for the stock distributed to the
minority shareholders.
In February 2000, the Company signed an agreement to sell the stock of Heart and
Cruising.
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In February 2000, KCLLC paid approximately $922,000 related to a capital
withdrawal by KCI. KCI used the funds to repurchase outstanding shares of its
common stock from three shareholders.
Management believes that the Company's cash flow from operations, together with
its borrowing availability under the new credit facilities, will be adequate to
meet its anticipated requirements of operations and capital expenditures for the
foreseeable future for the foreseeable future.
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of December 31, 1999, was approximately $28.4
million. The Company includes in its backlog only those orders for which it has
accepted purchase orders. However, backlog is not necessarily indicative of
future sales. In addition, purchase orders can generally be cancelled at any
time without penalty.
Other Matters
Year 2000 Compliance
The Company is heavily dependent upon computer technology to effectively carry
out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer technology in the conduct of their
business. The terms "Year 2000 issues" or "Year 2000 problems," or words of a
similar nature, refer to the potential for failure of computer applications as a
result of the failure of programs to properly recognize and handle dates beyond
the year 1999. In the case of the Company, such computer applications may
include customer order processing, inventory management, shipment of products,
manufacturing process controllers, internal financial systems, and other
information systems.
The Company completed its Year 2000 software program conversions and compliance
programs during the third quarter of 1999. The total external costs for such
programs was not material. Subsequent to December 31, 1999, the Company has not
experienced any Year 2000 problems either internally or from outside sources.
The Company has no reason to believe that Year 2000 failures will materially
affect it in the future. However, since it may take several additional months
before it is known whether the Company or third party suppliers, vendors or
customers may have undergone Year 2000 problems, no assurances can be given that
the Company will not experience losses or disruptions due to Year 2000
computer-related problems. The Company will continue to monitor the operations
of its data processing systems and devices for any Year 2000 problems.
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or
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phrases such as "management anticipates," "the Company believes," "the Company
anticipates," and words and phrases of similar impact, and include but are not
limited to statements regarding future operations and business environment. The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The factors that could cause
actual results to differ materially from the forward-looking statements include
the following: (i) industry conditions and competition, (ii) operational risks
and insurance, (iii) environmental liabilities which may arise in the future and
not covered by insurance or indemnity, (iv) the impact of current and future
laws and government regulations, and (v) the risks described from time to time
in the Company's reports to the Securities and Exchange Commission.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-K
that are not related to historical results, are forward looking statements.
Actual results may differ materially from those projected or implied in the
forward looking statements. Further, certain forward looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward looking statements involve risks and uncertainties, including but
not limited to the Company's dependence on regulatory approvals, its future cash
flows, sales, gross margins and operating costs, the effect of conditions in the
industry and the economy in general, and legal proceedings. Subsequent written
and oral forward looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in this Form 10-K, and in other
reports filed by the Company with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk is related to the variability in
interest rates associated with the $60-million term loan and the $40-million
revolving credit facility. Under both the term loan and the revolving credit
facility, the Company has the option to lock in a certain interest rate based on
either the base rate, which is equivalent to prime, or LIBOR plus an applicable
margin specified in the agreement. Principally all of the borrowings under the
term loan are locked in at approximately 9.0% until April 2000, when the
underlying LIBOR contract is up for renewal. The Company currently has no
outstanding borrowings under the revolving line of credit. The senior notes bear
a fixed rate of interest and therefore are not subject to market risk. The
Company does not trade in derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements for the three years ended
December 31, 1999, together with the report of PricewaterhouseCoopers LLP dated
March 3, 2000, are included elsewhere herein. See Item 14 for a list of the
consolidated financial statements and consolidated
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financial statement schedule.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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PART III
Item 10. Directors, Executive Officers and Key Employees of the Company
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company and its subsidiaries
as of December 31, 1999 All directors and officers of the Company and its
subsidiaries hold office until the annual meeting of stockholders next following
their election, or until their successors are elected and qualified.
Name Age Position
- ---- --- --------
John S. Dyson 57 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 37 Director of KCI and KCLLC. Chief Executive Officer
of KCLLC.
Robert B. Kay 37 Director of KCI and KCLLC. President of KCLLC.
Alan L. Rivera 37 Vice President, Secretary and Director of KCI and
KCLLC
George M. Scherer 46 Vice President and Director of the KCI and KCLLC
President of BWE
Christopher M.
Neenan 45 Director of KCI and KCLLC
Keith A. McGowan 37 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 49 President of Marinco
Mark Vertanan 40 President of Gits
Michael L. Colecchi 50 President of Hudson
A. Jack Hoppenjans 63 President of Turner
John S. Dyson has been Chairman of the Board of Directors of the KCI, KCLLC and
Finance Corp. since their inception. Since 1996, Mr. Dyson has been Chairman of
the Board of Directors of Millbrook Capital Management ("Millbrook"), a
management company providing executive level services to the Company under the
Management Agreement, and he currently serves as Chairman of the Mayor of the
City of New York's Council of Economic Advisors. From 1994 to 1996, Mr. Dyson
served as Deputy Mayor for Finance and Economic Development for the City of New
York. From 1982 to 1993 Mr. Dyson was the Chairman of Dyson-Sinclair Associates,
a management company and the predecessor of Millbrook. From 1976 to 1979, he
served as Commissioner of the New York State Department of Commerce. Mr. Dyson
was Vice Chairman of Dyson-Kissner-Moran Corporation from 1970 to 1975, at which
time he was appointed to the position of Commissioner of the New York State
Department of Agriculture.
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Clay B. Lifflander has served as a director of KCI and KCLLC since their
inception. Mr. Lifflander was elected Chief Executive Officer in November 1999.
Before November 1997, Mr. Lifflander has been President of KCI since its
inception. Mr. Lifflander has been President of Millbrook since 1995, and from
1994 to 1995, Mr. Lifflander was President of the New York City Economic
Development Corporation. Previously, Mr. Lifflander was Managing Director in the
Mergers and Acquisitions Group at Smith Barney Inc., where he worked from 1984
to 1994.
Robert B. Kay was elected President of KCLLC in November 1999. Prior to his
election he served as the Chief Financial Officer of KCLLC from February 1999 to
November 1999. Mr. Kay became a director of KCI and KCLLC in March 1999. From
August 1998 through December 1998, Mr. Kay was the Senior Vice-President and
Chief Financial Officer, as well as a director, of Tiffen Manufacturing Corp., a
manufacturer and distributor of photographic and imaging products. From January
1994 through August 1998, Mr. Kay was a Senior Vice-President and Chief
Financial Officer of Oxford Resources Corp. (renamed NationsBank Auto Leasing,
Inc.), a publicly traded consumer finance company.
Alan L. Rivera has been the Vice President, Secretary and a Director of KCI,
KCLLC and Finance Corp. since their inception. Since September 1996, Mr. Rivera
has been employed by Millbrook, where he serves as Chief Financial Officer and
General Counsel. From 1994 to 1996, Mr. Rivera served as Executive Vice
President of Finance and Administration and General Counsel of the New York City
Economic Development Corporation. From 1990 to 1994, Mr. Rivera was an associate
with the New York City law firm of Townley & Updike, specializing in corporate
finance matters, and from 1987 to 1990, Mr. Rivera was an associate with Mudge,
Rose, Guthrie, Alexander and Ferdon, specializing in public finance matters.
George M. Scherer has been the Vice President-Manufacturing and a Director of
KCI and KCLLC since their inception. Mr. Scherer has been with BWE since 1978
when he began as Engineering Manager. He has served as the President and a
Director of BWE since 1982. Prior to joining BWE, Mr. Scherer was a product
application engineer for Stow Manufacturing Company, Inc. in Binghamton, N.Y.
from 1975 to 1978. Prior to his position at Stow Manufacturing Company, Inc.,
Mr. Scherer was a plant engineer at GAF Corporation in Binghamton, N.Y. from
1973 to 1975.
Christopher M. Neenan was elected to the Board of Directors of KCI and KCLLC on
September 1, 1999, concurrent with Keyhold's investment in the Company. Since
1998, Mr. Neenan has been Managing Director and Chief Operating Officer of SG
Capital Partners LLC, the American merchant banking affiliate of Societe
Generale. Previously, he was the founding partner of the New York office of
Braxton Associates, the strategic consulting division of Deloitte & Touche, and
founded and served as the Managing Partner of the shareholder value strategies
practice at Price Waterhouse. Mr. Neenan also serves on the Board of Directors
of House of Lloyd Management, LLC.
Keith A. McGowan was elected as the Chief Financial Officer of KCLLC in November
1999. Prior to this promotion, he had served as KCLLC's Principal Accounting
Officer since April 1999. From April 1998 to March 1999, Mr. McGowan was a
self-employed consultant. From July 1997 to April 1998, he served as the Vice
President of Finance of Digitec 2000, Inc., a distributor of prepaid phone
products. From November 1985 to June 1997, Mr. McGowan was employed by BDO
Seidman, LLP, an accounting and consulting firm, where he was promoted to
Partner in July 1995.
23
<PAGE>
Michael L. Colecchi has been with Hudson since 1970, when he began as a tool and
die maker. He subsequently assumed various positions of responsibility in
Hudson's manufacturing department until 1980, when he was appointed Plant
Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing.
In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr.
Colecchi has served as President of Hudson since 1996.
J. Marty O'Donohue has been President of Marinco since 1991. Mr. O'Donohue
managed his own marketing consulting firm, O'Donohue and Associates, from 1988
to 1991.
Mark Vertanan has been the President of Gits since 1995. He joined Gits in 1984
and has held various positions during his 16 year tenure, including Vice
President of Engineering, Engineering Manager and Engineering Supervisor.
A. Jack Hoppenjans has been President of Turner since 1982. He joined Turner in
1960 as a mechanical designer and has held various positions with Turner during
his 39 year tenure.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The summary table sets forth information with respect to the compensation of
each of the named executive officers and key employees for services provided in
all capacities to the Company and its subsidiaries for the three years in the
period ended December 31, 1999.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------------------------------
Securities
Underlying
Name and Principal Position Year Salary ($) Bonus Options/SARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Clay B. Lifflander, Chief
Executive Officer (1) 1999 -- -- --
1998 -- -- --
1997 -- -- --
Robert B. Kay, President 1999 $250,000 --(2) 30,000(4)
Keith A. McGowan,
Chief Financial Officer 1999 $90,000 --(2) 5,000(4)
Alan L. Rivera,
Vice President and
Secretary (1) 1999 -- -- --
1998 -- -- --
1997 -- -- --
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
George M. Scherer,
President of BWE 1999 $225,000 --(2)
1998 $302,994 $43,028
1997 $232,807 $38,928
</TABLE>
(1) The salaries of Clay B. Lifflander and Alan L. Rivera were paid by
Millbrook Capital Management, Inc. ("Millbrook") pursuant to the terms of
a Management Agreement. See "Certain Relationships and Related
Transactions--Management Agreement."
(2) The 1999 bonuses for Robert B. Kay, George Scherer and Keith McGowan have
yet to be determined. The bonuses of these individuals are at the
discretion of the Board of Directors of KCLLC.
(3) The Company is a party to employment agreements with certain of its key
employees.
(4) Long terms awards related to options granted to purchase KCI common stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the options that were granted to named executive
officers of the Company in the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed Annual
Individual Grants Rates for Option Term (1)(2)
- ----------------------------------------------------------------------- --------------------------------------------------
Percent of
Total
Options/
Number of SARS
Securities Granted to
Underlying Employees Exercise
Options /SARS in Fiscal Price Expiration
Name Granted (#) Year ($/sh) Date 5% 10%
- ------------------------------------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B.
Kay 30,000 20.6% $35.00 1/17/09 $660,339 $1,673,429
Keith A.
McGowan 2,500 1.7% $35.00 4/12/09 $53,332 $124,213
2,500 1.7% $75.00 11/12/09 $105,797 $241,553
</TABLE>
(1) Market value was determined by the Board of Directors to equal the
exercise price at date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the term of the options. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not intended to forecast possible future
appreciation, if any, in the price of the KCI common stock. The gains
shown are net of the option exercise price, but do not include deductions
for taxes or other expenses associated with the exercise of the options or
the sale of the underlying shares. The actual gains, if any, on the stock
option exercises will depend on the future performance of the KCI common
stock, the holder's continued employment through applicable
25
<PAGE>
vesting periods and the date on which the options are exercised. The
potential realizable value of the foregoing options is calculated by
assuming that the fair market value of the KCI common stock on the date of
grant of such options equaled the exercise price of such options.
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 1999 AND
YEAR END OPTION/SAR VALUES
The following table provides information related to the number and value of
options held by the named executive officers at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities underlying Unexercised Value of Unexercised In-the-Money Options
Options at Year End (1) at Year End (1)
------------------------------------------- ----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert B. Kay 22,857 7,143 $1,371,420 $428,580
Keith A. McGowan 1,667 3,333 $66,660 $133,340
</TABLE>
(1) Assumes a fair market value of $95 per share of common stock, as
determined by independent appraisal as of December 31, 1999.
(2) Outstanding stock appreciation rights.
Long-Term Incentive Plan
KCI's 1998 Incentive Compensation Plan (the "1998 Plan") was adopted to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of KCI, KCLLC and its subsidiaries and to promote the success of the
Company's business. Options granted under the 1998 Plan may be either incentive
stock options, as defined in Section 422A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options. In addition, stock appreciation
rights, and restricted stock awards and other stock-based awards may be granted
under the 1998 Plan. KCI has reserved 200,000 shares of its no par value common
stock (the "Common Stock") for issuance in respect of options and other awards
granted under the 1998 Plan. As of December 31, 1999, options to purchase an
aggregate of 70,123 shares were outstanding under the 1998 Plan at a weighted
average exercise price of $36 per share, of which options to purchase 29,233
shares are currently exercisable.
The 1998 Plan is administered by the Board of Directors of KCI, which has the
power to determine the terms of any options or awards granted thereunder,
including the exercise price, the number of shares subject to the option or
award, and the exercisability thereof. Options and awards granted under the 1998
Plan are generally not transferable, and each option or award is exercisable
during the lifetime of the optionee only by such optionee. The exercise price of
all incentive stock options granted under the 1998 Plan must be at least equal
to the fair market value of the shares of Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of KCI, the exercise price of any stock
option granted must be equal to at least 110% of the fair market value on the
grant date and the maximum term of the option must not exceed five years. The
term of all other options or awards under the 1998 Plan may not exceed ten
years. The specific terms of each option grant or award are approved by KCI's
Board of Directors and are reflected in a written stock option or award
agreement.
Stock Appreciation Rights
In connection with the VFC acquisition, KCI issued stock appreciation rights
("SARS") to certain members of operating subsidiary management. The SARS, which
are fully vested, entitle the holder to receive, in cash, the difference between
the exercise price and market value of KCI stock as of the date of exercise. The
Company is required to record as compensation expense any net accretion in the
value of the SARS based on current market value of KCI stock. For the year ended
December 31, 1999, the Company included in continuing operations approximately
$4.2 million in compensation expense related to the SARS based on independent
appraisal as of December 31, 1999. The SARS are payable upon the earlier of the
employee's termination of employment with the Company, an initial public
offering of KCLLC or KCI, or January 19, 2007.
26
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company is comprised of KCLLC, a Delaware corporation who is a parent
holding company for its wholly owned subsidiaries, including Key Components
Finance Corp. KCI holds the majority member interest in KCLLC. KCI has no
material assets other than its interest in KCLLC and has no operations. The
shares of KCLLC held by KCI are identical in number to the shares held by the
stockholders of KCI. The following table sets forth information concerning the
beneficial ownership of KCLLC membership interests, as of March 15, 2000 of (i)
each person known to own beneficially more than 5% of KCLLC membership interest
and KCI's outstanding common stock, (ii) by each director, executive officer and
key employee of the Company and/or any of its subsidiaries and (iii) all such
directors, executive officers, and key employees as a group. All shares are
owned with sole voting and investment power, unless otherwise indicated.
27
<PAGE>
<TABLE>
<CAPTION>
Beneficial Owner Address Common Stock Beneficially Owned
- ------------------------------------------------------------------------------------------------
Shares (1) % (2)
<S> <C> <C> <C>
John S. Dyson Key Components, LLC
200 White Plains Road 697,188 (3) 52.7%
Tarrytown, NY 10591
Clay B. Lifflander Key Components, LLC
200 White Plains Road 534,803 (4) 40.4%
Tarrytown, NY 10591
George M. Scherer Key Components, LLC
200 White Plains Road 105,714 8.0%
Tarrytown, NY 10591
Alan L. Rivera Key Components, LLC
200 White Plains Road 45,412 3.4%
Tarrytown, NY 10591
Robert B. Kay Key Components, LLC
200 White Plains Road 40,000 (5) 3.0%
Tarrytown, NY 10591
Keith A. McGowan Key Components, LLC
200 White Plains Road 5,000 (6) 0.4%
Tarrytown, NY 10591
Keyhold, Inc. Keyhold, Inc. 137,931 10.4%
c/o SG Capital Partners LLC
1221 Avenue of the Americas
New York, NY 10020
Charles H. Dyson Trust #1 Key Components, LLC
F/B/O John S. Dyson 200 White Plains Road
U/A DTD 8/2/68 Tarrytown, NY 10591 118,536 9.0%
Charles H. Dyson Trust #1 Key Components, LLC
F/B/O John S. Dyson 200 White Plains Road
U/A DTD 4/6/76 Tarrytown, NY 10591 118,536 9.0%
Margaret M. Dyson Trust #1 Key Components, LLC
F/B/O John S. Dyson 200 White Plains Road
U/A DTD 3/26/68 Tarrytown, NY 10591 111,390 8.4%
All Officers and Directors (6) Key Components, LLC
persons) 200 White Plains Road 1,428,117 (7) 108.0%
Tarrytown, NY 10591
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise indicated, the Company believes that the beneficial
owners of the securities have sole investment and voting power with
respect to such securities, subject to community property laws where
applicable.
(2) Percentages are based on ownership percentages including dilutive
effect of outstanding stock options, but do not include outstanding
stock appreciation rights.
28
<PAGE>
(3) Includes an aggregate of 348,462 shares of KCI common stock owned of
record by the Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD
8/2/68, Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD 4/6/76
and the Margaret M. Dyson Trust #1 F/B/O John Dyson U/A DTD 3/26/68
(the "Dyson Trusts"), of which Mr. Dyson is a beneficiary and
trustee.
(4) Consists of 1,428 shares of KCI common stock owned of record by
trusts for the benefit of Mr. Lifflander's minor children, or which
Mr. Lifflander is a trustee and 348,462 shares of KCI common stock
owned of record by the Dyson Trusts, of which Mr. Lifflander is a
trustee.
(5) Includes options to purchase 30,000 shares of KCI common stock. See
"Management - Employment Ageements and Executive Compensation."
(6) Includes options to purchase 5,000 shares of KCI common stock. See
"Executive Compensation."
(7) Includes 348,462 shares of KCI common stock owned of record by the
Dyson Trusts and 1,428 shares of KCI common stock owned of record by
trusts for the benefit of Mr. Lifflander's minor children, of which
Mr. Lifflander is a trustee.
Item 13. Certain Relationships and Related Transactions
ESP Lease
The Company rents its Leominster, Massachusetts manufacturing facility under an
operating lease agreement entered into with a company that is co-owned by the
President of ESP and a shareholder of KCI. The lease, which expires on May 31,
2003, provides for annual rent increases based on the CPI. Rental payments
amounted to $203,000, $208,000 and $225,000 for the three years ended December
31, 1999, 1998 and 1997, respectively.
BWE Lease
The Company rents one of its manufacturing facilities under an operating lease
agreement entered into with a company which is co-owned by George Scherer who is
a member of the Board of Directors of KCI and KCLLC, a shareholder of KCI and
the President of BWE. The terms of the lease, which expires December 31, 2008,
provide for annual rent increases of 5%. Rental payments amounted to $144,000,
$137,000 and $131,000 in 1999, 1998 and 1997, respectively.
Management Agreement
KCLLC pays management fees to Millbrook, a party related to John S. Dyson,
Chairman of the Board of KCI and KCLLC and a shareholder of the KCI. These
management and other administrative fees totaled $800,000, $800,000 and $760,000
for the years ended December 31 1999, 1998 and 1997, respectively. Pursuant to
the terms of a Management Agreement, dated as of May 28, 1998, Millbrook
provides the Company with executive level services, for an annual base
management fee equal to $500,000 (the "Base Fee") payable in quarterly
installments, plus
29
<PAGE>
an additional fee of $300,000 per year (the "Additional Fee"), payable following
completion of the Company's audited financial statements for such year. No
portion of the Base Fee or the Additional Fee may be paid at the time that any
Event of Default (as defined therein) exists under the Company's Indenture,
dated as of May 28, 1998 (the "Indenture"). In addition, the Additional Fee may
only be paid to the extent that, after giving effect thereto, the Company's
Consolidated Coverage Ratio (as defined in the Indenture) exceeds 2.0:1, for the
fiscal years ending on or prior to December 31, 1999, and 2.25:1 for the fiscal
years ending after December 31, 1999. The Additional Fee may be increased,
beginning with the fiscal year ending December 31, 2000, by an amount up to 15%
of the aggregate amount of the Base Fee and the then current amount of the
Additional Fee; provided, however, that the percentage increase shall not exceed
the percentage increase in pro forma EBITDA (as defined in the Indenture) for
such fiscal year as compared to the prior fiscal year. Notwithstanding the
foregoing, total management fees payable under the Management Agreement may not
exceed $1.2 million in any fiscal year. Any management fees which are not
permitted to be paid at the time due will be deferred (without interest) and
will be paid as soon as permitted. Millbrook will also be entitled to be
reimbursed for its out of pocket expenses.
During 1999, KCLLC also paid Millbrook $500,000 and $350,000, respectively, for
investment advisory services related to the sale of the Keyhold membership
interest and the sale of Multiplex. Pursuant to the Management Agreement, the
Company paid Millbrook an investment fee equal to $900,000 upon consummation of
the offering of the Company's Senior Secured Notes in May 1998 for financial
advisory and other services. Millbrook received $400,000 in 1997 for advisory
services related to the financing and acquisition of ESP, which is included as
part of the deferred financing and acquisition costs.
Investment by Keyhold, Inc.
On August 12, 1999, KCLLC entered into the SG Agreements with Keyhold, a wholly
owned subsidiary of SGCP, and SGCP to sell up to $20.0 million of membership
equity interests in KCLLC. On September 1, 1999, SGCP (through Keyhold) made a
capital contribution to KCLLC of $10.0 million, before expenses of approximately
$997,000. Keyhold received approximately an 11% membership equity interest in
KCLLC. Prior to August 12, 2000, KCLLC may require SGCP (through Keyhold) to
purchase up to an additional $10.0 million membership equity interests (the
"Additional Investment"), constituting the balance of SGCP's membership equity
investment commitment. KCLLC can require the Additional Investment be in one
installment of $10.0 million or in two installments of $5.0 million each. The
Additional Investment currently represents an additional 9.3% membership equity
interest in KCLLC. Pursuant to the SGCP Agreements, under certain circumstances,
KCLLC is also restricted from selling additional membership equity interests
unless all or a portion of the Additional Investment is made. The SGCP
Agreements also provide that upon the earlier of a change in control of the
Company, as defined therein, or August 31, 2004, SGCP and Keyhold have the right
to require KCLLC to repurchase Keyhold's outstanding investment in KCLLC at the
then current market value. As part of the Agreements SGCP was granted the right
to elect one member to the Board of Directors of KCI and KCLLC, who initially is
Christopher M. Neenan.
30
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Form 10-K
---------
Page
----
(a) Documents filed as part of the Form 10-K
(1) Financial Statements:
Report of Independent Accountants 39
Consolidated Balance Sheet at December 31, 1999 and 1998 40
Consolidated Statement of Income for the three years ended
December 31, 1999 41
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999 42
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999 43
Notes to Consolidated Financial Statements 44-71
(2) Financial Statement Schedules:
Valuation and Qualifying Accounts and Reserves (Schedule II) 72
(b) Reports on Form 8-K
There were no Reports on form 8-K filed during the quarter
ended December 31, 1999. -
(c) Exhibits
See list of exhibits on page 32
(d) Financial Statement Schedules
See (a)(2) above 72
31
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Description Reference
------- ----------- ---------
2.1 Agreement and Plan of Merger. (1)
2.2 Amendment No. 1 to the Agreement and Plan of Merger, (1)
dated as of December 28, 1998.
3.1 Certificate of Formation of KCLLC. (2)
3.2 Limited Liability Company Agreement of KCLLC. (2)
3.3 Certificate of Incorporation of Finance Corp. (2)
3.4 By-Laws of Finance Corp. (2)
3.5 Amended and Restated Limited Liability Company Operating (5)
Agreement of KCLLC, dated as of September 1, 1999.
4.1 Indenture, dated as of May 28, 1998, by and among KCLLC, (2)
Finance Corp, BWE, Hudson, ESP and United States Trust
Company of New York, as trustee.
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of (2)
Exhibit 4.1).
4.3 Exchange and Registration Rights Agreement, dated May 20, (2)
1998, among KCLLC, Finance Corp, BWE, Hudson, ESP and
Societe Generale Securities Corporation.
4.4 Supplemental Indenture, dated as of August 31, 1999, (5)
among KCLLC, Finance Corp, Gits Manufacturing Co., LLC
Marine Industries, LLC, Turner Electric, LLC, Hudson
Lock, LLC, BWE Manufacturing, LLC, ESP Lock, LLC and
United States Trust Company.
4.5 Amendment to Indenture dated August 31, 1999, among KCI (5)
and certain of its subsidiaries and United States Trust
Company.
10.1 Purchase Agreement among KCLLC, Finance Corp, BWE, (2)
Hudson, ESP and Societe Generale Securities Corporation,
dated May 20, 1998.
10.2 Form of 10 1/2% Senior Notes, issued by KC LLC and (2)
Finance Corp. to certain purchasers, and dated as of May
28, 1998 (filed as part of Exhibit 4.1).
10.3 Employment Agreement between BWE and George M. Scherer, (2)
dated as of January 16, 1996, as amended March 16, 1996.
10.4 Employment Agreement between KCI and Michael L. Colecchi, (2)
dated as of May 15, 1997, as amended April 27, 1998.
10.5 Employment Agreement between ESP and August M. Boucher, (2)
dated as of December 10, 1997.
10.7 1998 Long-Term Incentive Plan of KCI. (2)
10.8 Management Agreement, dated May 28, 1998, with Millbrook (2)
Capital Management Inc.
10.9 Lease, dated January 1, 1989, between BWE and Empire (2)
Realty Company.
10.10 Lease, dated December 1, 1992, between RAD Lock, Inc. and (2)
S&S Properties, Inc.
10.12 Lease Agreement, dated June 7, 1990, between BWE and (2)
Route 12A.
32
<PAGE>
Associates, as amended.
10.12 Lease of Real Property, dated June 1, 1993, between ESP (2)
and Massachusetts Colony Corporation.
10.13 Commercial Lease and Deposit Receipt, dated August 27, (2)
1998, between Hudson and Jim Jelsema.
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998, (2)
among the Issuers, BWE, Hudson, ESP, Societe Generale, as
agent and certain financial institutions named therein.
10.15 Guarantor Security Agreement, dated as of July 27, 1998, (2)
among BWE, Hudson, Finance Corp., ESP and Societe
Generale.
10.16 Borrower Security Agreement, dated as of July 27, (2)
1998, between KCLLC and Societe Generale.
10.17 Pledge Agreement, dated as of July 27, 1998, between KCLLC (2)
and Societe Generale.
10.18 Form of Amended and Restated Credit and Guaranty (3)
Agreement, dated as of January 19, 1999, by and among Key
Components, LLC, as Borrower, certain of its
subsidiaries, as Guarantors, certain financial
institutions, as Lenders and Societe Generale, as Agent
for Lenders.
10.19 Form of Valley Forge Pledge Agreement, dated as of (3)
January 19, 1999, by Valley Forge Corporation and in
favor of Societe Generale.
10.20 Form of Amended and Restated Pledge Agreement, dated as (3)
of January 19, 1999, made by KCLLC in favor of Societe
Generale.
10.21 Form of Amended and Restated Borrower Security Agreement, (3)
dated as of January 19, 1999, made by KCLLC in favor of
Societe Generale.
10.22 Form of Amended and Restated Guarantor Security (3)
Agreement, dated as of January 19, 1999, made by B.W. Elliott
Manufacturing Co., Inc., Hudson Lock, Inc., ESP Lock
Products Inc., KCI Acquisition Corp., Valley Forge
Corporation, Cruising Equipment Company, Force 10 Marine
Ltd., Gits Manufacturing Company, Inc., Glendinning
Marine Products, Inc., Atlantic Guest, Inc., Heart
Interface Corporation, Marine Industries Company,
Multiplex Technology, Inc., Turner Electric Corporation,
VFC Acquisition Company, Inc., and Valley Forge
International Corporation in favor of Societe Generale.
10.23 Agreement and General Release between KCLLC and James D. (4)
Wilcox, dated March 9, 1999.
10.24 Form of Employment Agreement between the Company, (4)
Millbrook and Robert Kay, dated March 1, 1999.
10.25 Share Purchase Agreement among KCI, KCLLC, SGCP and (5)
Keyhold dated August 12, 1999.
10.26 Registration Rights Agreement of KCLLC, dated as of (5)
September 1, 1999, among KCI, KCLLC, SGCP and Keyhold.
10.27 Shareholders Agreement dated as of September 1, 1999, (5)
among KCLLC, KCI, SGCP, Keyhold and certain other
shareholders of KCI.
10.28 Amendment No. 2 to Amended and Restated Credit and (5)
Guaranty.
33
<PAGE>
Agreement, dated August 31, 1999 among KCLLC and
Certain of its Subsidiaries, Certain Lenders and Societe
Generale.
10.29 Joinder Agreement, dated as of August 31, 1999, by (5)
Certain Subsidiaries of KCLLC to Societe Generale.
10.30 Stock Purchase Agreement dated February 24,2000 by and (6)
between Trace Holdings LLC and KCLLC and KCLLC Holdings,
Inc. with respect to all outstanding capital stock of
Heart and Cruising.
21.1 List of the Company's Subsidiaries. (6)
25.1 Form T-1 Statement of Eligibility of Trustee. (2)
27.1 Financial Data Schedule. (6)
(1) Previously filed with the Company's Schedule 14D-1, filed on
December 9,1998 (Commission File No.5-13949).
(2) Previously filed with the Company's registration statement on Form
S-4 (File No. 333-59675), which was declared effective on November
9, 1998.
(3) Previously filed with the Company's Current Report on Form 8-K (File
No. 333-58675-01), filed February 3, 1999.
(4) Previously filed with the Company's Form 10-K for the year ended
December 31, 1998.
(5) Previously filed with the Company's Form 10-Q for the three months
ended September 30, 1999.
(6) Filed herewith.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KEY COMPONENTS, LLC
Dated: March 29, 2000 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Dated: March 29, 2000 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
35
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: March 29, 2000 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director
Dated: March 29, 2000 /s/ Clay B. Lifflander
By: ----------------------
Clay B. Lifflander
Director
Dated: March 29, 2000 /s/ Alan L. Rivera
By: ------------------
Alan L. Rivera
Director
Dated: March 29, 2000 By: /s/ Christopher M. Neenan
----------------------
Christopher M. Neenan
Director
Dated: March 29, 2000 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KEY COMPONENTS FINANCE CORP.
Dated: March 29, 2000 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Dated: March 29, 2000 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
Dated: March 29, 2000 By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: March 29, 2000 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director
Dated: March 29, 2000 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Director
Dated: March 29, 2000 By: /s/ Alan L. Rivera
------------------
Alan L. Rivera
Director
37
<PAGE>
Dated: March 29, 2000 By: /s/ Christopher M. Neenan
-------------------------
Christopher M. Neenan
Director
Dated: March 29, 2000 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director
38
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Key Components, LLC
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 31 present fairly, in all material
respects, the financial position of Key Components, LLC and its subsidiaries at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 31 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers, LLP
Syracuse, New York
March 3, 2000
39
<PAGE>
Key Components, LLC
and subsidiaries
Consolidated Balance Sheets
(in thousands)
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash $ 4,171 $ 13,119
Accounts receivable, net of allowance for doubtful
accounts of $511 and $175 in 1999 and 1998,
respectively 18,944 7,989
Inventories 22,372 8,487
Prepaid expenses and other current assets 1,140 441
Net assets of discontinued operations 14,610 --
- ---------------------------------------------------------------------------------------------
Total current assets 61,237 30,036
Property and equipment, at cost less accumulated
depreciation 19,038 12,222
Goodwill, at cost less accumulated amortization 92,098 44,378
Deferred financing costs, at cost less accumulated
amortization 5,965 4,616
Intangibles, at cost less accumulated amortization 1,251 1,620
Other assets 969 272
- ---------------------------------------------------------------------------------------------
$180,558 $ 93,144
=============================================================================================
Liabilities and Member's Equity
Current liabilities:
Current portion of long-term debt and accrued lease
costs $ 4,759 $ 518
Accounts payable 6,372 1,465
Accrued compensation 3,881 759
Accrued expenses 3,529 1,218
Accrued interest 1,660 750
- ---------------------------------------------------------------------------------------------
Total current liabilities 20,201 4,710
Long-term debt 131,362 80,151
Accrued stock appreciation rights liability 5,898 --
Accrued lease costs 586 609
- ---------------------------------------------------------------------------------------------
Total liabilities 158,047 85,470
Commitments
Redeemable member's equity 13,100 --
Member's equity 9,411 7,674
- ---------------------------------------------------------------------------------------------
$180,558 $ 93,144
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
Key Components, LLC
and subsidiaries
Consolidated Statements of Income
(in thousands)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 144,125 $ 61,862 $ 27,318
Cost of goods sold 85,079 39,130 15,798
- -------------------------------------------------------------------------------------------------
Gross profit 59,046 22,732 11,520
Selling, general and administrative expenses 32,265 9,979 5,561
Stock appreciation rights compensation
expense 4,211 -- --
Related party management fees 800 800 760
Nonrecurring business consolidation
charges 299 -- 84
- -------------------------------------------------------------------------------------------------
Income from operations 21,471 11,953 5,115
Other income (expense):
Other income 465 404 31
Interest expense (14,542) (7,641) (3,007)
- -------------------------------------------------------------------------------------------------
Income before provision for income
taxes 7,394 4,716 2,139
Provision for income taxes 2,551 97 889
- -------------------------------------------------------------------------------------------------
Income from continuing operations 4,843 4,619 1,250
Discontinued operations:
Net loss from operations of the inverter
business (net of income taxes of $149) (28) -- --
Extraordinary loss on early extinguishment
of debt -- 4,616 --
- -------------------------------------------------------------------------------------------------
Net income $ 4,815 $ 3 $ 1,250
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
Key Components, LLC
and subsidiaries
Consolidated Statements of Member's Equity
(in thousands)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Member's equity, beginning of year $ 7,674 $ 8,848 $ 6,974
Capital contributions 3,336 500 739
Capital distributions (2,317) (1,677) (115)
Redeemable member's interest accretion to
market value (4,097) -- --
Net income 4,815 3 1,250
- -------------------------------------------------------------------------------------------
Member's equity $ 9,411 $ 7,674 $ 8,848
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
Key Components, LLC
and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,815 $ 3 $ 1,250
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss on early extinguishment of debt -- 4,616 --
Provision for doubtful accounts 164 44 (26)
Depreciation and amortization 7,643 4,176 1,879
Deferred income taxes (128) -- 233
(Gain) loss on disposal of assets (8) 161 53
Stock appreciation rights 4,211 -- --
Increase (decrease) in cash caused by changes in
assets and liabilities (net of effects of
acquisition):
Accounts receivable (630) (270) (186)
Inventories (91) (55) 597
Prepaid expenses and other assets 77 (76) 260
Accounts payable 314 (237) (474)
Accrued expenses 2,737 360 442
- ----------------------------------------------------------------------------------------------
Net cash provided by continuing
operations 19,104 8,722 4,028
Net cash provided by discontinued
operations 1,378 -- --
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,482 8,722 4,028
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Non-compete agreement -- (231) --
Business acquisitions (87,319) (312) (55,442)
Proceeds from business dispositions 7,406 -- --
Capital expenditures (2,680) (2,242) (695)
Proceeds from sale of equipment -- 44 5
- ----------------------------------------------------------------------------------------------
Net cash used in continuing operations (82,593) (2,741) (56,132)
Net cash used in discontinued operations (258) -- --
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (82,851) (2,741) (56,132)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of notes payable and other obligations (37,050) (66,240) (12,468)
Costs associated with early repayment of debt -- (1,979) --
Proceeds from issuance of debt 82,638 80,000 67,332
Deferred financing costs (2,189) (4,906) (2,275)
Capital withdrawals (2,317) (1,677) (115)
Capital contributions 12,339 500 739
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 53,421 5,698 53,213
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,948) 11,679 1,109
Cash and cash equivalents, beginning of year 13,119 1,440 331
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,171 $ 13,119 $ 1,440
==============================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 13,633 $ 6,890 $ 2,632
Income taxes 3,085 76 451
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Organization and Basis of Presentation and Nature of Operations
Significant
Accounting The consolidated financial statements as of and for the
Policies three years ended December 31, 1999 include the
financial statements of Key Components, LLC ("KCLLC"),
and its wholly-owned subsidiaries (collectively the
"Company"). All significant intercompany transactions
have been eliminated.
KCLLC was formed on April 1, 1998 to facilitate an
offering of senior notes. Upon its formation, KCLLC
became the parent holding company of the wholly-owned
subsidiaries of Key Components, Inc. ("KCI"), a Delaware
corporation and KCI then held the sole membership
interest in KCLLC. KCLLC's assets are limited to the
Company's corporate office and its investments in its
subsidiaries. KCLLC's financial statements include the
related expenses of operating the corporate office. The
consolidated financial statements are prepared as though
KCLLC was formed on January 1, 1997. KCI's results of
operations from January 1, 1997 to April 1, 1998 are
included in KCLLC's financial statements. KCI holds no
other assets other than its investment in KCLLC and has
no operations. As a result, all transactions of or
obligations related to KCI are reflected in the
consolidated financial statements of KCLLC.
44
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company is in the business of the manufacture and
sale of custom engineered essential componentry in a
diverse array of end use markets. Through its two
business segments, mechanical engineered components and
electrical components, the Company targets its products
to original equipment manufacturers. The Company's
mechanical engineered components, whose product
offerings consist primarily of medium security lock
products and accessories, flexible shaft and remote
valve control components and turbo-charger actuators,
are manufactured by Hudson Lock, LLC ("Hudson"), ESP
Lock Products, LLC ("ESP"), B.W. Elliott Manufacturing,
LLC ("BWE") and Gits Manufacturing, LLC ("Gits"). The
Company's electrical components, whose product offerings
include specialty electrical components including, but
not limited to, weather- and corrosion-resistant wiring
devices and battery chargers and high-voltage utility
switches, are manufactured by Marine Industries, LLC
("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner
Electric, LLC ("Turner").
The Company also wholly owns two companies and has an
interest of approximately 47% of a Dutch enterprise all
in the business of the manufacture and sale of power
inverters and related instrumentation. As of December
31, 1999, the Company had determined to sell its
interests in all three entities and has classified the
net assets of and operations related to these entities
as discontinued (Note 2).
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
45
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Inventories
Inventories are stated at the lower of cost or market,
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated using the straight-line method over useful
lives of the assets as follows:
--------------------------------------------------------
Buildings and building improvements 20 - 40 years
Equipment, furniture and fixtures 3 - 10 years
Leasehold improvements Term of lease
========================================================
Income Taxes
Effective May 31, 1997, each of the subsidiaries of KCI,
as of that date, elected to be treated as a subchapter S
corporation, which caused the stockholders of their then
parent company, KCI, to be personally liable for the
taxes due on the income of the Company. Through August
31, 1999, Valley Forge Corporation ("VFC") (Note 2) and
its subsidiaries were C corporations and were
responsible for paying taxes on their income. Effective
August 31, 1999, VFC was merged into KCLLC and most of
VFC's subsidiaries, as well as BWE, Hudson and ESP, were
converted to limited liability company ("LLC") status.
These conversions were accomplished by merging each of
the existing subsidiaries into a newly organized
Delaware LLC. Upon election of LLC status by the
subsidiaries, two members of KCLLC, Keyhold, Inc.
("Keyhold") (Note 9), a New York C Corporation, and KCI
became responsible for the taxes due on the income of
the Company, apart from the subsidiaries that remained C
corporations. Since KCI is currently a S corporation,
the shareholders of KCI are personally responsible for
the income taxes on the income of KCLLC that is
allocated to KCI.
46
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Accordingly, no provision for income taxes has been
recognized in the financial statements from May 31, 1997
through the date of acquisition of VFC, except for
certain franchise and income taxes which certain states
impose on S corporations. Prior to May 31, 1997, the
Company provided for income taxes for one of its
subsidiaries that reported as a C corporation at that
time. For the year ended December 31, 1999, the
Company's provision for income taxes relates primarily
to VFC's consolidated taxable income (as a C
corporation) and the taxable income of the subsidiaries
not converted to LLC status. For those entities that
were not converted to LLC status, deferred income taxes
have been recorded to reflect the tax consequences on
future years of temporary differences between the tax
bases of assets and liabilities and their financial
reporting amounts at year-end.
Intangibles
Intangibles at December 31, 1999 primarily consist of
costs associated with a licensing agreement and
covenants not to compete arising from business
acquisitions. These assets are being amortized on a
straight-line basis over the lives of the related
agreements which range from five to seven years.
Amortization of intangibles charged to continuing
operations amounted to approximately $681,000, $809,000
and $541,000 for 1999, 1998 and 1997, respectively.
Accumulated amortization at December 31, 1999 and 1998
was approximately $2,490,000 and $1,797,000,
respectively.
Goodwill
Goodwill represents the excess of the cost of acquired
businesses over the fair market value of their net
tangible assets. Goodwill is being amortized on the
straight-line method over thirty-five to forty years.
Amortization charged to continuing operations amounted
to approximately $2,464,000, $1,140,000 and $505,000 for
the years ended December 31, 1999, 1998 and 1997,
respectively. Accumulated amortization at December 31,
1999 and 1998 was approximately $4,102,000 and
$1,645,000, respectively. At each balance sheet date,
the Company evaluates
47
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
the realizability of goodwill based on expectations of
non-discounted cash flows and operating income for each
operation having a material goodwill balance. Based on
its most recent analysis, the Company believes that no
impairment of goodwill exists at December 31, 1999.
Deferred Financing Costs
Debt issuance costs have been deferred and are being
amortized on a straight-line basis over the lives of the
financings.
Revenue Recognition
The Company recognizes revenue upon shipment of products
to customers.
Concentration of Credit Risk
Financial instruments which potentially expose the
Company to concentrations of credit risk consist
primarily of trade accounts receivable. The Company's
customer base includes customers in a multitude of
industries. Some of its larger customers are focused in
the marine, turbocharger, aerospace, lawn and garden and
office furniture industries. Due to the distribution of
its customer base amongst a large array of end user
markets, management does not believe that a significant
concentration of credit risk exists at December 31,
1999.
Fair Value of Financial Instruments
For certain of the Company's financial instruments,
including cash, accounts receivable, accounts payable
and accrued expenses, management believes that the
carrying amounts approximate fair value due to their
short maturities. The estimated fair value of the
Company's long-term debt is based on the current rates
offered to the Company for debt of similar maturities
and approximates carrying value at December 31, 1999.
Reclassifications
Certain reclassifications were made to conform the prior
periods to the current year presentation.
48
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Acquisitions and During the three years ended December 31, 1999, the
Dispositions Company acquired the entities described below, which
were accounted for by the purchase method of accounting,
and the results of operations have been included in the
consolidated financial statements since the date of
acquisition.
(a) Valley Forge Corporation
On January 19, 1999, the Company acquired all of
the outstanding shares of VFC for a purchase price
of approximately $84,000,000 (including the
issuance of stock appreciation rights of
approximately $1,400,000) and assumed liabilities
of approximately $21,700,000. In conjunction with
the acquisition, the Company repaid approximately
$8,900,000 of VFC's outstanding long-term debt out
of the approximately $21,700,000 of liabilities
assumed as part of the acquisition. VFC
manufactures electrical and mechanical engineered
components sold to original equipment
manufacturers ("OEM"), dealers, and distributors.
The Company recorded the excess purchase price
over net assets acquired of approximately
$52,500,000 as goodwill. The Company ascribed a
thirty-five year useful life to goodwill.
At the time of the acquisition, the Company
decided to sell two VFC subsidiaries, Force 10
Marine Company ("Force 10") and Multiplex
Technology, Inc. ("Multiplex"). In accordance with
Emerging Issues Task Force ("EITF") Bulletin
87-11, the Company recorded the anticipated net
proceeds from the sale of these subsidiaries
adjusted for the anticipated net cash outflows
during the holding period (date of acquisition to
date of sale) as assets held for sale. In
addition, the net earnings from these subsidiaries
during the holding period were excluded from the
operations of the Company, in accordance with EITF
87-11. Such results and sale proceeds have been
included in goodwill. The sale of
49
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Force 10 was completed on February 26, 1999 for
proceeds before taxes of $1,700,000 in cash.
Multiplex was sold on May 28, 1999 for proceeds
before taxes of approximately $4,300,000. The tax
liability for the sales of Force 10 and Multiplex
was approximately $144,000.
On November 30, 1999, the Company sold the stock
of Glendinning Marine Products, Inc.
("Glendinning"), a former subsidiary of VFC, for
approximately $3,000,000. The Company received
approximately $2,100,000 in cash and the new
owners assumed the outstanding mortgage of the
Glendinning facility.
In November 1999, management of the Company
decided to withdraw from the business of the
manufacture and sale of power inverters and
related instrumentation by selling its interests
in Heart Interface Corporation ("Heart"), Cruising
Equipment Company ("Cruising") and Mastervolt
International B.V. ("Mastervolt"), all of which
were acquired as part of the VFC acquisition. In
accordance with Accounting Principles Board
Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions",
the Company recorded the net assets of Heart,
Cruising, and Mastervolt as net assets of
discontinued operations and reported the results
of operations as loss from discontinued
operations. The Company has made no accrual of
costs of disposal related to the sale of their
interests since it is management's estimate that
the Company will record gains from the sales.
In February 2000, the Company signed an agreement
to sell the stock of Heart and Cruising.
No definitive agreement has been signed in
connection with the Company's sale of its interest
in Mastervolt.
50
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following table summarizes the net assets of
the power inverter business as of December 31,
1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------
(in thousands)
<S> <C>
Accounts receivable $ 4,005
Inventory 4,014
Other current assets and prepaid expenses 165
Plant and equipment, net 985
Goodwill, net 4,768
Other intangibles, net 148
Other assets 4
Deferred tax assets 666
Bank overdraft (218)
Accounts payable (1,358)
Accrued wages and related (476)
Accrued expenses (994)
--------------------------------------------------------------
Net assets of Heart and Cruising 11,709
Investment in and notes receivable
from Mastervolt 2,901
--------------------------------------------------------------
Total $14,610
==============================================================
</TABLE>
The summary of the operations of the power
inverter business for the year ended December 31,
1999 is as follows:
--------------------------------------------------
(in thousands)
Net sales $23,956
==================================================
Net income from operations of the
inverter business $ 114
Equity in loss of Mastervolt (142)
--------------------------------------------------
Net loss of discontinued operations
(net of income taxes of $149) $ (28)
==================================================
51
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
On an unaudited pro forma basis, assuming the VFC
acquisition, the sale of Glendinning and the
decision to sell the power inverter business had
occurred as of January 1, 1998, the consolidated
results of operations of the Company would have
been as follows:
Year ended December 31, 1999 1998
--------------------------------------------------
(Unaudited) (in thousands)
Pro forma net sales $144,832 $135,633
Pro forma income from
continuing operations $ 5,646 $ 3,333
Pro forma net income
(loss) $ 5,657 $ (215)
==================================================
The unaudited pro forma financial information
presented above is not necessarily indicative of
the results that would have actually occurred had
the companies been combined for the periods
presented.
On December 1, 1999, KCI, KCLLC and the minority
shareholders of Atlantic Guest, Inc. ("Guest"), a
subsidiary acquired as part of the VFC
acquisition, consummated the sale of the 7%
minority interest of Guest to the Company for a
combination of cash and KCI stock. KCI received as
consideration for the stock issued to the
shareholders an equal interest in KCLLC.
(b) G & H Technology
On February 5, 1999, the Company acquired G&H
Technology, Inc. ("G&H") for approximately
$4,000,000 in cash. The acquired product lines are
compatible with the Company's mechanical
engineered components business and the assets and
product lines of G&H were integrated into the
Company's flexible shaft manufacturing facility in
Binghamton, New York. The Company recorded
goodwill of approximately $3,000,000 in connection
with the acquisition. The pro forma effect of this
transaction was not material.
52
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(c) Hudson Lock, Inc.
On May 15, 1997, the Company acquired all of the
outstanding shares of Hudson Lock, Inc. ("Hudson")
for a cash purchase price of $39,100,000 and
assumed liabilities of approximately $1,200,000.
Hudson manufactures medium-security custom and
specialty locks, primarily for original equipment
manufacturers. The purchase price was allocated
based on estimated fair values at the date of
acquisition. This resulted in an excess of
purchase price over assets acquired of
approximately $31,000,000, which is being
amortized on a straight-line basis over forty
years.
(d) ESP Lock Products, Inc.
On December 10, 1997, the Company acquired all of
the outstanding shares of ESP Lock Products, Inc.
("ESP") for a cash purchase price of $16,300,000
and assumed liabilities of approximately
$10,400,000. ESP primarily manufactures
medium-security custom and specialty locks, and
key blanks. The purchase price was allocated based
on estimated fair values at the date of
acquisition and included $1,200,000 for a covenant
not to compete. This resulted in an excess of
purchase price over assets acquired of
approximately $14,700,000, which is being
amortized on a straight-line basis over forty
years.
53
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Inventories Inventories consist of the following:
December 31, 1999 1998
--------------------------------------------------
(in thousands)
Raw materials $10,774 $2,642
Work-in-process 6,401 3,982
Finished goods 5,197 1,863
--------------------------------------------------
Total inventory $22,372 $8,487
==================================================
4. Property, Plant Property, plant and equipment consists of the following:
and Equipment
December 31, 1999 1998
--------------------------------------------------------
(in thousands)
Land, building and
improvements $ 5,824 $ 3,083
Equipment 19,925 14,168
Furniture and fixtures and
leasehold improvements 496 192
Construction-in-progress 135 292
--------------------------------------------------------
26,380 17,735
Less: Accumulated depreciation (7,342) (5,513)
--------------------------------------------------------
Total property, plant
and equipment $19,038 $12,222
========================================================
Depreciation expense amounted to approximately
$3,607,000, $1,796,000 and $836,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
54
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Operating Through 1998, the Company operated in two business
Segments segments, both of which were involved in the manufacture
of mechanical engineered components. These businesses
were comprised of the manufacturing of specialty locks
and related accessories and the manufacture of flexible
shaft products. Concurrent with the VFC acquisition, the
Company reorganized its operating segments into the
mechanical engineered components business and the
electrical components business. The VFC acquisition
resulted in the Company expanding its mechanical
engineered components business from its two original
business lines to include the manufacturing of
turbocharger actuators and related accessories. Further,
the VFC acquisition resulted in the Company entering
into the business of manufacturing electrical
components. The electrical components business produces
an array of electrical componentry items for marine,
recreational and industrial applications. It also
produces switches for utility companies which are
utilized in industrial markets.
55
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company evaluates performance and allocates
resources based on profit or loss from operations before
interest, taxes, depreciation and amortization
("EBITDA"). In its calculation of EBITDA certain charges
that management determines as non-recurring are
excluded. Segment information is as follows:
<TABLE>
<CAPTION>
Mechanical
engineered Electrical
(In thousands) components components Total
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1999:
Net sales from external
customers $81,656 $62,469 $144,125
Intersegment net sales 327 314 641
Segment profit - EBITDA 23,704 9,567 33,271
Segment assets 91,037 86,144 177,181
Depreciation and amortization 4,302 2,443 6,745
Interest expense 8,505 6,037 14,542
Year ended December 31, 1998:
Net sales from external
customers 61,862 -- 61,862
Intersegment net sales - -- --
Segment profit - EBITDA 18,078 -- 18,078
Segment assets 82,800 -- 82,800
Depreciation and amortization 4,146 -- 4,146
Interest expense 7,641 -- 7,641
Year ended December 31, 1997
Net sales from external
customers 27,318 -- 27,318
Intersegment net sales -- -- --
Segment profit - EBITDA 7,921 -- 7,921
Segment assets 79,753 -- 79,753
Depreciation and amortization 1,817 -- 1,817
Interest expense 3,007 -- 3,007
================================================================================
</TABLE>
56
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Reconciliation of Selected Segment Information to the
Company's Consolidated Totals
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
Profit or loss:
Total profit from
reportable segments $ 33,271 $ 18,078 $ 7,921
Reconciling items:
Corporate expenses (2,593) (360) (114)
Depreciation and amortization (7,643) (4,146) (1,817)
Interest expense (14,542) (7,641) (3,007)
Management fee (800) (800) (760)
Other charges (299) (415) (84)
------------------------------------------------------------------------
Total consolidated income from
continuing operations before
provision for income taxes $ 7,394 $ 4,716 $ 2,139
========================================================================
</TABLE>
December 31, 1999 1999 1998
--------------------------------------------------------
(in thousands)
Assets:
Total assets for reportable
segments $ 177,181 $ 82,800
Unallocated amounts:
Corporate assets 3,377 10,344
--------------------------------------------------------
Total consolidated assets $ 180,558 $ 93,144
========================================================
57
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Long-Term Long-term debt consists of the following:
Debt
December 31, 1999 1998
--------------------------------------------------------
(in thousands)
Senior notes $ 80,000 $80,000
Term loan 55,000 --
Mortgage 832 --
Other 217 651
--------------------------------------------------------
136,049 80,651
Less: Current portion (4,687) (500)
--------------------------------------------------------
Total long-term debt $131,362 $80,151
========================================================
(a) Senior Notes
On May 28, 1998, the Company issued $80,000,000 of
10.50% Senior Notes due June 1, 2008, with
interest payable semi-annually. The net proceeds
from the sale were used to repay debt, repurchase
outstanding warrants and for general corporate
purposes. In connection with this repayment, the
Company recorded an extraordinary loss of
$4,616,000 in 1998. The extraordinary loss
represents the payment of redemption premiums and
the write-off of deferred finance costs. As of
December 31, 1999 and 1998, the Company has
accrued interest on these notes in the amount of
$700,000 and $750,000, respectively.
The notes are fully and unconditionally
guaranteed, jointly and severally, on an unsecured
basis, by the subsidiaries of the Company (the
"Subsidiary Guarantors"). At December 31, 1999,
KCLLC has deminimus assets other than its
investments in the Subsidiary Guarantors and no
operations other than those of the Company's
corporate office. Accordingly, the consolidated
financial statements present the combined assets
and operations of the Subsidiary Guarantors.
58
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(b) Term Loan and Revolving Credit Facility
On January 19, 1999, the Company amended its prior
credit agreement with Societe Generale, an
affiliate of SG Capital Partners LLC, as
administrative agent for the lenders, to provide
for working capital needs and to finance the VFC
and future acquisitions. The amended agreement
provides for a six-year $40 million revolving
credit facility and a six-year $60 million term
loan acquisition facility. Borrowings under the
revolver are subject to a borrowing base
limitation measured by eligible inventory and
accounts receivable. The credit agreement is
collateralized by all of the capital stock of the
subsidiaries, receivables, inventories, equipment
and certain intangible property.
The term loan is payable in quarterly installments
through January 19, 2005 and the Company may
prepay the quarterly installments. The term loan
and revolving credit facility bear interest at
fluctuating interest rates determined by reference
to a base rate plus an applicable margin which
will vary from 1.50% to 2.25%. The revolving
credit facility also calls for a commitment fee of
0.50% on the unused portion of the facility as
well as quarterly commitment fees. The Company has
temporarily waived $5,000,000 of the revolving
credit facility commitment. As of December 31,
1999, the Company had no borrowings outstanding
under the revolving credit facility and had
$55,000,000 outstanding under the term loan.
Accrued interest and commitment fees payable at
December 31, 1999 and 1998 were $959,000 and
$50,000, respectively.
The term loan and revolving credit facility and
senior notes contain certain covenants and
restrictions which require the maintenance of
financial ratios, and restrict or limit dividends
and other stockholder distributions, transactions
with affiliates, capital expenditures, rental
obligations, incurrence of indebtedness and the
issuance of preferred stock, among others. At
December 31, 1999, the Company was in compliance
with these covenants and restrictions.
59
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(c) Mortgage
The Company has a mortgage collateralized by one
of the Company's manufacturing facilities. The
mortgage requires monthly payments of
approximately $5,000 of principal and interest at
approximately 7.7% per annum with the balance of
the principal of approximately $657,000 due May 1,
2008.
At December 31, 1999, aggregate principal payments
required on all amounts due after one year are as
follows:
Year ending December 31, Amount
--------------------------------------------------------
(in thousands)
2000 $ 4,687
2001 9,055
2002 10,774
2003 13,270
2004 14,021
Thereafter 84,242
========================================================
60
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
7. Federal and State Income tax expense (benefit) consists of the following:
Income Taxes
Year ended December 31, 1999 1998 1997
--------------------------------------------------------
(in thousands)
Current:
Federal $2,261 $ -- $782
State 418 97 107
--------------------------------------------------------
2,679 97 889
--------------------------------------------------------
Deferred:
Federal (115) -- --
State (13) -- --
--------------------------------------------------------
(128) -- --
--------------------------------------------------------
Total provision for income
taxes $2,551 $ 97 $889
========================================================
A reconciliation between income taxes computed at the
statutory federal rate and income tax expense is as
follows:
Year ended December 31, 1999 1998 1997
-------------------------------------------------------
Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal 4.0 2.0 3.3
Permanent differences 2.9
Write-off of net deferred tax
asset -- -- 21.9
Income taxed directly to
shareholders (6.7) (34.0) (20.7)
Other, net .3 -- 3.0
--------------------------------------------------------
34.5% 2.0% 41.5%
========================================================
61
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Due to the change in tax status as described in Note 1,
the 1997 deferred tax provision includes a charge of
$469,000 representing net deferred tax assets that were
eliminated. At December 31, 1999 and 1998, the Company's
net assets for financial reporting purposes were
approximately $68,000,000 and $13,600,000, respectively,
greater than the related tax basis of such net assets,
principally related to the goodwill generated from the
acquisitions of VFC and ESP which are not deductible for
tax purposes.
The Company's net deferred assets related to the
remaining C corporation as of December 31, 1999 were as
follows:
December 31, 1999
--------------------------------------------------------
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 12
Warranty reserve 77
Inventory reserve 74
Accrued stock appreciation rights 142
Other 35
--------------------------------------------------------
340
Deferred tax liabilities:
Excess depreciation (126)
--------------------------------------------------------
Net deferred tax asset $214
========================================================
8. Lease The Company rents several manufacturing and warehouse
Commitments facilities under operating lease agreements, two of
which are with related parties (Note 11). Rental
payments under all lease agreements amounted to
$1,077,000, $499,000 and $253,000 in 1999, 1998 and
1997, respectively.
The Company also leases certain machinery and equipment
with a bargain purchase option. These leases are
classified as capital leases and expire at various dates
through 2002.
62
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
At December 31, 1999 and 1998, approximately $658,000
and $626,000, respectively, was recorded as accrued
lease costs related to leased facilities no longer in
use by one of the Company's subsidiaries. The accrual
represents the discounted future rental payments, net of
estimated sublease income. At December 31, 1999 and
1998, approximately $72,000 and $17,000, respectively,
were included in current maturities of long-term debt,
and accrued lease costs.
The following is a schedule of the future minimum lease
payments (net of sublease income) required under
operating leases.
<TABLE>
<CAPTION>
Minimum rental Estimated
Year ended December 31, payments sublease income Net
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
2000 $1,322 $ (42) $1,280
2001 1,151 (31) 1,120
2002 1,077 (19) 1,058
2003 959 (19) 940
2004 846 - 846
Thereafter 3,833 - 3,833
--------------------------------------------------------------------------
Total minimum
lease payments $9,188 $(111) $9,077
==========================================================================
</TABLE>
63
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Member's Equity (a) Sale of Membership Interest
On August 12, 1999, KCLLC entered into agreements (the
"SG Agreements") with Keyhold, Inc., a New York C
Corporation ("Keyhold"), a wholly-owned subsidiary of
SGC Partners II LLC ("SG"), an entity controlled by SG
Capital Partners LLC, and SG, to sell up to $20,000,000
of membership equity interests in KCLLC. On September 1,
1999, SG (through Keyhold) made a capital contribution
to KCLLC of $10,000,000, before expenses of
approximately $997,000. Keyhold received approximately
an 11% membership equity interest in KCLLC. Prior to
August 12, 2000, KCLLC may require SG (through Keyhold)
to purchase up to an additional $10,000,000 membership
equity interest (the "Additional Investment"),
constituting the balance of SG's membership equity
investment commitment. KCLLC can require the Additional
Investment be in one installment of $10,000,000 or in
two installments of $5,000,000 each. The Additional
Investment would currently represent an additional 9.3%
membership equity interest in KCLLC. Pursuant to the SG
Agreements, under certain circumstances, KCLLC is also
restricted from selling additional membership equity
interests unless all or a portion of the Additional
Investment is made. The SG Agreements also provide that
upon the earlier of a change in control of the Company,
as defined therein, or August 31, 2004, SG and Keyhold
have the right to require KCLLC to repurchase Keyhold's
outstanding investment in KCLLC at the then current
market value. Keyhold's investment has been classified
as redeemable member's equity and has been adjusted to
estimated fair value, based on an independent appraisal,
as of December 31, 1999. The accretion in value has been
recorded as a reduction in member's equity.
64
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(b) Long-term Incentive Plan of KCI
In 1998, KCI adopted a Long-Term Incentive Plan
(the "Plan") to attract, retain and provide
additional incentive to employees. Awards under
the Plan may take the form of incentive stock
options of KCI or non-qualified stock options of
KCI. In addition, stock appreciation rights and
restricted stock awards and other stock-based
awards may be granted. During the years ended
December 31, 1999 and 1998, KCI issued options to
purchase 55,120 and 23,000 shares, respectively,
of KCI stock with exercise prices ranging from $25
to $75 per share. As of December 31, 1999, options
to purchase an aggregate of 70,120 shares of KCI
were outstanding under the Plan at a weighted
average exercise price of $36 per share and a
weighted average remaining contractual life of
nine years. At December 31, 1999, options to
purchase 15,000, 49,286 and 5,834 shares,
respectively, were outstanding at $25, $35 and $75
per share, respectively with remaining weighted
average contractual lives of 8, 9 and 10 years,
respectively. At December 31, 1998, options to
purchase 23,000 shares were outstanding with a
weighted average exercise price of $29 per share
and a weighted average remaining contractual life
of nine years. Options to purchase 15,000 shares
were outstanding at $25 per share with the balance
at $35 per share, with remaining contractual lives
of nine years, respectively. At December 31, 1999,
options to purchase 37,323 shares were exercisable
at a weighted average price of $35 and a weighted
average remaining contractual life of nine years.
The options to purchase 37,323 shares that were
exercisable consisted of options to purchase
8,000, 27,380 and 1,943 shares at exercise prices
of $25, $35 and $75, respectively, with remaining
contractual lives of 8, 9 and 10 years,
respectively. During 1999, options to purchase
8,000 shares of KCI common stock were forfeited.
The Plan is administered by the Board of
Directors, which has the power to determine the
terms of any options or awards granted, including
the exercise price and the number of shares
subject to award.
The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan.
Accordingly, as the exercise price of options was
at or above the market value estimated by
management at date of grant, no compensation cost
has been recognized.
65
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Pro forma information regarding net income is
required by SFAS No. 123, "Accounting for
Stock-Based Compensation", and has been determined
as if the Company had accounted for its employee
stock options under the minimum value method with
the following assumptions for 1999 and 1998:
1999 1998
--------------------------------------------------
Weighted average risk-free
interest rate 5.0% 5.5%
Dividend yield None None
Weighted average
expected life 8 years 8 years
==================================================
Had compensation cost for the stock options been
determined based on the fair values at the grant
dates for fiscal 1999 and 1998 awards, the
Company's net income would have been reduced to
the pro forma amounts indicated below:
Year ended December 31, 1999 1998
--------------------------------------------------
(in thousands)
Net income:
As reported $4,815 $ 3
Pro forma 4,432 (37)
==================================================
66
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(c) Accrued Compensation Rights
In connection with the VFC acquisition, KCI issued
stock appreciation rights ("SARS") to certain
members of operating subsidiary management. The
SARS, which are fully vested, entitle the holder
to receive, in cash, the difference between the
exercise price and market value of KCI stock as of
the date of exercise. The Company is required to
record as compensation expense any net accretion
in the value of the SARS based on current market
value of KCI stock. For the year ended December
31, 1999, the Company included in continuing
operations approximately $4,211,000 in
compensation expense related to the SARS based on
an independent appraisal as of December 31, 1999.
The SARS are payable upon the earlier of the
employee's termination of employment with the
Company, an initial public offering of common
stock of the Company or KCI, or January 19, 2007.
(d) Subsequent Capital Withdrawals
In February 2000, KCLLC paid approximately
$922,000 related to a capital withdrawal by KCI.
KCI used the funds to repurchase outstanding
shares of its common stock from three
shareholders.
10. Retirement Plans The Company's disclosures regarding its pensions and
other post-retirement plans are in accordance with
Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other
Post-Retirement Benefits". The statement, which was
effective for all years beginning after December 15,
1997, does not change the measurement or recognition of
those plans, but revises disclosures about pensions and
other post-retirement benefit plans.
The Company sponsors a profit sharing plan for all
non-union employees at two subsidiaries acquired as part
of the VFC acquisition. Under this plan, contributions
are discretionary and limited to a percentage of
eligible employees' compensation. There was no profit
sharing expense for this plan for 1999.
67
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Currently, the Company has four 401(k) plans in effect.
One covers all employees at domestic locations of all
the subsidiaries acquired as part of the VFC acquisition
("VFC Plan"). Employee contributions under the VFC Plan
of up to 3% of each covered employee's compensation are
matched 100% by the Company. The employees of BWE,
Hudson and ESP are covered by 401(k) plans for each
subsidiary. Employer contributions to these plans are
discretionary. Employer contributions were approximately
$496,000, $90,000 and $47,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Gits has a noncontributory defined benefit pension plan
(the "Plan") covering its union employees retiring after
August 1, 1993. Pension benefits are based on a multiple
of a fixed amount per month and years of service, as
defined in the union agreement. Benefits generally vest
over a seven-year period. Gits funds the Plan under the
minimum funding requirements of the Employee Retirement
Income Security Act ("ERISA") of 1974. The assets of the
Plan are managed and invested by an insurance company.
68
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Summarized information of the Plan is shown below (in
thousands):
Change in Benefit Obligation:
Year ended December 31, 1999
--------------------------------------------------------
(in thousands)
Benefit obligation at acquisition date $1,366
Service cost 43
Interest cost 60
Actuarial gain (382)
Benefits paid (54)
--------------------------------------------------------
Benefit obligation at end of year $1,033
========================================================
Change in Plan Assets:
Year ended December 31, 1999
--------------------------------------------------------
(in thousands)
Fair value of plan assets at acquisition date $1,366
Actual return on plan assets 31
Benefits paid (54)
--------------------------------------------------------
Fair value of plan assets at end of year $1,343
========================================================
Reconciliation of Funded Status
Year ended December 31, 1999
--------------------------------------------------------
(in thousands)
Overfunded status $ 310
Unrecognized net actuarial gain (310)
--------------------------------------------------------
Prepaid benefit $ --
========================================================
69
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Components of Net Periodic (Benefit) Cost
Year ended December 31, 1999
--------------------------------------------------------
(in thousands)
Service cost $ 43
Interest cost 60
Expected return on plan assets (116)
--------------------------------------------------------
Net period benefit $ (13)
========================================================
Assumption and Method Disclosures
Year ended December 31, 1999
--------------------------------------------------------
(in thousands)
Discount rate 6.50%
Expected long-term rate of return on assets 8.50%
Amortization method Straight-line
========================================================
11. Related Party The Company rents one of its manufacturing facilities
Transactions under an operating lease agreement entered into with a
company, that is co-owned by the President of BWE who
also is a shareholder of KCI. The terms of the lease,
which expires December 31, 2008, provide for annual rent
increases of 5%. Rental payments amounted to $144,000,
$137,000 and $131,000 in 1999, 1998 and 1997,
respectively.
The Company rents its Leominster, Massachusetts
manufacturing facility under an operating lease
agreement entered into with a company that is co-owned
by the President of ESP who also is a shareholder of
KCI. The lease, which expires on May 31, 2003, provides
for annual rent increase based on the CPI. Rental
payments amounted to $203,000, $208,000 and $225,000 for
the three years ended December 31, 1999, 1998 and 1997,
respectively.
70
<PAGE>
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company pays management fees to Millbrook Capital
Management, Inc. ("Millbrook"), a party related to a
Company stockholder. These management fees amounted to
$800,000, $800,000 and $660,000 for the years ended
December 31 1999, 1998 and 1997, respectively. During
1999, the Company also paid Millbrook $500,000 and
$350,000, respectively, for investment advisory services
related to the sale of the Keyhold membership interest
and the sale of Multiplex. The Company paid Millbrook
$900,000 upon the consummation of the offering of the
Company's senior secured notes in May 1998 for financial
advisory and other services. The Company also paid
$100,000 for administrative support services in 1997 and
$400,000 for advisory services related to the financing
and acquisition of ESP Lock Products Inc., which is
included as part of the deferred financing and
acquisition costs.
12. Nonrecurring In connection with the VFC and G&H acquisitions, the
Business Company incurred $235,000 of nonrecurring administrative
Consolidation expenses during the year ended December 31, 1999.
Charges
During 1996, the Company initiated a program at BWE to
consolidate manufacturing and administrative facilities.
The Company expensed as incurred moving costs of $64,000
and $84,000 during 1999 and 1997, respectively.
71
<PAGE>
Key Components, LLC
and subsidiaries
================================================================================
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at --------- Balance at
beginning Charged to costs Charged to other end of
Description of period and expenses accounts (2) Deductions (1) period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts deducted from
accounts receivable in the balance sheet:
Year ended December 31:
1999 $175 $164 $ 202 $ (31) $ 510
1998 81 111 -- (17) 175
1997 36 27 37 (19) 81
Allowance for excess and obsolete inventory
deducted from inventory in the balance sheet
Year ended December 31:
1999 $411 $955 $1,571 $ (35) $2,902
1998 373 44 -- (6) 411
1997 387 (26) 174 (162) 373
====================================================================================================================================
</TABLE>
- ----------
(1) Deductions primarily represent write-offs charged against the reserves
listed.
(2) Represents allowance account balances of companies acquired at the date of
acquisitions.
72
STOCK PURCHASE AGREEMENT
dated as of February 24, 2000
by and between
Trace Holdings LLC
and
Key Components, LLC and KCLLC Holdings, Inc.
with respect to all
outstanding capital stock of
Heart Interface Corporation and Cruising Equipment Company
<PAGE>
TABLE OF CONTENTS
Page No.
--------
Article I SALE OF SHARES AND CLOSING.........................................1
1.01 Purchase and Sale................................................1
1.02 Purchase Price...................................................1
1.03 Closing; Escrow..................................................1
1.04 Pre-Closing Adjustment...........................................2
1.05 Post-Closing Adjustment..........................................2
1.06 Further Assurances; Post-Closing Cooperation.....................3
Article II REPRESENTATIONS AND WARRANTIES OF SELLER..........................4
2.01 Organization of Sellers..........................................4
2.02 Authority........................................................4
2.03 Organization of the Companies....................................5
2.04 Capital Stock....................................................5
2.05 No Conflicts.....................................................5
2.06 Governmental Approvals and Filings...............................6
2.07 Books and Records................................................6
2.08 Financial Statements.............................................6
2.09 Absence of Changes...............................................7
2.10 No Undisclosed Liabilities.......................................8
2.11 Taxes............................................................9
2.12 Legal Proceedings...............................................11
2.13 Compliance With Laws and Orders.................................11
2.14 Benefit Plans; ERISA............................................11
2.15 Real Property...................................................14
2.16 Tangible Personal Property; Investment Assets...................14
2.17 Intellectual Property Rights....................................15
2.18 Contracts.......................................................15
2.19 Licenses........................................................17
2.20 Insurance.......................................................17
2.21 Affiliate Transactions..........................................18
2.22 Employees; Labor Relations......................................18
2.23 Environmental Matters...........................................19
2.24 Substantial Customers and Suppliers.............................20
2.25 Bank and Brokerage Accounts; Investment Assets..................20
2.26 No Powers of Attorney...........................................20
2.27 Accounts Receivable; Accounts Payable...........................20
2.28 Inventory.......................................................21
2.29 Brokers.........................................................21
2.30 Product Liabilities and Product Warranties......................21
2.31 Indebtedness....................................................21
2.32 Disclosure......................................................21
i
<PAGE>
Page No.
--------
Article III REPRESENTATIONS AND WARRANTIES OF PURCHASER.....................22
3.01 Organization....................................................22
3.02 Authority.......................................................22
3.03 No Conflicts....................................................22
3.04 Governmental Approvals and Filings..............................22
3.05 Legal Proceedings...............................................23
3.06 Purchase for Investment.........................................23
3.07 Brokers.........................................................23
Article IV COVENANTS OF SELLERS.............................................23
4.01 Regulatory and Other Approvals..................................23
4.02 Intentionally Omitted...........................................24
4.03 Investigation by Purchaser......................................24
4.04 No Solicitations................................................24
4.05 Conduct of Business.............................................24
4.06 Financial Statements and Reports; Filings.......................25
4.07 Employee Matters................................................26
4.08 Certain Restrictions............................................26
4.09 Affiliate Transactions..........................................27
4.10 Books and Records...............................................28
4.11 Noncompetition..................................................28
4.12 Notice and Cure.................................................29
4.13 Fulfillment of Conditions.......................................29
4.14 Qualified Plans.................................................29
Article V COVENANTS OF PURCHASER............................................30
5.01 Regulatory and Other Approvals..................................30
5.02 Intentionally Omitted...........................................30
5.03 Notice and Cure.................................................30
5.04 Fulfillment of Conditions.......................................30
Article VI CONDITIONS TO OBLIGATIONS OF PURCHASER...........................31
6.01 Representations and Warranties..................................31
6.02 Performance.....................................................31
6.03 Officers' Certificates..........................................31
6.04 Orders and Laws.................................................31
6.05 Regulatory Consents and Approvals...............................31
6.06 Third Party Consents; Release of Liens..........................32
6.07 Opinion of Counsel..............................................32
6.08 Resignations of Directors and Officers..........................32
6.09 Escrow Agreement................................................32
6.10 Proceedings.....................................................32
6.11 No Material Change..............................................32
Article VII CONDITIONS TO OBLIGATIONS OF SELLERS............................32
7.01 Representations and Warranties..................................33
7.02 Performance.....................................................33
ii
<PAGE>
Page No.
--------
7.03 Officers' Certificates..........................................33
7.04 Orders and Laws.................................................33
7.05 Regulatory Consents and Approvals...............................33
7.06 Third Party Consents............................................33
7.07 Letters of Credit...............................................33
7.08 Proceedings.....................................................33
Article VIII TAX MATTERS AND POST-CLOSING TAXES.............................34
8.01 Preparation And Filing of Tax Returns...........................34
8.02 Tax Cooperation.................................................35
8.03 Tax Indemnification.............................................35
8.04 Tax Contests....................................................36
8.05 Section 338(h)(10) Election.....................................37
Article IX [RESERVED].......................................................40
Article X SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS........................................................40
10.01 Survival of Representations, Warranties, Covenants and
Agreements.....................................................40
Article XI INDEMNIFICATION..................................................40
11.01 Indemnification................................................40
11.02 Method of Asserting Claims.....................................42
11.03 Exclusivity....................................................45
Article XII TERMINATION.....................................................45
12.01 Termination....................................................45
12.02 Effect of Termination..........................................45
Article XIII DEFINITIONS....................................................46
13.01 Definitions....................................................46
Article XIV MISCELLANEOUS...................................................53
14.01 Notices........................................................53
14.02 Entire Agreement...............................................55
14.03 Expenses.......................................................55
14.04 Public Announcements...........................................55
14.05 Confidentiality................................................55
14.06 Waiver.........................................................56
14.07 Amendment......................................................56
14.08 No Third Party Beneficiary.....................................56
14.09 No Assignment; Binding Effect..................................56
14.10 Headings.......................................................56
14.11 Consent to Jurisdiction........................................56
14.12 Invalid Provisions.............................................57
14.13 Governing Law..................................................57
14.14 Counterparts...................................................57
iii
<PAGE>
This STOCK PURCHASE AGREEMENT dated as of February 24, 2000 is made and
entered into by and among Trace Holdings LLC, a Delaware limited liability
company ("Purchaser"), KCLLC Holdings, Inc., a Delaware corporation
("Holdings"), and Key Components, LLC, a Delaware limited liability company
("Parent" and, together with Holdings, "Sellers"). Capitalized terms not
otherwise defined herein have the meanings set forth in Section 13.01.
WHEREAS, Holdings owns 19,922 shares of common stock, par value $.01 per
share, of Heart Interface Corporation ("Heart"), a Washington corporation, and
1,000 shares of the common stock, par value $1.00 per share, of Cruising
Equipment Company, a Washington corporation ("Cruising" and together with Heart
the "Companies") constituting all of the issued and outstanding shares of
capital stock of each of the Companies (such shares being referred to herein as
the "Shares");
WHEREAS, Holdings is a wholly owned subsidiary of Parent; and
WHEREAS, Sellers desire to sell, and Purchaser desires to purchase, the
Shares on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
SALE OF SHARES AND CLOSING
1.01 Purchase and Sale. Holdings agrees to sell to Purchaser, and
Purchaser agrees to purchase from Holdings, all of the right, title and interest
of Holdings in and to the Shares free and clear of all Liens at the Closing on
the terms and subject to the conditions set forth in this Agreement.
1.02 Purchase Price. Subject to the Pre-Closing Adjustment in Section 1.04
and the Post-Closing Adjustment in Section 1.05, the aggregate purchase price
for the Shares and for the covenant of Seller contained in Section 4.11 is
$11,830,000 (the "Purchase Price"), payable in immediately available United
States funds at the Closing in the manner provided in Section 1.03.
1.03 Closing; Escrow. The Closing will take place by facsimile
transmission and dispatch by overnight or local same-day courier of all required
closing deliveries at 9:00 A.M. Los Angeles time, on the Closing Date. At the
Closing, Purchaser will pay the Purchase Price by wire transfer of immediately
available funds to such account as Sellers may reasonably direct by written
notice delivered to Purchaser by Sellers at least two (2) Business Days before
the Closing Date, provided that $1,000,000 of the Purchase Price shall be
delivered by Purchaser by wire transfer of immediately available funds to U.S.
Bank National Trust Association, as escrow agent (the "Escrow Agent") under an
escrow agreement to be entered into on the Closing Date by Sellers, Purchaser
and the Escrow Agent substantially in the form of Exhibit A hereto (the "Escrow
Agreement"). Simultaneously, Sellers will assign and transfer to Purchaser all
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Seller's right, title and interest in and to the Shares by delivering to
Purchaser certificates representing the Shares, in genuine and unaltered form,
duly endorsed in blank or accompanied by duly executed stock powers endorsed in
blank, with requisite stock transfer tax stamps, if any, attached. At the
Closing, there shall also be delivered to Sellers and Purchaser the opinion,
certificates and other Contracts, documents and instruments to be delivered
under Articles VI and VII.
1.04 Pre-Closing Adjustment.
(a) Following the date hereof, the Sellers will, at their sole cost
and expense, prepare and deliver to Purchasers a Combined balance sheet,
Combined statement of operations and Combined statement of stockholder's equity
and cash flows of the Companies, and the related notes, as of and for the year
ended December 31, 1999 which shall be accompanied by an unqualified audit
report of PricewaterhouseCoopers LLP stating that such financial statements were
prepared in accordance with GAAP and such other matters as are customarily
included in audit reports issued by nationally recognized accounting firms (the
"Audited Financial Statements") together with a statement and calculation of the
amount of Combined EBITDA of the Companies for the year ended December 31, 1999
calculated from the Audited Financial Statements and the calculation of the
Purchase Price as adjusted pursuant to Section 1.04(b). Sellers shall, as
promptly to Purchaser as practicable following completion of the Audited
Financial Statements, deliver the Audited Financial Statements and the
calculation of Combined EBITDA and adjusted Purchase Price (such date on which
such documents are delivered, the "Audited Financial Delivery Date"). The
Audited Financial Statements shall be accompanied by a certificate of the Chief
Financial Officer of the Parent to the effect that the Audited Financial
Statements present fairly in all material respects, in accordance with GAAP and
the accounting practices of each Company applied on a consistent basis, the
financial condition of the Companies on a Combined basis as of December 31, 1999
and that the Combined EBITDA was derived from such Audited Financial Statements.
(b) In the event that the Combined EBITDA is less than $1,086,800
and more than $1,201,200, the Purchase Price shall be adjusted to be equal to an
amount equal to the difference between (I) the product of the Combined EBITDA
multiplied by 10.49 less (II) $170,000; provided that (i) in the event that the
Combined EBITDA is less than $972,400, Purchaser shall have the option, in its
sole discretion, to (x) purchase the Shares for an aggregate Purchase Price
equal to the difference between (I) Combined EBITDA multiplied by 10.49 less
(II) $170,000 or (y) terminate this Agreement by written notice to Purchaser no
later than five (5) Business Days following the Audited Financial Delivery Date
and (ii) in the event that the Combined EBITDA is more than $1,315,600, the
Purchase Price shall be adjusted to $13,630,644.
1.05 Post-Closing Adjustment.
(a) As promptly as practicable after the Closing Date (but in no
event more than sixty (60) days after the Closing Date) (such date on which the
Closing Balance Sheet is delivered, the "Closing Financial Statements Delivery
Date"), Purchaser will prepare and deliver to Sellers a Combined balance sheet
of the Companies as of the close of business on the day immediately preceding
the Closing Date (the "Closing Balance Sheet"). The Closing Balance
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Sheet shall be accompanied by a certificate of the Chief Financial Officer of
Purchaser to the effect that the Closing Balance Sheet presents fairly, in
accordance with GAAP and the accounting practices of each Company applied on a
consistent basis, the financial condition of the Companies as of the close of
business on the Closing Date. Sellers and a firm of independent public
accountants designated by the Sellers ("Sellers' Accountant") will be entitled
to reasonable access during normal business hours to the relevant records,
personnel and working papers of the Companies to aid in their review of the
Closing Balance Sheet. The Closing Balance Sheet shall be deemed to be accepted
by the Sellers and shall be conclusive for the purposes of the adjustment
described in Section 1.05(b) hereof except to the extent, if any, that Sellers
or Sellers' Accountant shall have delivered, within thirty (30) days after the
Closing Financial Statements Delivery Date, a written notice to Purchaser
setting forth objections thereto, specifying in reasonable detail any such
objection (it being understood that any amounts not disputed as provided herein
shall be paid promptly). If a change proposed by Sellers is disputed by
Purchaser, then Purchaser and Sellers shall negotiate in good faith to resolve
such dispute. If, after a period of thirty (30) days following the date on which
Sellers give Purchaser notice of any such proposed change, any such proposed
change still remains disputed, then Purchaser and Sellers hereby agree that the
Seattle, Washington office of Arthur Andersen LLP (the "Accounting Firm") shall
resolve any remaining disputes. The Accounting Firm shall act as an arbitrator
to make a determination with respect to the issues that are disputed by the
parties, based on presentations by Sellers and Purchaser, and by independent
review of the Accounting Firm if deemed necessary in the sole discretion of the
Accounting Firm, which determination shall be limited to only those issues still
in dispute. The decision of the Accounting Firm shall be final and binding and
shall be in accordance with the provisions of this Section 1.05(a). The fees and
expenses of the Accounting Firm, if any, shall be paid equally by Purchaser and
Sellers. The date on which the Net Working Capital is finally determined
pursuant to this Section 1.05(a) is referred to hereinafter as the
"Determination Date."
(b) In the event that there is a Deficiency with respect to the Net
Working Capital, Sellers shall pay to Purchaser, as an adjustment to the
Purchase Price, an aggregate amount equal to the Deficiency. Any payments
required to be made by Sellers pursuant to this Section 1.05(b) shall be made
within ten (10) days of the Determination Date by wire transfer of immediately
available funds to an account designated by Purchaser.
(c) In the event that there is a Surplus with respect to the Net
Working Capital, Purchaser shall pay to Holdings, as an adjustment to the
Purchase Price, an amount equal to the Surplus. Any payments required to be made
by Purchaser pursuant to this Section 1.05(c) shall be made within ten (10) days
of the Determination Date by wire transfer of immediately available funds to an
account designated by Sellers.
1.06 Further Assurances; Post-Closing Cooperation.
(a) At any time or from time to time after the Closing, at
Purchaser's expense, Sellers shall execute and deliver to Purchaser such other
documents and instruments, provide such materials and information and take such
other actions as Purchaser may reasonably request more effectively to vest title
to the Shares in Purchaser and, to the full extent permitted by Law, to put
Purchaser in actual possession and operating control of the Companies and their
Assets and Properties and Books and Records, and otherwise to cause Sellers to
fulfill their obligations
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under this Agreement and the Operative Agreements to which they are their party.
Without limiting the foregoing, the parties hereto agree that following the
Closing that Sellers shall use their commercially reasonable efforts to assist
Purchaser and the Companies in tendering claims under policies held by Sellers
or their Affiliates covering the Companies and in recovering all amounts payable
in respect of such claims pursuant to such policies.
(b) Following the Closing, each party will afford the other party,
its counsel and its accountants, during normal business hours, reasonable access
to the books, records and other data relating to the Business or Condition of
the Companies in its possession with respect to periods prior to the Closing and
the right to make copies and extracts therefrom, to the extent that such access
may be reasonably required by the requesting party in connection with (i) the
preparation of Tax Returns, (ii) the determination or enforcement of rights and
obligations under this Agreement, (iii) compliance with the requirements of any
Governmental or Regulatory Authority, (iv) the determination or enforcement of
the rights and obligations of any party to this Agreement or any of the
Operative Agreements or (v) in connection with any actual or threatened Action
or Proceeding. Further, each party agrees for a period extending six (6) years
after the Closing Date not to destroy or otherwise dispose of any such books,
records and other data unless such party shall first offer in writing to
surrender such books, records and other data to the other party and such other
party shall not agree in writing to take possession thereof during the ten (10)
day period after such offer is made.
(c) If, in order properly to prepare its Tax Returns, other
documents or reports required to be filed with Governmental or Regulatory
Authorities or its financial statements or to fulfill its obligations hereunder,
it is necessary that a party be furnished with additional information, documents
or records relating to the Business or Condition of the Companies not referred
to in paragraph (b) above, and such information, documents or records are in the
possession or control of the other party, such other party shall use its best
efforts to furnish or make available such information, documents or records (or
copies thereof) at the recipient's request, cost and expense. Any information
obtained by Sellers in accordance with this paragraph shall be held confidential
by Sellers in accordance with Section 14.05.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Sellers hereby jointly and severally represent and warrant to Purchaser as
follows:
2.01 Organization of Sellers. Each of Holdings and Parent is duly
organized, validly existing and in good standing under the Laws of the state of
its organization. Each of Holdings and Parent has full power and authority to
execute and deliver this Agreement and the Operative Agreements to which it is a
party and to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby, including without limitation,
in the case of Holdings, to own, hold, sell and transfer (pursuant to this
Agreement) the Shares.
2.02 Authority. The execution and delivery by each of the Sellers of this
Agreement and the Operative Agreements to which it is a party, and the
performance by each Seller of its obligations hereunder and thereunder, have
been duly and validly authorized by the Board of Directors of such Seller and
the sole stockholder of Holdings, no other action on the part of such
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Seller or its stockholders being necessary. This Agreement has been duly and
validly executed and delivered by each Seller and constitutes, and upon the
execution and delivery by such Seller of the Operative Agreements to which it is
a party, such Operative Agreements will constitute legal, valid and binding
obligations of such Seller enforceable against such Seller in accordance with
their terms.
2.03 Organization of the Companies. Each of the Companies is a corporation
duly organized, validly existing and in good standing under the Laws of its
state of organization, and has full corporate power and authority to conduct its
business as and to the extent now conducted and to own, use and lease its Assets
and Properties. Section 2.03 of the Disclosure Schedule lists the lines of
business in which the Companies are primarily participating or engaged. Each of
the Companies is duly qualified, licensed or admitted to do business and is in
good standing in those jurisdictions specified in Section 2.03 of the Disclosure
Schedule, which are the only jurisdictions in which the ownership, use or
leasing of its Assets and Properties, or the conduct or nature of its business,
makes such qualification, licensing or admission necessary, except for those
jurisdictions in which the adverse effects of all such failures by either
Company to be qualified, licensed or admitted and in good standing can in the
aggregate be eliminated without material cost or expense by such Company, as the
case may be, becoming qualified or admitted and in good standing. The names of
each director and officer of each Company on the date hereof, and the position
with such Company held by each, are listed in Section 2.03 of the Disclosure
Schedule. Sellers have prior to the execution of this Agreement delivered to
Purchaser true and complete copies of the charter and by-laws of each Company as
in effect on the date hereof. Neither of the Companies has any subsidiaries.
2.04 Capital Stock. The authorized capital stock of Heart consists solely
of 50,000 shares of common stock, par value of $.01 per share, and the
authorized capital stock of Cruising consists solely of 50,000 shares of Common
Stock, par value $1.00 per share. There are no outstanding shares of capital
stock of either Company other than the Shares. The Shares are duly authorized,
validly issued, outstanding, fully paid and nonassessable. Except as set forth
in Section 2.04 of the Disclosure Schedule, Holdings owns the Shares,
beneficially and of record, free and clear of all Liens. Except for this
Agreement and as disclosed in Section 2.04 of the Disclosure Schedule, there are
no outstanding Options with respect to either Company. The delivery of
certificates at the Closing representing the Shares in the manner provided in
Section 1.03 will transfer to Purchaser good and valid title to the Shares, free
and clear of all Liens.
2.05 No Conflicts. The execution and delivery by each Seller of this
Agreement do not, and the execution and delivery by each Seller of the Operative
Agreements to which it is a party, the performance by each Seller of its
obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the certificate or articles of incorporation
or by-laws (or other comparable corporate charter documents) of either Seller or
the Companies;
(b) subject to obtaining the consents, approvals and actions, making
the filings and giving the notices disclosed in Section 2.05 of the Disclosure
Schedule, conflict with or
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result in a violation or breach of any term or provision of any Law or Order
applicable to such Seller, either of the Companies or any of their respective
Assets and Properties; or
(c) except as disclosed in Section 2.05 of the Disclosure Schedule,
(i) conflict with or result in a violation or breach of, (ii) constitute (with
or without notice or lapse of time or both) a default under, (iii) require
either Seller or either Company to obtain any consent, approval or action of,
make any filing with or give any notice to any Person as a result or under the
terms of, (iv) result in or give to any Person any right of termination,
cancellation, acceleration or modification in or with respect to, (v) result in
or give to any Person any additional rights or entitlement to increased,
additional, accelerated or guaranteed payments under, or (vi) result in the
creation or imposition of any Lien upon either Seller, either Company or any of
their respective Assets and Properties under, any Contract or License to which
such Seller or such Company is a party or by which any of their respective
Assets and Properties are bound, that in any such case could be reasonably
expected to have a material adverse effect on the Business or Condition of the
Companies or the ability of the Sellers or the Companies to consummate the
transactions contemplated hereby.
2.06 Governmental Approvals and Filings. Except as disclosed in Section
2.06 of the Disclosure Schedule, no consent, approval or action of, filing with
or notice to any Governmental or Regulatory Authority on the part of either
Seller or either Company is required in connection with the execution, delivery
and performance of this Agreement or any of the Operative Agreements to which it
is a party or the consummation of the transactions contemplated hereby or
thereby.
2.07 Books and Records. The minute books and other similar records of each
of the Companies as made available to Purchaser prior to the execution of this
Agreement contain a true and complete record, in all material respects, of all
action taken at all meetings and by all written consents in lieu of meetings of
the stockholders, the boards of directors and committees of the boards of
directors of such Company. The stock transfer ledgers and other similar records
of each of the Companies as made available to Purchaser prior to the execution
of this Agreement accurately reflect all record transfers prior to the execution
of this Agreement in the capital stock of the Companies. Except as set forth in
Section 2.07 of the Disclosure Schedule, neither of the Companies has any of its
Books and Records recorded, stored, maintained, operated or otherwise wholly or
partly dependent upon or held by any means (including any electronic, mechanical
or photographic process, whether computerized or not) which (including all means
of access thereto and therefrom) are not under the exclusive ownership and
direct control of such Company.
2.08 Financial Statements. Attached hereto in Section 2.08 of the
Disclosure Schedules are true and complete copies of the balance sheets of each
of the Companies as of December 31, 1997 and 1998 and November 30, 1999, and the
Combined balance sheets of the Companies as of such dates and the related
statements of operations and cash flows for each of the Companies and for the
Companies on a Combined basis for each of the periods then ended. Except as set
forth in the notes thereto and as disclosed in Section 2.08 of the Disclosure
Schedule, all such financial statements (i) were prepared in accordance with
GAAP, (ii) fairly present in all material respects the financial condition and
results of operations of each of the Companies individually and on a Combined
basis as of the respective dates thereof and for the
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respective periods covered thereby, and (iii) were compiled from the Books and
Records of each of the Companies regularly maintained by management and used to
prepare the financial statements of such Company in accordance with the
principles stated therein. Each of the Companies has maintained its respective
Books and Records in a manner sufficient to permit the preparation of financial
statements in accordance with GAAP.
2.09 Absence of Changes. Except for the execution and delivery of this
Agreement and the transactions to take place pursuant hereto on or prior to the
Closing Date, since the Financial Statement Date there has not been any material
adverse change, or any event or development which, individually or together with
other such events, could reasonably be expected to result in a material adverse
change, in the Business or Condition of the Companies. Without limiting the
foregoing, except as disclosed in Section 2.09 of the Disclosure Schedule, there
has not occurred between the Financial Statement Date and the date hereof:
(a) any declaration, setting aside or payment of any dividend or
distribution in respect of the capital stock of either Company or any direct or
indirect redemption, purchase or other acquisition by such Company of any
capital stock of or any Option with respect to either Company;
(b) any authorization, issuance, sale or other disposition by either
Company of any shares of capital stock of or Option with respect to such
Company, or any modification or amendment of any right of any holder of any
outstanding shares of capital stock of or Option with respect to either Company;
(c) (x) any increase in the salary, wages, bonus or other
compensation of any officer, employee or consultant of either Company in excess
of 5% of such employee's compensation prior to the increase in compensation or
payment of the bonus; (y) any establishment or modification of (A) targets,
goals, pools or similar provisions in respect of any fiscal year under any
Benefit Plan, employment-related Contract or other employee compensation
arrangement or (B) salary ranges, increase guidelines or similar provisions in
respect of any Benefit Plan, employment-related Contract or other employee
compensation arrangement; or (z) any adoption, entering into or becoming bound
by any Benefit Plan, employment-related Contract or collective bargaining
agreement, or amendment, modification or termination (partial or complete) of
any Benefit Plan, employment-related Contract or collective bargaining
agreement, except to the extent required by applicable Law and, in the event
compliance with legal requirements presented options, only to the extent the
option which such Company reasonably believed to be the least costly was chosen;
(d) any voluntary purchase, cancellation, prepayment or complete or
partial discharge in advance of a scheduled payment date with respect to, or
waiver of any right of either Company under, any Indebtedness of or owing to
such Company;
(e) any physical damage, destruction or other casualty loss (whether
or not covered by insurance) affecting any of the plant, real or personal
property or equipment of the Companies in an aggregate amount exceeding $10,000;
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(f) any material change in (x) any pricing, investment, accounting,
financial reporting, inventory, credit, allowance or Tax practice or policy of
either Company or (y) any method of calculating any bad debt, contingency or
other reserve of either Company for accounting, financial reporting or Tax
purposes, or any change in the fiscal year of either Company;
(g) any write-off or write-down of or any determination to write off
or write down any of the Assets and Properties of the Companies in an aggregate
amount exceeding $10,000;
(h) any acquisition of or incurrence of a Lien (other than a
Permitted Lien) on, any Assets and Properties of either Company, other than in
the ordinary course of business consistent with past practice;
(i) any disposition of any Assets or Properties of the Companies
with an aggregate value of $10,000 or greater, other than in the ordinary course
of business consistent with past practice;
(j) any (A) amendment of the certificate or articles of
incorporation or by-laws (or other comparable corporate charter documents) of
either Company, (B) recapitalization, reorganization, liquidation or dissolution
of either Company or (C) merger or other business combination involving either
Company and any other Person;
(k) any entering into, amendment, modification, termination (partial
or complete) or granting of a waiver under or giving any consent with respect to
(A) any Contract which is required (or had it been in effect on the date hereof
would have been required) to be disclosed in the Disclosure Schedule pursuant to
Section 2.18(a) or (B) any material License held by either Company;
(l) capital expenditures or commitments for additions to property,
plant or equipment of the Companies constituting capital assets in an aggregate
amount exceeding $10,000;
(m) any commencement or termination by either Company of any line of
business;
(n) any transaction by either Company with either Seller, any
officer, director or Affiliate (other than such Company) of either Seller;
(o) any entering into of a Contract to do or engage in any of the
foregoing; or
(p) any other material transaction involving or material development
affecting either Company outside the ordinary course of business consistent with
past practice.
2.10 No Undisclosed Liabilities. Except as reflected or reserved against
in the balance sheet included in the Financial Statements or in the notes
thereto or as disclosed in Section 2.10 of the Disclosure Schedule, there are no
Liabilities against, relating to or affecting either Company or any of their
respective Assets and Properties, other than Liabilities (i) incurred in
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the ordinary course of business consistent with reasonable commercial practice
or (ii) which, individually or in the aggregate, are not material to the
Business or Condition of the Companies.
2.11 Taxes.
(a) Tax Return Filings. Except as set forth in Section 2.11(a) of
the Disclosure Schedule, each of the Companies has filed all Tax Returns (or the
Tax Returns have been filed on behalf of each of the Companies) required to be
filed by applicable law prior to the date hereof. All Tax Returns were (and, as
to Tax Returns not filed as of the date hereof, will be) true, complete and
correct and filed on a timely basis. Each of the Companies (i) has paid all
Taxes that are due, or to the Knowledge of Sellers claimed or asserted by any
taxing authority to be due, from each of the Companies for the periods covered
by the Tax Returns and (ii) has duly and fully provided reserves adequate to pay
all Taxes, including Taxes not yet due and payable, in accordance with GAAP.
(b) Tax Liens. Except as set forth in Section 2.11(b) of the
Disclosure Schedule, there are no Tax liens upon the assets of either of the
Companies except liens for Taxes not yet due.
(c) Withholding Taxes. Except as set forth in Section 2.11(c) of the
Disclosure Schedules, each of the Companies has complied (and until the Closing
Date will comply) with all applicable laws, rules, and regulations relating to
the payment and withholding of Taxes (including withholding and reporting
requirements under Code Sections 1441 through 1464, 3401 through 3406, 6041 and
6049 and similar provisions under any other laws) and have, within the time and
in the manner prescribed by law, withheld from employee wages and paid over to
the proper governmental authorities all required amounts.
(d) Extensions of Time for Filing Returns. Except as set forth in
Section 2.11(d) of the Disclosure Schedule, neither of the Companies has
requested (and no request has been made on its behalf) any extension of time
within which to file any Tax Return.
(e) Waivers of Statute of Limitations. Except as set forth in
Section 2.11(e) of the Disclosure Schedule neither Company has executed any
outstanding waivers or comparable consents regarding the application of the
statute of limitations for any Taxes or Tax Returns (and no extensions have been
executed on its behalf).
(f) Expiration of Statute of Limitations. Except as set forth in
Section 2.11(f) of the Disclosure Schedule, to the Knowledge of Sellers, no
deficiency for any Taxes has been suggested, proposed, asserted or assessed
against either of the Companies that has not been resolved and paid in full.
(g) Audit, Administrative and Court Proceedings. Except as set forth
in Section 2.11(g) of the Disclosure Schedule, no audits or other administrative
proceedings or court proceedings are presently pending with regard to any Taxes
or Tax Returns of either Company.
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(h) Powers of Attorney. Except as set forth in Section 2.11(h) of
the Disclosure Schedule, no power of attorney currently in force has been
granted by either Company concerning any Tax matter.
(i) Tax Rulings. Except as set forth in Section 2.11(i) of the
Disclosure Schedule, neither Company has received any written ruling of a taxing
authority relating to Taxes, or any other written and legally binding agreement
with a taxing authority relating to Taxes.
(j) Availability of Tax Returns and Associated Work Papers. The
Sellers have made available (or, in the case of Tax Returns to be filed on or
before the Closing Date, will make available ) to Purchaser complete and
accurate copies of all Tax Returns and associated work papers in their
possession filed by or on behalf of each of the Companies for all taxable years
ending within six years of the Closing Date.
(k) Code Section 341(f). Except as set forth in Section 2.11(k) of
the Disclosure Schedule, neither Company has filed (and nor will they file prior
to the Closing Date) a consent pursuant to Code Section 341(f) or agree to have
Code Section 341(f)(2) apply to any disposition of a subsection (f) asset.
(l) Code Section 168. Except as set forth in Section 2.11(l) of the
Disclosure Schedule, no property of either Company is property that is or will
be required to treat as being owned by another person pursuant to the provisions
of Code Section 168(f)(8) (as in effect prior to its amendment by the Tax Reform
Act of 1986) or is "tax-exempt use property" within the meaning of Code Section
168.
(m) Code Section 481 Adjustments. Except as set forth in Section
2.11(m) of the Disclosure Schedule, neither Company is required to include in
income any adjustment pursuant to Code Section 481(a) by reason of a voluntary
change in accounting method initiated by such Company, and the Internal Revenue
Service has not proposed an adjustment or change in accounting method.
(n) Code Section 280G. Except as set forth in Section 2.11(n) of the
Disclosure Schedule, neither Company is a party to any agreement, contract, or
arrangement that would result, separately or in the aggregate, in the payment of
any "excess parachute payments" within the meaning of Code Section 280G.
(o) Code Sections 6661 and 6662. To the knowledge of Sellers, all
transactions that could give rise to an understatement of federal income tax
(within the meaning of Code Section 6661 for Tax Returns filed on or before
December 31, 1989, and within the meaning of Code Section 6662 for tax returns
filed after December 31, 1989) by either of the Companies have been adequately
disclosed (or, with respect to Tax Returns filed following the Closing will be
adequately disclosed) on such Company's Tax Returns in accordance with Code
Section 6661(b)(2)(B) for Tax Returns filed on or prior to December 31, 1989,
and in accordance with Code Section 6662(d)(2)(B) for Tax Returns filed after
December 31, 1989.
(p) Loss Corporation. If either of the Companies is a loss
corporation within the meaning of Code Section 382, Schedule 2.11(p) of the
Disclosure Schedule lists all owner shifts for
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the past 3 years, all outstanding options, and all options that have been issued
within the past ten years.
2.12 Legal Proceedings. Except as disclosed in Section 2.12 of the
Disclosure Schedule (with paragraph references corresponding to those set forth
below):
(a) there are no Actions or Proceedings pending or, to the Knowledge
of Sellers, threatened against, relating to or affecting either Seller, either
Company or any of their respective Assets and Properties which (i) could
reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or any of the Operative
Agreements or have a material adverse effect on the Business or Condition of the
Companies, or (ii) if determined adversely to such Seller or such Company, could
reasonably be expected to result in (x) any injunction or other equitable relief
against such Company that would interfere in any material respect with its
business or operations or (y) Losses by the Companies, individually or in the
aggregate with Losses in respect of other such Actions or Proceedings, exceeding
$25,000;
(b) there are no facts or circumstances Known to Sellers that could
reasonably be expected to give rise to any Action or Proceeding that would be
required to be disclosed pursuant to clause (a) above; and
(c) there are no Orders outstanding against either Company.
2.13 Compliance With Laws and Orders. Except as disclosed in Section 2.13
of the Disclosure Schedule, the Companies are not and have not at any time
within the last three (3) years been, and have not received any notice that
either of them is or has at any time within the last five (5) years been, in
violation of or in default under, in any material respect, any Law or Order
applicable to either Company or any of their respective Assets and Properties.
2.14 Benefit Plans; ERISA.
(a) Section 2.14(a) of the Disclosure Schedule (i) contains a true
and complete list and description of each of the Benefit Plans, (ii) identifies
each of the Benefit Plans that is a Qualified Plan, (iii) identifies each
Benefit Plan which at any time during the five-year period preceding the date of
this Agreement was a Defined Benefit Plan and (iv) lists, describes and
identifies each other Plan maintained, established, sponsored or contributed to
by an ERISA Affiliate, or any predecessor thereof, which, during the five-year
period preceding the date of this Agreement, was at any time a Defined Benefit
Plan. Neither Company has scheduled or agreed upon future increases of benefit
levels (or creations of new benefits) with respect to any Benefit Plan, and no
such increases or creation of benefits have been proposed, made the subject of
representations to employees or requested or demanded by employees under
circumstances which make it reasonable to expect that such increases will be
granted. Except as disclosed in Section 2.14(a) of the Disclosure Schedule, no
loan is outstanding between either Company and any employee.
(b) The Companies do not maintain and are not obligated to provide
benefits under any life, medical or health plan (other than as an incidental
benefit under a Qualified Plan)
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which provides benefits to retirees or other terminated employees other than
benefit continuation rights under the Consolidated Omnibus Budget Reconciliation
of 1985, as amended.
(c) Except as set forth in Section 2.14(c) of the Disclosure
Schedule, each Benefit Plan of either Company covers only employees who are
employed by such Company (or former employees or beneficiaries with respect to
service with such Company), so that the transactions contemplated by this
Agreement will require no spin-off of assets and liabilities or other division
or transfer of rights with respect to any such plan.
(d) Neither of the Companies nor any ERISA Affiliate has at any time
contributed to any "multiemployer plan", as that term is defined in Section 4001
of ERISA.
(e) Each of the Benefit Plans is, and its administration is and has
been since inception, in all material respects in compliance with, and neither
Company has received any claim or notice that any such Benefit Plan is not in
compliance with, all applicable Laws and Orders and prohibited transactions
exemptions, including the requirements of ERISA, the Code, the Age
Discrimination in Employment Act, the Equal Pay Act and Title VII of the Civil
Rights Act of 1964. Each Qualified Plan has received a determination letter from
the Internal Revenue Service to the effect that such Qualified Plan and related
trust are qualified and exempt from federal income taxes under Section 401(a)
and 501(a), respectively, and nothing has occurred, whether by action or
inaction, which could adversely affect such determination or such status. Each
Benefit Plan which is intended to provide for the deferral of income, the
reduction of salary or other compensation or to afford other Tax benefits
complies with the requirements of the applicable provisions of the Code or other
Laws required in order to provide such Tax benefits.
(f) None of the Sellers or the Companies is in default in performing
any of its material contractual obligations under any of the Benefit Plans or
any related trust agreement or insurance contract. All contributions and other
payments required to be made by Sellers or the Companies to any Benefit Plan
with respect to any period ending before or at or including the Closing Date
have been made or reserves adequate for such contributions or other payments
have been reflected in the Financial Statements in accordance with GAAP. There
are no material outstanding liabilities of any Benefit Plan other than
liabilities for benefits to be paid to participants in such Benefit Plan and
their beneficiaries in accordance with the terms of such Benefit Plan.
(g) No event has occurred, and there exists no condition or set of
circumstances in connection with any Benefit Plan or any Plan sponsored,
maintained or contributed to by an ERISA Affiliate, under which either Company,
directly or indirectly (through any indemnification agreement or otherwise),
could reasonably be expected to be subject to any risk of material liability
under Section 302 of ERISA, Section 409 of ERISA, Section 502(i) of ERISA, Title
IV of ERISA or Section 412 or 4975 of the Code.
(h) No transaction contemplated by this Agreement will result in
liability to the PBGC or otherwise under Section 4062, 4063, 4064 or 4069 of
ERISA, or otherwise, with respect to either Company, Purchaser or any
corporation or organization controlled by or under common control with any of
the foregoing within the meaning of Section 4001 of ERISA, and, to the Knowledge
of Sellers, no event or condition exists or has existed which could reasonably
be
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expected to result in any such liability with respect to Purchaser, either
Company, or any such corporation or organization. No "reportable event" within
the meaning of Section 4043 of ERISA has occurred with respect to any Defined
Benefit Plan. No termination re-establishment or spin-off re-establishment
transaction has occurred with respect to any Subject Defined Benefit Plan. No
Subject Defined Benefit Plan has incurred any accumulated funding deficiency
whether or not waived. No filing has been made and no proceeding has been
commenced for the complete or partial termination of, or withdrawal from, any
Defined Benefit Plan which is a Pension Benefit Plan.
(i) No benefit under any Benefit Plan, including, without
limitation, any severance or parachute payment plan or agreement, will be
established or become accelerated, vested, funded or payable by reason of any
transaction contemplated under this Agreement.
(j) There are no pending or, to the Knowledge of Sellers, threatened
claims by or on behalf of any Benefit Plan, by any Person covered thereby, or
otherwise, which could reasonably be expected to result in liability on the part
of Purchaser, either Company or any fiduciary of any such Benefit Plan, nor is
there any basis for such a claim.
(k) No employer securities, employer real property or other employer
property is included in the assets of any Benefit Plan.
(l) The fair market value of the assets of each Subject Defined
Benefit Plan, as determined as of the last day of the most recent plan year of
such plan for which an actuarial report is available, was not less than the
present value of the projected benefit obligations under such plan at such date
as established on the basis of the actuarial assumptions applicable under such
Subject Defined Benefit Plan at said date and, to the Knowledge of Sellers,
there have been no material changes in such values since said date.
(m) Complete and correct copies of the following documents have been
furnished to Purchaser prior to the execution of this Agreement:
(i) the Benefit Plans, any related trust agreements, and
service provider agreements, insurance contracts or agreements with investment
managers, including without limitation, all amendments thereto;
(ii) current summary Plan descriptions of each Benefit Plan
subject to ERISA, and any similar descriptions of all other Benefit Plans;
(iii) the most recent Form 5500 and Schedules thereto for each
Benefit Plan subject to ERISA reporting requirements;
(iv) the most recent determination of the IRS with respect to
the qualified status of each Qualified Plan;
(v) the most recent accountings with respect to any Benefit
Plan funded through a trust;
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(vi) the most recent actuarial report of the qualified actuary
of any Subject Defined Benefit Plan or any other Benefit Plan with respect to
which actuarial valuations are conducted; and
(vii) all qualified domestic relations orders or other orders
governing payments from any Benefit Plan.
2.15 Real Property.
(a) Section 2.15(a) of the Disclosure Schedule contains a true and
correct list of each parcel of real property leased by each of the Companies (as
lessor or lessee). Neither Company owns any real property.
(b) Each of the Companies has adequate rights of ingress and egress
with respect to the real property listed in Section 2.15(a) of the Disclosure
Schedule and all buildings, structures, material facilities and fixtures and
other material improvements thereon. None of such real property, buildings and
other material, structures, facilities, fixtures or improvements, or the use
thereof, contravenes or violates any building, zoning, administrative,
occupational safety and health or other applicable Law in any material respect.
(c) Each of the Companies has valid and subsisting leasehold estates
in and the right to quiet enjoyment of the real properties leased by it for the
full term of the lease thereof. Each lease referred to in clause (ii) of
paragraph (a) above is a legal, valid and binding agreement, enforceable in
accordance with its terms, of such Company and of each other Person that is a
party thereto, and except as set forth in Section 2.15(c) of the Disclosure
Schedule, there is no, and neither Company has received notice of any default
(or any condition or event which, after notice or lapse of time or both, would
constitute a default) thereunder. Neither Company owes brokerage commissions in
excess of an aggregate of $10,000 with respect to all space leased by the
Companies.
(d) The Sellers have delivered to Purchaser prior to the execution
of this Agreement true and complete copies of all leases (including any
amendments and renewal letters) with respect to the real property leased by each
of the Companies.
(e) Except as disclosed in Section 2.15(e) of the Disclosure
Schedule, taken as a whole, the improvements on the real property identified in
Section 2.15(a) of the Disclosure Schedule are in good operating condition and
in a state of good maintenance and repair, ordinary wear and tear excepted, are
adequate and suitable for the purposes for which they are presently being used,
and, to the Knowledge of Sellers, there are no condemnation or appropriation
proceedings pending or threatened against any of such real property or the
improvements thereon.
2.16 Tangible Personal Property; Investment Assets.
(a) Each of the Companies is in possession of and has good title to,
or valid leasehold interests in or valid rights under Contract to use, all
tangible personal property used in or reasonably necessary for the conduct of
its business, including all tangible personal property reflected on the balance
sheet included in the Financial Statements and tangible personal
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property acquired since the Financial Statement Date other than property
disposed of since such date in the ordinary course of business consistent with
past practice. All such tangible personal property is free and clear of all
Liens, other than Permitted Liens and Liens disclosed in Section 2.16(a) of the
Disclosure Schedule, and is in good working order and condition, ordinary wear
and tear excepted, and to the knowledge of Sellers its use complies in all
material respects with all applicable Laws.
(b) Section 2.16(b) of the Disclosure Schedule describes each
Investment Asset owned by the Companies on the date hereof. Except as disclosed
in Section 2.16(b) of the Disclosure Schedule, all such Investment Assets are
owned by each of the Companies free and clear of all Liens other than Permitted
Liens.
2.17 Intellectual Property Rights. Each of the Companies has interests in
and uses the Intellectual Property disclosed in Section 2.17 of the Disclosure
Schedule, each of which such Company either has all right, title and interest in
or valid and binding rights under Contract to use. No other Intellectual
Property is used or necessary in the conduct of the business of such Company.
Except as disclosed in Section 2.17 of the Disclosure Schedule or where the
breach of such representation would not have a material adverse effect on the
Business or Condition of the Companies, (i) each Company has the exclusive right
to use the Intellectual Property disclosed in Section 2.17 of the Disclosure
Schedule, (ii) all registrations with and applications to Governmental or
Regulatory Authorities in respect of such Intellectual Property are valid and in
full force and effect and except as required by Law are not subject to the
payment of any Taxes or maintenance fees or the taking of any other actions by
such Company to maintain their validity or effectiveness, (iii) there are no
restrictions on the direct or indirect transfer of any Contract, or any interest
therein, held by such Company in respect of such Intellectual Property, (iv) the
Sellers have made available to Purchaser prior to the execution of this
Agreement all requested documentation with respect to any invention, process,
design, computer program or other know-how or trade secret included in such
Intellectual Property, (v) each Company has taken such security measures as are
customary in the industry in which the Companies conduct their business to
protect the secrecy, confidentiality and value of their trade secrets, (vi)
neither Company is, or has received notice that it is, in default (or with the
giving of notice or lapse of time or both, would be in default) under any
Contract to use such Intellectual Property and (vii) to the Knowledge of
Sellers, no such Intellectual Property is being infringed by any other Person.
None of the Sellers or the Companies has received notice that either Company is
infringing any Intellectual Property of any other Person, no claim is pending
or, to the Knowledge of Sellers, has been made to such effect that has not been
resolved and, to the Knowledge of Sellers, neither Company is infringing any
Intellectual Property of any other Person. No former employees, officers,
agents, directors or independent contractors of either of the Companies have
asserted any claim, or have any valid claim or valid right to any of the
Companies' Intellectual Property.
2.18 Contracts. Section 2.18(a) of the Disclosure Schedule (with paragraph
references corresponding to those set forth below) contains a true and complete
list of each of the following Contracts or other arrangements (true and complete
copies or, if none, reasonably complete and accurate written descriptions of
which, together with all amendments and supplements thereto and all waivers of
any terms thereof, have been delivered or made available to Purchaser prior to
the execution of this Agreement), to which either Company is party or by which
any of its respective Assets and Properties are bound:
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(a) (A) all Contracts (excluding Benefit Plans) providing for a
commitment of employment or consultation services for a specified or unspecified
term or otherwise relating to employment or the termination of employment, the
name, position and rate of compensation of each Person party to such a Contract
and the expiration date of each such Contract; and (B) any written or unwritten
representations, commitments, promises, communications or courses of conduct
(excluding Benefit Plans and any such Contracts referred to in clause (A))
involving an obligation of either of the Companies to make payments in any year,
other than with respect to salary or incentive compensation payments in the
ordinary course of business, to any employee exceeding $50,000 or any group of
employees exceeding $50,000 in the aggregate;
(b) all Contracts with any Person containing any provision or
covenant prohibiting or limiting the ability of either Company to engage in any
business activity or compete with any Person or, except as provided in Section
4.11, prohibiting or limiting the ability of any Person to compete with such
Company;
(c) all partnership, joint venture, shareholders' or other similar
Contracts with any Person;
(d) all Contracts relating to Indebtedness of either of the
Companies or to preferred stock issued by either Company;
(e) all material Contracts with distributors, dealers,
manufacturer's representatives, sales agencies or franchisees;
(f) all Contracts relating to (A) the future disposition or
acquisition of any Assets and Properties, other than dispositions or
acquisitions in the ordinary course of business consistent with past practice,
and (B) any merger or other business combination;
(g) all Contracts between or among either of the Companies, on the
one hand, and either of the Sellers, any officer, director or Affiliate (other
than such Company) of either Seller, on the other hand;
(h) all collective bargaining or similar labor Contracts;
(i) all Contracts that (A) limit or contain restrictions on the
ability of either of the Companies to declare or pay dividends on, to make any
other distribution in respect of or to issue or purchase, redeem or otherwise
acquire its capital stock, to incur Indebtedness, to incur or suffer to exist
any Lien, to purchase or sell any Assets and Properties, to change the lines of
business in which it participates or engages or to engage in any Business
Combination or (B) require either of the Companies to maintain specified
financial ratios or levels of net worth or other indicia of financial condition;
and
(j) all other Contracts (other than Benefit Plans, leases listed in
Section 2.15(a) of the Disclosure Schedule and insurance policies listed in
Section 2.20 of the Disclosure Schedule) that (A) involve the payment or
potential payment, pursuant to the terms of any such Contract, by or to either
of the Companies of more than $10,000 annually and (B) cannot be terminated
within thirty (30) days after giving notice of termination without resulting in
any material cost or penalty to such Company.
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Each Contract required to be disclosed in Section 2.18(a) of the
Disclosure Schedule is in full force and effect and constitutes a legal, valid
and binding agreement, enforceable in accordance with its terms, of each party
thereto; and except as disclosed in Section 2.18(b) of the Disclosure Schedule
neither of the Companies, to the Knowledge of Sellers, nor any other party to
such Contract is, or has received notice that it is, in violation or breach of
or default under any such Contract (or with notice or lapse of time or both,
would be in violation or breach of or default under any such Contract), in any
material respect. Sellers have delivered true, correct and complete copies of
the Contracts listed in Section 2.18(a) of the Disclosure Schedule to Purchaser.
2.19 Licenses. Section 2.19 of the Disclosure Schedule contains a true and
complete list of all Licenses used in and material, individually or in the
aggregate, to the business or operations of each of the Companies (and all
pending applications for any such Licenses), setting forth the grantor, the
grantee, the function and the expiration and renewal date of each. Prior to the
execution of this Agreement, Sellers have delivered to Purchaser true and
complete copies of all such Licenses. Except as disclosed in Section 2.19 of the
Disclosure Schedule:
(a) each Company owns or validly holds all Licenses that are
material, individually or in the aggregate, to its business or operations;
(b) each License listed in Section 2.19 of the Disclosure Schedule
is valid, binding and in full force and effect; and
(c) neither Company is, or has received any notice that it is in
default (or with the giving of notice or lapse of time or both, would be in
default) under any such License which default, either individually or in the
aggregate, could be reasonably expected to have a material adverse effect on the
Business or Condition of the Companies.
2.20 Insurance. Section 2.20 of the Disclosure Schedule contains a true
and complete list (including the names and addresses of the insurers, the names
of the Persons to whom such Policies have been issued, the expiration dates
thereof, the annual premiums and payment terms thereof, whether it is a "claims
made" or an "occurrence" policy and a brief description of the interests insured
thereby) of all liability, property, workers' compensation, directors' and
officers' liability and other insurance policies currently in effect that insure
the business, operations or employees of either of the Companies or affect or
relate to the ownership, use or operation of any of the Assets and Properties of
either of the Companies and that (i) have been issued to such Company or (ii)
have been issued to any Person (other than such Company) for the benefit of such
Company. The insurance coverage provided by any of the policies described in
clause (i) above will not terminate or lapse as to any claim arising prior to
the Closing by reason of the transactions contemplated by this Agreement. Each
policy listed in Section 2.20 of the Disclosure Schedule is valid and binding
and in full force and effect, no premiums due thereunder have not been paid and
neither of the Companies nor the Person to whom such policy has been issued has
received any notice of cancellation or termination in respect of any such policy
or is in default thereunder. To Sellers' knowledge, the insurance policies
listed in Section 2.20 of the Disclosure Schedule are placed with financially
sound and reputable insurers and, in light of the respective business,
operations and Assets and Properties of the Companies, are in amounts and have
coverages that are reasonable and customary for Persons engaged in
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such businesses and operations and having such Assets and Properties. Neither of
the Companies nor the Person to whom such policy has been issued has received
notice that any insurer under any policy referred to in this Section is denying
liability with respect to a claim thereunder or defending under a reservation of
rights clause.
2.21 Affiliate Transactions. Except as disclosed in Section 2.18(g) or
Section 2.21(a) of the Disclosure Schedule, (i) after the Closing there will be
no intercompany Liabilities between either of the Companies, on the one hand,
and either of the Sellers, any officer, director or Affiliate (other than such
Company) of either Seller, on the other, (ii) neither of the Sellers nor any
such officer, director or Affiliate provides or causes to be provided any
assets, services or facilities to either of the Companies, (iii) neither of the
Companies provides or causes to be provided any assets, services or facilities
to either of the Sellers or any such officer, director or Affiliate and (iv)
neither of the Companies beneficially own, directly or indirectly, any
Investment Assets issued by either of the Sellers or any such officer, director
or Affiliate. Except as disclosed in Section 2.21(b) of the Disclosure Schedule,
each of the Liabilities and transactions listed in Section 2.21(a) of the
Disclosure Schedule was incurred or engaged in, as the case may be, on an
arm's-length basis. Except as disclosed in Section 2.21(c) of the Disclosure
Schedule, since the Financial Statement Date neither Seller has paid or incurred
any Liability on behalf of either of the Companies that has not been reimbursed
by the Companies and all settlements of intercompany Liabilities between either
of the Companies, on the one hand, and either of the Sellers or any such
officer, director or Affiliate, on the other, have been made, and all
allocations of intercompany expenses have been applied, in the ordinary course
of business consistent with reasonable commercial practices.
2.22 Employees; Labor Relations.
(a) Section 2.22 of the Disclosure Schedule contains a list of the
name of each officer and employee of the Companies as of the date hereof,
together with each such person's position or function, annual base salary or
wages and any incentive or bonus arrangement with respect to such person in
effect on such date. Neither of the Sellers has received any information that
would lead it to believe that a material number of such persons or that any such
person that is material to the operation of either Company will or may cease to
be employees, or will refuse offers of employment from Purchaser.
(b) Except as disclosed in Section 2.22 of the Disclosure Schedule,
(i) no employee of either of the Companies is presently a member of a collective
bargaining unit and, to the Knowledge of Sellers, there are no threatened or
contemplated attempts to organize for collective bargaining purposes any of the
employees of such Company, and (ii) no unfair labor practice complaint or sex,
age, race or other discrimination claim has been brought during the last five
(5) years against either Company before the National Labor Relations Board, the
Equal Employment Opportunity Commission or any other Governmental or Regulatory
Authority. Since January 19, 1999, there has been no work stoppage, strike or
other concerted action by employees of either Company. During that period, each
of the Companies has complied in all material respects with all applicable Laws
relating to the employment of labor, including, without limitation those
relating to wages, hours and collective bargaining.
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2.23 Environmental Matters. Each Company has obtained all Licenses which
are required under applicable Environmental Laws in connection with the conduct
of the business or operations of such Company, the absence of which could result
in fines or penalties in excess of $25,000 or in injunctive relief. Each of such
Licenses is in full force and effect and contains no provisions or conditions
that would materially interfere with the business of either Company and each
Company is in compliance with the terms and conditions of all such Licenses and
with any applicable Environmental Law, the failure to comply with which could be
reasonably expected to result in fines or penalties in excess of $25,000 or in
injunctive relief. In addition, except as set forth in Section 2.23 of the
Disclosure Schedule (with paragraph references corresponding to those set forth
below):
(a) No Order has been issued, no Environmental Claim has been
asserted, no penalty has been assessed and, to the Knowledge of Sellers, no
investigation or review is pending and no Environmental Claim or penalty has
been threatened by any Governmental or Regulatory Authority under any
Environmental Law in connection with the conduct of the business or operations
of the Companies or with respect to any generation, treatment, storage,
recycling, transportation, discharge, disposal or Release of any Hazardous
Material generated by such Company, and there are no facts or circumstances in
existence which could be reasonably expected to form the basis for any such
Order, Environmental Claim, penalty or investigation.
(b) The Companies do not own, operate or lease a treatment, storage
or disposal facility for Hazardous Materials requiring a permit under the
Resource Conservation and Recovery Act, as amended, or under any other
comparable state or local Law and no site or facility now or previously owned,
operated or leased by the Companies is listed or proposed for listing on the
NPL, CERCLIS or any similar state or local list of sites requiring investigation
or clean-up; and, without limiting the foregoing, (i) no polychlorinated
biphenyl is or has been present, (ii) no asbestos or asbestos-containing
material is or has been present, (iii) there are no underground storage tanks or
surface impoundments for Hazardous Materials, active or abandoned, and (iv) no
Hazardous Material has been Released in a quantity reportable under, or in
violation of, any Environmental Law or otherwise Released, in the cases of
clauses (i) through (iv), at, on or under any site or facility now or previously
owned, operated or leased by the Companies.
(c) Neither of the Companies has transported or arranged for the
transportation of any Hazardous Material to any location that is (i) listed on
the NPL under CERCLA, (ii) listed for possible inclusion on the NPL by the
Environmental Protection Agency in CERCLIS or on any similar state or local list
or (iii) the subject of enforcement actions by federal, state or local
Governmental or Regulatory Authorities that may lead to Environmental Claims
against either Company.
(d) No Liens have arisen under or pursuant to any Environmental Law
on any site or facility owned, operated or leased by the Companies, and no
federal, state or local Governmental or Regulatory Authority action has been
taken or, to the Knowledge of the Sellers, is in process that could subject any
such site or facility to such Liens, and neither Company would be required to
place any notice or restriction relating to the presence of Hazardous Materials
at any site or facility owned by it in any deed to the real property on which
such site or facility is located.
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(e) The Sellers and the Companies have delivered to Purchaser all
environmental investigations, studies, audits, tests, reviews or other analyses
conducted by, or that are in the possession of, the Sellers or the Companies in
relation to any site or facility now or previously owned, operated or leased by
the Companies.
2.24 Substantial Customers and Suppliers. Section 2.24(a) of the
Disclosure Schedule lists the ten (10) largest customers of each of the
Companies for the last three fiscal years and for the latest available interim
period, on the basis of revenues for goods sold or services provided, and the
revenues of the Companies generated by each such customer during such periods.
Section 2.24(b) of the Disclosure Schedule lists the ten (10) largest suppliers
of each of the Companies for the last three fiscal years and for the latest
available interim period, on the basis of cost of goods or services purchased.
Except as disclosed in Section 2.24(c) of the Disclosure Schedule, no such
customer or supplier has ceased or materially reduced its purchases from, use of
the services of, or sales or provision of services to either Company since the
Financial Statement Date, or to the Knowledge of Sellers, has threatened to or
intends to cease or materially reduce such purchases, use, sales or provision of
services after the date hereof. Except as disclosed in Section 2.24(d) of the
Disclosure Schedule, to the Knowledge of Sellers, no such customer or supplier
is threatened with bankruptcy or insolvency.
2.25 Bank and Brokerage Accounts; Investment Assets. Section 2.25 of the
Disclosure Schedule sets forth (a) a true and complete list of the names and
locations of all banks, trust companies, securities brokers and other financial
institutions at which either Company has an account or safe deposit box or
maintains a banking, custodial, trading or other similar relationship; (b) a
true and complete list and description of each such account, box and
relationship, indicating in each case the account number and the names of the
respective officers, employees, agents or other similar representatives of
either Company having signatory power with respect thereto; and (c) a list of
each Investment Asset, the name of the record and beneficial owner thereof, the
location of the certificates, if any, therefor, the maturity date, if any, and
any stock or bond powers or other authority for transfer granted with respect
thereto.
2.26 No Powers of Attorney. Except as set forth in Section 2.26 of the
Disclosure Schedule, neither Company has powers of attorney or comparable
delegations of authority outstanding.
2.27 Accounts Receivable; Accounts Payable. Except as set forth in Section
2.27(a) of the Disclosure Schedule, the accounts and notes receivable of the
Companies reflected on the balance sheets included in the Financial Statements,
and all accounts and notes receivable arising subsequent to the Financial
Statement Date, (i) arose from bona fide sales transactions in the ordinary
course of business and are payable on ordinary trade terms, (ii) are legal,
valid and binding obligations of the respective debtors enforceable in
accordance with their terms, (iii) are not subject to any valid set-off or
counterclaim, (iv) do not represent obligations for goods sold on consignment,
on approval or on a sale-or-return basis or subject to any other repurchase or
return arrangement, (v) to the Knowledge of Sellers are collectible in the
ordinary course of business consistent with past practice in the aggregate
recorded amounts thereof, net of any applicable reserve reflected in the balance
sheets included in the Financial Statements, and (vi) are not the subject of any
Actions or Proceedings brought by or on behalf of either Company. Section
2.27(b) of the Disclosure Schedule sets forth a description of any security
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arrangements and collateral securing the repayment or other satisfaction of
receivables of each of the Companies. All steps necessary to render all such
security arrangements legal, valid, binding and enforceable, and to give and
maintain for such Company, as the case may be, a perfected security interest in
the related collateral, have been taken. Attached hereto as Section 2.27(c) of
the Disclosure Schedule is an aging report with regard to accounts receivable of
each of the Companies as of December 31, 1999. Attached hereto as Section
2.27(d) of the Disclosure Schedule is an aging report with regard to accounts
payable of each of the Companies as of December 31, 1999.
2.28 Inventory. All inventory of the Companies reflected on the balance
sheets included in the Financial Statements consisted, and all such inventory
acquired since the Financial Statement Date consists, of a quality and quantity
usable and salable in the ordinary course of business consistent with past
practice, subject to reserves established in accordance with GAAP. Except as
disclosed in Section 2.10 of the Disclosure Schedule or in the notes to the
Financial Statements, all items included in the inventory of each Company are
the property of such Company, free and clear of any Lien other than Permitted
Liens, have not been pledged as collateral, are not held by such Company on
consignment from others and conform in all material respects to all standards
applicable to such inventory or its use or sale imposed by Governmental or
Regulatory Authorities. Except as set forth in Section 2.28 of the Disclosure
Schedule, neither Company has sold any inventory that is subject to any
repurchase or return arrangement or obligation.
2.29 Brokers. Except for Millbrook Capital Management, Inc., whose fees,
commissions and expenses are the sole responsibilities of the Sellers, all
negotiations relative to this Agreement and the transactions contemplated hereby
have been carried out by the Sellers directly with Purchaser without the
intervention of any Person on behalf of the Sellers in such manner as to give
rise to any valid claim by any Person against Purchaser or either Company for a
finder's fee, brokerage commission or similar payment.
2.30 Product Liabilities and Product Warranties. Except as disclosed in
Section 2.30(a) of the Disclosure Schedule, there are no pending or, to the
Knowledge of Sellers, threatened Product Liability Claims against either of the
Companies. Section 2.30(b) of the Disclosure Schedule sets forth a summary of
each Product Liability Claim in excess of $10,000 paid by either of the
Companies or by Sellers in the past five years. Except as set forth on Section
2.30(c) of the Disclosure Schedule, there is no manufacturing design or defect
Known to Sellers that could be reasonably expected to result in a material
liability to the Companies. Standard form product warranties issued by each of
the Companies are listed and described in 2.30(b) of the Disclosure Schedule.
The reserves set forth on the Financial Statements are adequate for all pending,
threatened and reasonably anticipated Product Warranty Claims. There are no
uninsured Product Liability Claims that are pending or, to the Knowledge of
Sellers, threatened.
2.31 Indebtedness. Neither of the Companies has any outstanding
Indebtedness.
2.32 Disclosure. All material facts relating to the Business or Condition
of the Companies have been disclosed and all material documents relating to the
Business or Condition of the Companies have been provided to Purchaser in or in
connection with this Agreement. No
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representation or warranty contained in this Agreement, and no statement
contained in the Disclosure Schedule or in any certificate, list or other
writing furnished to Purchaser pursuant to any provision of this Agreement
(including without limitation the Financial Statements), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Sellers as follows:
3.01 Organization. Purchaser is a limited liability corporation duly
organized, validly existing and in good standing under the Laws of the State of
Delaware. Purchaser has full corporate power and authority to execute and
deliver this Agreement and the Operative Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
3.02 Authority. The execution and delivery by Purchaser of this Agreement
and the Operative Agreements to which it is a party, and the performance by
Purchaser of its obligations hereunder and thereunder, have been duly and
validly authorized by the Board of Directors of Purchaser, no other corporate
action on the part of Purchaser or its stockholders being necessary. This
Agreement has been duly and validly executed and delivered by Purchaser and
constitutes, and upon the execution and delivery by Purchaser of the Operative
Agreements to which it is a party, such Operative Agreements will constitute,
legal, valid and binding obligations of Purchaser enforceable against Purchaser
in accordance with their terms.
3.03 No Conflicts. The execution and delivery by Purchaser of this
Agreement do not, and the execution and delivery by Purchaser of the Operative
Agreements to which it is a party, the performance by Purchaser of its
obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the certificate of formation or limited
liability company agreement of Purchaser;
(b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to Purchaser or any of its Assets and
Properties; or
(c) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require Purchaser to obtain any consent, approval or action of, make any
filing with or give any notice to any Person as a result or under the terms of,
or (iv) result in the creation or imposition of any Lien upon Purchaser or any
of its Assets or Properties under, any Contract or License to which Purchaser is
a party or by which any of its Assets and Properties is bound.
3.04 Governmental Approvals and Filings. No consent, approval or action
of, filing with or notice to any Governmental or Regulatory Authority on the
part of Purchaser is required
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in connection with the execution, delivery and performance of this Agreement or
the Operative Agreements to which it is a party or the consummation of the
transactions contemplated hereby or thereby.
3.05 Legal Proceedings. There are no Actions or Proceedings pending or, to
the knowledge of Purchaser, threatened against, relating to or affecting
Purchaser or any of its Assets and Properties which could reasonably be expected
to result in the issuance of an Order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of any of the transactions
contemplated by this Agreement or any of the Operative Agreements.
3.06 Purchase for Investment. The Shares will be acquired by Purchaser for
its own account for the purpose of investment, it being understood that the
right to dispose of such Shares shall be entirely within the discretion of
Purchaser. Purchaser will refrain from transferring or otherwise disposing of
any of the Shares, or any interest therein, in such manner as to cause Sellers
to be in violation of the registration requirements of the Securities Act of
1933, as amended, or applicable state securities or blue sky laws.
3.07 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by Purchaser directly
with the Sellers without the intervention of any Person on behalf of Purchaser
in such manner as to give rise to any valid claim by any Person against such
Seller or the Company for a finder's fee, brokerage commission or similar
payment.
ARTICLE IV
COVENANTS OF SELLERS
Sellers jointly and severally covenant and agree with Purchaser that, at
all times from and after the date hereof until the Closing and, with respect to
any covenant or agreement by its terms to be performed in whole or in part after
the Closing, for the period specified therein or, if no period is specified
therein, indefinitely, Sellers will comply with all covenants and provisions of
this Article IV, except to the extent Purchaser may otherwise consent in
writing.
4.01 Regulatory and Other Approvals. Sellers will, as promptly as
practicable (a) take all commercially reasonable steps necessary or desirable to
obtain all consents, approvals or actions of, make all filings with and give all
notices to Governmental or Regulatory Authorities or any other Person required
of Sellers or the Company to consummate the transactions contemplated hereby,
including without limitation those described in Sections 2.05 and 2.06 of the
Disclosure Schedule, (b) provide such other information and communications to
such Governmental or Regulatory Authorities, including without limitation the
Federal Trade Commission or the Antitrust Division of the Department of Justice,
or other Persons as Purchaser or such Governmental or Regulatory Authorities or
other Persons may reasonably request in connection therewith, including any
requests for additional information received by Purchaser or its Affiliates from
the Federal Trade Commission or the Antitrust Division of the Department of
Justice pursuant to the HSR Act, and (c) cooperate with Purchaser in connection
with the performance of its obligations under Section 5.01 and in connection
with resolving any investigation or other inquiry commenced by either the
Federal Trade Commission or the Antitrust Division of the Department of Justice
or state attorneys general. Sellers will provide
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prompt notification to Purchaser when any such consent, approval, action, filing
or notice referred to in clause (a) above is obtained, taken, made or given, as
applicable, and will advise Purchaser of any material communications (and,
unless precluded by Law, provide copies of any such communications that are in
writing) with any Governmental or Regulatory Authority or other Person regarding
any of the transactions contemplated by this Agreement or any of the Operative
Agreements.
4.02 Intentionally Omitted.
4.03 Investigation by Purchaser. Sellers will, and will cause each Company
to, (a) provide Purchaser and its officers, directors, employees, agents,
counsel, accountants, financial advisors, consultants and other representatives
(together "Representatives") with full access, upon reasonable prior notice and
during normal business hours, to all officers, employees, agents and accountants
of such Company and their Assets and Properties and Books and Records, and (b)
furnish Purchaser and such other Persons with all such information and data
(including without limitation copies of Contracts, Benefit Plans and other Books
and Records) concerning the business and operations of such Company as Purchaser
or any of such other Persons reasonably may request in connection with such
investigation.
4.04 No Solicitations. Sellers will not take, nor will they permit either
of the Companies or any Affiliate of either Seller (or authorize or permit any
investment banker, financial advisor, attorney, accountant or other Person
retained by or acting for or on behalf of Sellers, the Companies or any such
Affiliate) to take, directly or indirectly, any action to solicit, encourage,
receive, negotiate, assist or otherwise facilitate (including by furnishing
confidential information with respect to either Company or permitting access to
the Assets and Properties and Books and Records of such Company) any offer or
inquiry from any Person concerning an Acquisition Proposal. If any of the
Sellers, the Companies or such Affiliates (or any such Person acting for or on
their behalf) receives from any Person any offer, inquiry or informational
request referred to above, the Sellers will promptly advise such Person, by
written notice, of the terms of this Section 4.04 and will promptly, orally and
in writing, advise Purchaser of such offer, inquiry or request and deliver a
copy of such notice to Purchaser.
4.05 Conduct of Business. Sellers will cause each of the Companies to
conduct business only in the ordinary course consistent with reasonable
commercial practices. Without limiting the generality of the foregoing, Sellers
will:
(a) cause each Company to use commercially reasonable efforts to (i)
preserve intact the present business organization and reputation of such
Company, (ii) keep available (subject to dismissals and retirements in the
ordinary course of business consistent with past practice) the services of the
present officers, employees and consultants of such Company, (iii) maintain the
Assets and Properties of the Companies, taken as a whole, in good working order
and condition, ordinary wear and tear excepted, (iv) maintain the good will of
customers, suppliers, lenders and other Persons to whom such Company sells goods
or provides services or with whom such Company otherwise has significant
business relationships and (v) continue all current sales, marketing and
promotional activities and research and development activities relating to the
business and operations of such Company;
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(b) except to the extent required by applicable Law, (i) cause the
Books and Records to be maintained in the usual, regular and ordinary manner,
(ii) not permit any material change in (A) any investment, accounting, financial
reporting, inventory, credit, allowance or Tax practice or policy of either
Company, or (B) any method of calculating any bad debt, contingency or other
reserve of either Company for accounting, financial reporting or Tax purposes
and (iii) not permit any change in the fiscal year of either Company;
(c) (i) use, and will cause each Company to use, commercially
reasonable efforts to maintain in full force and effect until the Closing
substantially the same levels of coverage as the insurance afforded under the
Contracts listed in Section 2.20 of the Disclosure Schedule, (ii) to the extent
that any amounts are paid under such Contracts (whether before or after the
Closing Date) with respect to the business, operations, employees or Assets and
Properties of either Company, cause such amounts to be paid to such Company, and
(ii) use commercially reasonable efforts to cause any and all benefits under
such Contracts paid or payable (whether before or after the Closing Date) with
respect to the business, operations, employees, or Assets and Properties of
either Company to be paid to such Company; and
(d) cause each Company to comply, in all material respects, with all
Laws and Orders applicable to the business and operations of such Company, and
promptly following receipt thereof to give Purchaser copies of any notice
received from any Governmental or Regulatory Authority or other Person alleging
any violation of any such Law or Order.
4.06 Financial Statements and Reports; Filings. The Sellers shall deliver
to Purchaser drafts of the unaudited Combined financial statements of the
Companies for the year ended December 31, 1999 that will be submitted to
PricewaterhouseCoopers LLP for audit and a draft of the Audited Financial
Statements and the audit report of PricewaterhouseCoopers LLP with respect
thereto as promptly as practicable following preparation of such drafts. As
promptly as practicable and in any event no later than (a) 20 days after the end
of each month ending after December 31, 1999 and prior to the date hereof with
respect to which Purchaser has not received financial statements prior to the
date hereof and each month ending after the date hereof and before the Closing
Date (other than the end of a fiscal quarter), (b) thirty (30) days after the
end of each fiscal quarter ending after the date hereof and before the Closing
Date (other than the fourth quarter) or (c) sixty (60) days after the end of
each fiscal year ending after the date hereof and before the Closing Date, as
the case may be, Sellers will deliver to Purchaser true and complete copies of
the unaudited balance sheet, and the related unaudited statements of operations,
stockholders' equity and cash flows, of each Company and for the Companies on a
Combined basis, in each case as of and for the fiscal year then ended or as of
and for each such fiscal quarter and the portion of the fiscal year then ended,
as the case may be, together with the notes, if any, relating thereto, which
financial statements shall be prepared on a basis consistent with the Financial
Statements.
(a) As promptly as practicable, Sellers will deliver to Purchaser
true and complete copies of such other financial statements, reports and
analyses as may be prepared or received by Sellers or each Company relating to
the business or operations of such Company or as Purchaser may otherwise
reasonably request.
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(b) As promptly as practicable, Sellers will deliver copies of all
License applications and other filings made by each Company after the date
hereof and before the Closing Date with any Governmental or Regulatory Authority
(other than routine, recurring filings made in the ordinary course of business
consistent with past practice).
4.07 Employee Matters. Except as may be required by Law, Sellers will
refrain, and will cause each Company to refrain, from directly or indirectly:
(a) making any representation or promise, oral or written, to any
officer, employee or consultant of either Company concerning any Benefit Plan,
except for statements as to the rights or accrued benefits of any officer,
employee or consultant under the terms of any Benefit Plan;
(b) making any increase in the salary, wages or other compensation
of any officer, employee or consultant of either Company;
(c) adopting, entering into or becoming bound by any Benefit Plan,
employment-related Contract or collective bargaining agreement, or amending,
modifying or terminating (partially or completely) any Benefit Plan,
employment-related Contract or collective bargaining agreement, except to the
extent required by applicable Law and, in the event compliance with legal
requirements presents options, only to the extent that the option which the
Sellers reasonably believe to be the least costly is chosen; or
(d) establishing or modifying any (i) targets, goals, pools or
similar provisions in respect of any fiscal year under any Benefit Plan,
employment-related Contract or other employee compensation arrangement or (ii)
salary ranges, increase guidelines or similar provisions in respect of any
Benefit Plan, employment-related Contract or other employee compensation
arrangement.
Sellers will cause each of the Companies to administer each Benefit Plan,
or cause the same to be so administered, in all material respects in accordance
with the applicable provisions of the Code, ERISA and all other applicable Laws.
Sellers will promptly notify Purchaser in writing of each receipt by Sellers or
either Company (and furnish Purchaser with copies) of any notice of
investigation or administrative proceeding by the IRS, Department of Labor, PBGC
or other Person involving any Benefit Plan. Sellers will not take any action to
discourage or otherwise dissuade any employee of the Companies who is designated
by Purchaser from executing an employment contract in form and substance
satisfactory to Purchaser with the Company that currently employs such employee.
4.08 Certain Restrictions. Sellers will cause each of the Companies to
refrain from:
(a) amending its certificate or article of incorporation or by-laws
(or other comparable corporate charter documents) or taking any action with
respect to any such amendment or any recapitalization, reorganization,
liquidation or dissolution of any such corporation;
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(b) authorizing, issuing, selling or otherwise disposing of any
shares of capital stock of or any Option with respect to such Company, or
modifying or amending any right of any holder of outstanding shares of capital
stock of or Option with respect to such Company;
(c) (i) declaring, setting aside or paying any dividend or other
distribution in respect of the capital stock of such Company other than
distributions of intercompany accounts and distributions made prior to the
Closing Date solely from cash on hand as of the date hereof or cash from
operations of such Company between the date hereof and the day prior to the
Closing Date, or (ii) directly or indirectly redeeming, purchasing or otherwise
acquiring any capital stock of or any Option with respect to such Company;
(d) acquiring or disposing of, or incurring any Lien (other than a
Permitted Lien) on, any Assets and Properties, other than in the ordinary course
of business consistent with past practice;
(e) entering into, amending, modifying, terminating (partially or
completely), granting any waiver under or giving any consent with respect to (A)
any Contract that would, if in existence on the date of this Agreement, be
required to be disclosed in the Disclosure Schedule pursuant to Section 2.18(a)
or (B) any material License or (ii) granting any irrevocable powers of attorney;
(f) violating, breaching or defaulting under in any material
respect, or taking or failing to take any action that (with or without notice or
lapse of time or both) would constitute a material violation or breach of, or
default under, any term or provision of any License held or used by such Company
or any Contract to which such Company is a party or by which any of its
respective Assets and Properties is bound;
(g) (i) incurring Indebtedness or (ii) voluntarily purchasing,
canceling, prepaying or otherwise providing for a complete or partial discharge
in advance of a scheduled payment date with respect to, or waiving any right of
the Company under, any Indebtedness of or owing to such Company;
(h) engaging with any Person in any merger or other business
combination;
(i) making capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets in an aggregate amount
exceeding $50,000;
(j) making any change in the lines of business in which they
participate or are engaged;
(k) selling, disposing of, writing off or writing down any of their
Assets and Properties outside the ordinary course of business consistent with
past practice; or
(l) entering into any Contract to do or engage in any of the
foregoing.
4.09 Affiliate Transactions. Except as contemplated by Section 4.08(c) or
as set forth in Section 4.09 of the Disclosure Schedule, immediately prior to
the Closing, all Indebtedness and other amounts owing under Contracts between
either Seller, any officer, director or Affiliate
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(other than the Company) of either Seller, on the one hand, and either Company,
on the other, will be paid in full or, to the extent not paid, contributed to
the equity capital of the Companies, and each Seller will terminate and will
cause any such officer, director or Affiliate to terminate each such Contract
with the Companies. Prior to the Closing, neither Company will enter into any
Contract or amend or modify any existing Contract, and will not engage in any
transaction outside the ordinary course of business consistent with past
practice or not on an arm's-length basis (other than pursuant to Contracts
disclosed pursuant to Section 2.18(a)(vii) of the Disclosure Schedule), with
either Seller or any such officer, director or Affiliate.
4.10 Books and Records. On the Closing Date, Sellers will deliver or make
available to Purchaser at the offices of either Company all of the Books and
Records, and if at any time after the Closing Sellers discover in their
possession or under their control any other Books and Records, they will
forthwith deliver such Books and Records to Purchaser.
4.11 Noncompetition.
(a) Sellers and their Affiliates will, for a period of three (3)
years from the Closing Date refrain from, either alone or in conjunction with
any other Person, or directly or indirectly through their respective present or
future Affiliates:
(i) employing, engaging or seeking to employ or engage any
individual who within the prior six (6) months had been an officer or employee
of either Company with the title of Manager or a higher ranking, unless such
officer or employee (A) resigns voluntarily (without any solicitation or
encouragement from Sellers or any of their Affiliates) or (B) is terminated by
such Company after the Closing Date;
(ii) causing or attempting to cause (A) any client, customer
or supplier of either Company to terminate or materially reduce its business
with such Company or (B) any officer, employee or consultant of either Company
to resign or sever a relationship with such Company;
(iii) disclosing (unless compelled by judicial or
administrative process) or using any confidential or secret information relating
to either Company or any of their respective clients, customers or suppliers; or
(iv) participating or engaging in (other than through the
ownership of five percent (5%) or less of any class of securities registered
under the Securities Exchange Act of 1934, as amended), or otherwise lending
assistance (financial or otherwise) to any Person participating or engaged in
the manufacture, marketing, sale or distribution of power conversion equipment
or instrumentation systems to monitor and control power conversion equipment;
provided, that direct or indirect ownership of 47% of the outstanding stock of
Mastervolt B.V. and the voting of such shares and designation of a member of the
board of directors of Mastervolt B.V. and its Affiliates shall not be deemed a
breach of this covenant.
(b) The parties hereto recognize that the Laws and public policies
of the various states of the United States may differ as to the validity and
enforceability of covenants similar to those set forth in this Section. It is
the intention of the parties that the provisions of this Section be enforced to
the fullest extent permissible under the Laws and policies of each
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jurisdiction in which enforcement may be sought, and that the unenforceability
(or the modification to conform to such Laws or policies) of any provisions of
this Section shall not render unenforceable, or impair, the remainder of the
provisions of this Section. Accordingly, if any provision of this Section shall
be determined to be invalid or unenforceable, such invalidity or
unenforceability shall be deemed to apply only with respect to the operation of
such provision in the particular jurisdiction in which such determination is
made and not with respect to any other provision or jurisdiction.
(c) The parties hereto acknowledge and agree that any remedy at Law
for any breach of the provisions of this Section would be inadequate, and
Sellers hereby consent to the granting by any court of an injunction or other
equitable relief, without the necessity of actual monetary loss being proved, in
order that the breach or threatened breach of such provisions may be effectively
restrained.
4.12 Notice and Cure. Sellers will notify Purchaser in writing (where
appropriate, through updates to the Disclosure Schedule) of, and
contemporaneously will provide Purchaser with true and complete copies of any
and all information or documents relating to, and will use all commercially
reasonable efforts to cure before the Closing, any event, transaction or
circumstance, as soon as practicable after it becomes Known to Sellers,
occurring after the date of this Agreement that causes or will cause any
covenant or agreement of Seller under this Agreement to be breached or that
renders or will render untrue any representation or warranty of Sellers
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein or shall in any way limit Purchaser's right to
seek indemnity under Article XII.
4.13 Fulfillment of Conditions. Sellers will execute and deliver at the
Closing each Operative Agreement that Sellers are required hereby to execute and
deliver as a condition to the Closing, will take all commercially reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each other condition to the obligations of Purchaser contained in this Agreement
and will not, and will not permit either Company to, take or fail to take any
action that could reasonably be expected to result in the nonfulfillment of any
such condition.
4.14 Qualified Plans. Immediately prior to the Closing, Sellers will cause
each Qualified Plan sponsored by the Sellers or any of their Affiliates (other
than the Companies) (the "Seller Plans") to fully vest each participant employed
by the Companies in their account balances under such Seller Plan as of the
Closing Date. In addition, Seller shall cause the Seller Plans to permit each
participant employed by the Companies to receive a lump sum distribution of
their account balances under such plans as soon as administratively feasible
following the Closing Date to the extent allowable by law.
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ARTICLE V
COVENANTS OF PURCHASER
Purchaser covenants and agrees with the Sellers that, at all times from
and after the date hereof until the Closing, Purchaser will comply with all
covenants and provisions of this Article V, except to the extent the Sellers may
otherwise consent in writing.
5.01 Regulatory and Other Approvals. Purchaser will as promptly as
practicable (a) take all commercially reasonable steps necessary or desirable to
obtain all consents, approvals or actions of, make all filings with and give all
notices to Governmental or Regulatory Authorities or any other Person required
of Purchaser to consummate the transactions contemplated hereby and by the
Operative Agreements, including without limitation those described in Schedules
3.03 and 3.04 hereto, (b) provide such other information and communications to
such Governmental or Regulatory Authorities or other Persons as either Seller or
such Governmental or Regulatory Authorities or other Persons may reasonably
request in connection therewith and (c) cooperate with each of the Sellers and
each of the Companies in connection with the performance of their obligations
under Sections 4.01 and 4.02. Purchaser will provide prompt notification to the
Sellers when any such consent, approval, action, filing or notice referred to in
clause (a) above is obtained, taken, made or given, as applicable, and will
advise the Sellers of any communications (and, unless precluded by Law, provide
copies of any such communications that are in writing) with any Governmental or
Regulatory Authority or other Person regarding any of the transactions
contemplated by this Agreement or any of the Operative Agreements.
5.02 Intentionally Omitted.
5.03 Notice and Cure. Purchaser will notify Sellers in writing of, and
contemporaneously will provide Sellers with true and complete copies of any and
all information or documents relating to, and will use all commercially
reasonable efforts to cure before the Closing, any event, transaction or
circumstance, as soon as practicable after it becomes known to Purchaser,
occurring after the date of this Agreement that causes or will cause any
covenant or agreement of Purchaser under this Agreement to be breached or that
renders or will render untrue any representation or warranty of Purchaser
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein or shall in any way limit Sellers' rights to
seek indemnity under Article XI.
5.04 Fulfillment of Conditions. Purchaser will execute and deliver at the
Closing each Operative Agreement that Purchaser is hereby required to execute
and deliver as a condition to the Closing, will take all commercially reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each other condition to the obligations of Sellers contained in this Agreement
and will not take or fail to take any action that could reasonably be expected
to result in the nonfulfillment of any such condition. As of the date hereof,
Purchaser has no reason to believe that the condition set forth in Section 6.06
will not be timely satisfied.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser hereunder to purchase the Shares are subject
to the fulfillment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by Purchaser
in its sole discretion):
6.01 Representations and Warranties. Each of the representations and
warranties made by the Sellers in this Agreement (other than those made as of a
specified date earlier than the Closing Date) shall be true and correct in all
material respects on and as of the Closing Date as though such representation or
warranty was made on and as of the Closing Date, and any representation or
warranty made as of a specified date earlier than the Closing Date shall have
been true and correct in all material respects on and as of such earlier date,
except for the representations and warranties contained in Section 2.09 to the
extent that such failure to be true and correct in all material respects on and
as of the Closing Date is a result of the effects of general economic conditions
arising between the date hereof and the Closing Date that are not unique to the
Companies but also affect other Persons who participate or are engaged in the
lines of business in which the Companies participate or are engaged; provided
that to the extent that any representation or warranty is qualified as to
materiality pursuant to the terms of such representation or warranty, such
representation or warranty shall be true and correct in all respects as of the
Closing Date unless such representation or warranty was made as of a specified
date earlier than the Closing Date in which case such representation shall be
true and correct in all respects on and as of such earlier date.
6.02 Performance. Each of the Sellers shall have performed and complied
with, in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by such Seller at or
before the Closing.
6.03 Officers' Certificates. Each of the Sellers shall have delivered to
Purchaser a certificate, dated the Closing Date and executed in the name and on
behalf of such Seller by the Chairman of the Board, the President or any
Executive or Senior Vice President of such Seller, substantially in the form and
to the effect of Exhibit B hereto, and a certificate, dated the Closing Date and
executed by the Secretary or any Assistant Secretary of such Seller,
substantially in the form and to the effect of Exhibit C hereto.
6.04 Orders and Laws. There shall not be in effect on the Closing Date any
Order or Law restraining, enjoining or otherwise prohibiting or making illegal
the consummation of any of the transactions contemplated by this Agreement or
any of the Operative Agreements, and there shall not be pending or threatened on
the Closing Date any Action or Proceeding in, before or by any Governmental or
Regulatory Authority which could reasonably be expected to result in the
issuance of any such Order or the enactment, promulgation or deemed
applicability to Purchaser, either Company or the transactions contemplated by
this Agreement or any of the Operative Agreements of any such Law.
6.05 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Purchaser and the Sellers to perform their obligations under
this Agreement and the Operative
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Agreements and to consummate the transactions contemplated hereby and thereby
(a) shall have been duly obtained, made or given, (b) shall be in form and
substance reasonably satisfactory to Purchaser, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect.
6.06 Third Party Consents; Release of Liens. The lenders pursuant to
Purchaser's credit facility shall have consented in writing to the transactions
contemplated hereby, provided that this condition shall be deemed to have been
waived if such consent is not obtained on or prior to February 25, 2000 and
Purchaser shall not have terminated this Agreement on or prior to such date
pursuant to the provisions of Section 12.01(e) hereof. There shall be no Liens
on the Shares or, except for Permitted Liens, the Assets and Properties of the
Companies and any guaranties by the Companies of the obligations of any other
Person shall have been terminated and the Companies shall have been released
from all of their obligations thereunder. Sellers shall have delivered Purchaser
evidence reasonably satisfactory to Purchaser that there are no such Liens and
that all such guaranties have been terminated.
6.07 Opinion of Counsel. Purchaser shall have received the opinion of
RubinBaum LLP, counsel to the Sellers and the Companies, dated the Closing Date,
substantially in the form and to the effect of Exhibit D hereto, and to such
further effect as Purchaser may reasonably request.
6.08 Resignations of Directors and Officers. Such members of the boards of
directors and such officers of the Companies as are designated in a written
notice delivered at least two (2) Business Days prior to the Closing Date by
Purchaser to Sellers shall have tendered, effective at the Closing, their
resignations as such directors and officers.
6.09 Escrow Agreement. Each of the Sellers and the Escrow Agent shall have
entered into the Escrow Agreement.
6.10 Proceedings. All proceedings to be taken on the part of either of the
Sellers in connection with the transactions contemplated by this Agreement and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser, and Purchaser shall have received copies of all such
documents and other evidences as Purchaser may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
6.11 No Material Change. There shall have been no material adverse change
in the Business or Condition of the Companies except for changes resulting from
the effects of general economic conditions arising between the date hereof and
the Closing Date that are not unique to the Companies but also affect other
Persons who participate or are engaged in the lines of business in which the
Companies participate or are engaged.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLERS
The obligations of the Sellers hereunder to sell the Shares are subject to
the fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by the Sellers in their
sole discretion):
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7.01 Representations and Warranties. Each of the representations and
warranties made by Purchaser in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though such representation or
warranty was made on and as of the Closing Date.
7.02 Performance. Purchaser shall have performed and complied with, in all
material respects, each agreement, covenant and obligation required by this
Agreement to be so performed or complied with by Purchaser at or before the
Closing.
7.03 Officers' Certificates. Purchaser shall have delivered to the Sellers
a certificate, dated the Closing Date and executed in the name and on behalf of
Purchaser by the Chairman of the Board, the President or any Executive or Senior
Vice President of Purchaser, substantially in the form and to the effect of
Exhibit E hereto, and a certificate, dated the Closing Date and executed by the
Secretary or any Assistant Secretary of Purchaser, substantially in the form and
to the effect of Exhibit F hereto.
7.04 Orders and Laws. There shall not be in effect on the Closing Date any
Order or Law that became effective after the date of this Agreement restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or any of the Operative
Agreements.
7.05 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit each Seller and Purchaser to perform their obligations under
this Agreement and the Operative Agreements and to consummate the transactions
contemplated hereby and thereby (a) shall have been duly obtained, made or
given, (b) shall not be subject to the satisfaction of any condition that has
not been satisfied or waived and (c) shall be in full force and effect.
7.06 Third Party Consents. All consents (or in lieu thereof waivers) to
the performance by each Seller of its obligations hereunder and to the
consummation of the transactions contemplated hereby as are required under the
Contracts listed in Section 7.06 of the Disclosure Schedules (a) shall have been
obtained, (b) shall not be subject to the satisfaction of any condition that has
not been satisfied or waived and (c) shall be in full force and effect.
7.07 Letters of Credit. Purchaser shall have delivered to Sellers or
Affiliates of Sellers letters of credit from financial institutions and in form
and substance reasonably satisfactory to Sellers with respective face amounts
equal to, and expiration and renewal provisions substantially similar to, the
letters of credit issued by lenders of Sellers or Affiliates of Sellers in
respect of payment obligations of the Companies for supplies, inventory and
other items purchased by the Companies in the ordinary course of business.
7.08 Proceedings. All proceedings to be taken on the part of Purchaser in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Sellers, and the Sellers shall have received copies of all such
documents and other evidences as Sellers may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
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ARTICLE VIII
TAX MATTERS AND POST-CLOSING TAXES
8.01 Preparation And Filing of Tax Returns. Any tax sharing agreements,
tax settlement agreements, arrangements, policies or guidelines, formal or
informal, express or implied that may exist between the Companies and Seller or
any Affiliate of Seller (other than the Companies) shall terminate as of the
Closing Date and, except as specifically provided herein, any obligation to make
payments under such agreements shall be cancelled as of the Closing Date.
Sellers shall prepare and timely file or shall cause to be prepared and timely
filed all Federal, state, local and foreign Tax Returns in respect of the
Companies, their assets or activities that (a) are required to be filed on or
before the Closing Date or (b) are required to be filed after the Closing Date
and (i) are consolidated, combined or unitary Tax Returns or (ii) are with
respect to income taxes and are required to be filed on a separate Tax Return
basis for any tax period ending on or before the Closing Date. At Purchaser's
request, Sellers shall, to the extent permitted by law, cause the Companies to
end their respective taxable years on the Closing Date for state income tax
purposes, provided that Purchaser shall promptly reimburse Sellers for any
additional reasonable costs and expenses, including reasonable accounting costs,
incurred by Sellers in connection with the preparation of Tax Returns relating
to such taxable year. Purchaser shall prepare or cause to be prepared and shall
file or cause to be filed all other Tax Returns required of the Companies or in
respect of their assets or activities. Any such Tax Returns that include periods
ending on or before the Closing Date or that include the activities of the
Companies prior to the Closing Date shall, insofar as they relate to the
Companies, be on a basis consistent with the last previous such Tax Returns
filed in respect of the Companies, unless Sellers or Purchaser, as the case may
be, concludes that there is no reasonable basis for such position. None of
Purchaser or either of the Companies shall file any amended Tax Returns for any
periods for or in respect of the Companies with respect to which Purchaser is
not obligated to prepare or cause to be prepared the original such Tax Returns
pursuant to this Section 8.01 without the prior written consent of Sellers;
provided that nothing in the preceding sentence shall limit the right of the
Companies, subject to Section 8.04, to cooperate with a taxing authority in
resolving and determining the tax consequences of any Tax Claim (as such term is
defined in Section 8.04(a)).
(a) Carryforwards and Carrybacks. Purchaser shall cause each of the
Companies to elect, and where such election does not affect the treatment of any
tax item of Purchaser or any Purchaser Affiliate other than the Companies, where
permitted by law, to carry forward any net operating loss, charitable
contribution or other item arising after the Closing Date that could, in the
absence of such an election, be carried back to a taxable period of each of the
Companies ending on or before the Closing Date in which such Company was
included in a consolidated, combined or unitary Tax Return.
(b) Refunds. Sellers shall be entitled to retain, or receive payment
as promptly as practicable from Purchaser (including the Companies) of, any
refund or credit with respect to Taxes (including, without limitation, refunds
and credits arising by reason of amended Tax Returns files after the Closing
Date or otherwise) with respect to any Tax period ending on or before the
Closing Date relating to the Companies; provided, however that Purchaser and the
Companies shall be entitled to retain, or receive immediate payment from Sellers
of, any such refund or credit to the extent that such refund or credit arises as
a result of the use or application
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(as provided in Section 8.01(b)) of any net operating loss or charitable
contribution, net capital loss, foreign tax credit or research and development
credit or other item of the Companies for any tax year ending on any date
following the Closing Date to any period of the Companies ending on or before
the Closing Date. Purchaser and the Companies shall be entitled to retain, or
receive immediate payment from Sellers of, any refund or credit with respect to
Taxes with respect to any taxable period beginning after the Closing Date
relating to any of the Companies. Purchaser and Sellers shall equitably
apportion any refund or credit with respect to Taxes with respect to any taxable
period that included (but does not end on) the Closing Date.
8.02 Tax Cooperation. After the Closing Date, each of the parties will
cooperate with the other in the preparation of all Tax Returns and will provide
(or cause to be provided) any records and other information any party requests,
and will provide access to, and the cooperation of its auditors. Each of the
parties will cooperate with the other in connection with any Tax investigation,
audit or other proceeding.
8.03 Tax Indemnification.
(a) After the Closing Date, each of the Sellers will jointly and
severally indemnify and hold harmless Purchaser and each of the Companies from
and against any and all claims, actions, causes of action, liabilities, losses,
damages, and reasonable out-of-pocket expenses and costs resulting from, arising
out of or relating to, (i) any Taxes of either of the Companies for all taxable
periods ending on or before the Closing Date, (ii) any Tax liabilities of either
of the Companies for any taxable periods including the Closing Date, in an
amount equal to the Tax liability that would have resulted had the last day of
the period been the Closing Date and had the books of such Company been closed
on that date, with the taxable income being determined under the principles of
appropriate law, and Taxes other than income Taxes for which the last day of the
taxable period is not the Closing Date will be allocated pro rata per day
between the period ending on the Closing Date and the period commencing after
the Closing Date. Any amount payable by the Sellers as computed by Purchaser
under this Section will be remitted to Purchaser at least three business days
prior to the due date of the respective Tax Returns (with interest being imposed
at the Federal Funds Rate for any late payment), and (iii) any Taxes imposed on
either of the Sellers. Notwithstanding the foregoing, Sellers shall not
indemnify, defend or hold harmless Purchaser from any liability for Taxes
attributable to any action taken on the Closing Date by Purchaser, any of its
Affiliates (including the Companies), or any transferee Purchaser or any of its
Affiliates outside of the ordinary course of business (other than any such
action expressly required or otherwise expressly contemplated by this Agreement
or with the written consent of Sellers (a "Buyer Tax Act"),
(b) Purchaser shall, and shall cause the Companies to, indemnify,
defend and hold the Sellers harmless from and against (i) for all taxable
periods beginning after the Closing Date and for that portion of any taxable
period including the Closing Date for which Seller is not responsible pursuant
to Section 8.03(a)(ii), all liability for Taxes of the Companies, (ii) all
liability for Taxes attributable to a Buyer Tax Act, and (iii) all liability for
reasonable legal, accounting and appraisal fees and expenses with respect to any
item described in clause (i) or (ii) above.
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(c) Any indemnity payment required to be made pursuant to this
Section shall be paid within 30 days after the indemnified party makes written
demand upon the indemnifying party, but in no case earlier than five business
days prior to the date on which the relevant Taxes are required to be paid to
the relevant taxing authority (including estimated Tax payments).
8.04 Tax Contests.
(a) If a claim shall be made by any taxing authority (a "Tax Claim")
which, if successful, might result in an indemnity payment to Purchaser pursuant
to Section 8.03 Purchaser shall promptly notify Sellers of such claim; provided,
however, that the failure to give such notice shall not affect the
indemnification provided hereunder except to the extent Sellers has actually
been prejudiced as a result of such failure.
(b) With respect to any Tax Claim relating to Taxes and relating to
a taxable period ending on or before the Closing Date, Sellers shall control all
proceedings any may make all decisions taken in connection with such Tax Claim
(including selection of counsel, which counsel shall be reasonably acceptable to
Purchaser) and, without limiting the foregoing, may in their sole discretion
pursue or forego any and all administrative appeals, proceedings, hearings and
conference with any taxing authority with respect thereto, and may, in their
sole discretion, either pay the Tax claimed and sue for a refund where
applicable law permits such refund suits or contest the Tax Claim in any
permissible manner. Notwithstanding the foregoing, Sellers shall not settle any
Tax Claim without the prior written consent of Purchaser, which consent shall
not be unreasonably withheld. Furthermore, Purchaser, and counsel of its own
choosing, shall have the right to participate fully in the prosecution or
defense of such Tax Claim, and Sellers shall inform Purchaser, promptly in
advance, of the date, time and place of all administrative or judicial meetings,
conferences, hearings and other proceedings relating to such Tax Claim and shall
provide Purchaser all information document requests and responses, proposed
notices of deficiency, notices of deficiencies, revenue agents' reports,
protests, petitions and any other documents relating to such Tax Claim promptly
upon receipt from, or in advance of submission to (as the case may be), the
relevant taxing authority. Purchaser shall be entitled to have its
representatives attend and participate in any such administrative or judicial
meeting, conference, hearing or other proceeding. Before taking any action with
respect to the conduct of such Tax Claim (including, but no limited to, the
submission of any protest, petitions or responses to information document
requests), Sellers shall first consult with Purchaser in good faith about such
action.
(c) Seller and Buyer shall jointly control and participate in all
proceedings taken in connection with any Tax Claim relating to Taxes of the
Companies for any Tax period preceding, or including, the Closing Date. Neither
Sellers nor Purchaser shall settle any such Tax Claim without the prior written
consent of the other.
(d) Purchaser shall control all proceedings with respect to Taxes
for any taxable period beginning after the Closing Date.
(e) Purchaser, the Companies, and each of their respective
Affiliates, on the one hand, and Sellers and their respective Affiliates, on the
other, shall cooperate in contesting any Tax Claims, which cooperation shall
include the retention and (upon request) the provision
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to the requesting party of records and information which are reasonably relevant
to such Tax Claim, and making employees available on a mutually convenient basis
to provide additional information or explanation of any material provided
hereunder to testify at proceedings relating to such Tax Claim.
8.05 Section 338(h)(10) Election.
(a) Purchaser may choose to make an election under Section 338(g) of
the Code and, if it so elects, Section 338(h)(10) of the Code and to make (or
not to make or to elect out of) an election under any provision of state or
local law comparable to Section 338(g) or Section 338(h)(10) (the "Section 338
Elections") with respect to the acquisition of the stock of the Companies.
Purchaser shall provide written notice of such choice to make any Section 338
Elections (and of any states with respect to which it may, but will not, make or
will elect out of a Section 338 Election) to Sellers on or before the date by
which such Section 338 Elections must be made pursuant to the applicable
provisions of the Code (the "Due Date"), and Sellers shall, and shall cause any
required Affiliate to, jointly make with Purchaser any such election under
Section 338(h)(10) of the Code and any comparable provision of state or local
law.
(b) From and after the date hereof, Sellers shall make available to
Purchaser accurate information as reasonably requested by Purchaser, within 60
days of the first such request and as promptly as practicable (but not later
than 30 days) after each subsequent request, that is sufficient to enable
Purchaser to decide whether it will choose to make the Section 338 Elections as
provided in Section 8.05(a) hereof and to determine the Section 338 Indemnity
Amount Purchaser would have to pay Sellers pursuant to Section 8.05(c) hereof in
the event Purchaser decides to make such elections. Purchaser shall be
responsible for the preparation and filing of all Section 338 Forms and Sellers
shall cooperate with Purchaser in such preparation and filing. "Section 338
Forms" means all returns (other than income and franchise tax returns the
responsibility for the preparation of which is governed by Section 8.01 hereof),
documents, statements and other forms that are required to be submitted to any
federal, state or local taxing authority in connection with the Section 338
Elections. Purchaser shall prepare any required Section 338 Forms and shall
provide Sellers with a copy of such Forms together with the Allocation Schedule
(as defined below) no later than 75 days before the Due Date. Sellers shall
execute and deliver to Purchaser such documents or forms (including executed
Section 338 Forms) as are requested and are required by any laws to properly
complete the Section 338 Forms, at least 60 days prior to the Due Date.
(c) (i) In the event Purchaser and Sellers join in the Section 338
Elections as provided in Section 8.05 hereof, in addition to any other
obligation it may have to indemnify and hold harmless Sellers pursuant to this
Agreement (but without duplication), Purchaser agrees to indemnify Sellers in an
amount equal to the excess of (x) the aggregate liability of Holdings and its
Subsidiaries for Taxes for the taxable year that includes the Closing Date which
would have been payable if the sale of the stock of the Companies was the only
transaction during such period (except that net operating losses for the year
that ends on the Closing Date (computed without regard to income and loss from
the deemed sale of assets of the Companies pursuant to any Section 338
Elections), net operating loss carryforwards and other losses and credits, in
each case, attributable to the Companies shall be taken into account), over (y)
the aggregate hypothetical tax liability of Holdings and its Subsidiaries for
the taxable year that includes the Closing Date which would have been payable if
the sale of the stock of the Companies were the only
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transactions during such period and Sellers did not make an election under
Section 338(h)(10) of the Code. Such excess shall be determined without regard
to any interest or penalties payable by Holdings and its Subsidiaries, except to
the extent such interest and penalties were incurred solely as a result of any
action or delay by Purchaser in connection with the making of any Section 338
Election (including any penalties that are attributable to the allocation
prepared by Purchaser pursuant to Section 8.05(e)). For purposes of computing
the "aggregate hypothetical tax liability" of Holdings and its subsidiaries, it
shall be assumed that actual federal, state and local tax rates apply. The
indemnity amount described in this Section 8.05(c)(i) (the "Section 338
Indemnity Amount") shall be determined on an after-tax basis, assuming actual
federal, state and local tax rates apply, by taking into account any income
recognized by Sellers as the result of the receipt of such amount. The
determination required by the preceding sentence shall assume that the sale of
the stock of the Companies and the payment of the Section 338 Indemnity Amount
were the only transactions during the applicable period.
(ii) No later than 30 days after the date the Section 338
Forms and the Allocation Schedule are provided to Sellers,
PricewaterhouseCoopers, LLP (or any other nationally recognized firm of
independent certified public accountants retained by Sellers ("Sellers'
Accountants")) shall compute the Section 338 Indemnity Amount and shall deliver,
within such 30-day period, such computation to Purchaser. Purchaser and a firm
of independent public accountant designated by Purchaser ("Purchaser's
Accountants") will be entitled to reasonable access during normal business hours
to relevant records, personnel and working papers in order to aid their review
of the Section 338 Indemnity Amount. The computation of the Section 338
Indemnity Amount shall be deemed accepted by Purchaser except to the extent, if
any, Purchaser or Purchaser's Accountant shall have delivered within 30 days of
receipt of Seller's computation a written notice specifying any objections or
requesting information as to the computation. If Purchaser or Purchaser's
Accountant specifies any objections either initially or upon the receipt of
additional information, Purchaser and Seller shall negotiate in good faith to
resolve such dispute. If, after a period of thirty (30) days following the date
on which Purchaser gives Sellers notice of any such objections, any such
proposed objection still remains disputed, then purchaser and Sellers hereby
agree that the Accounting Firm shall resolve any remaining disputes. The
Accounting Firm shall act as an arbitrator to make a determination with respect
to the issues that are disputed by the parties, based on presentations by
Sellers and purchaser, and by independent review of the Accounting Firm if
deemed necessary in the sole discretion of the Accounting Firm, which
determination shall be limited to only those issues still in dispute. The
decision of the Accounting Firm shall be final and binding. The fees and expense
of the Accounting Firm, if any, shall be paid by Purchaser unless the Accounting
Firm determines that the Section 338 Indemnity Amount as initially computed
exceeded the Section 338 Indemnity Amount as determined by the Accountants by at
least 10% of the Section 338 Indemnity Amount calculated by Sellers, in which
case the fees and expenses of Accountant shall be paid by Sellers. Purchaser
shall as promptly as practicable reimburse Sellers for fees of Sellers'
Accountants in connection with this Section 8.05 upon receipt of Sellers'
Accountants' bill for such fees.
(iii) Within 15 business days prior to the payment by Sellers
of Taxes attributable to the Section 338 Elections, Sellers shall deliver to
Purchaser either (x) a statement stating that the Section 338 Indemnity amount
calculated pursuant to Section 8.05(c)(i) is due or (y) a statement of Seller's
Accountants (the "Accountant's Certificate") providing a recomputation of the
Section 338 Indemnity Amount, which recomputation shall vary from the Section
338 Indemnity Amount
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calculated pursuant to Section 8.05(c)(i) only to the extent necessary to take
into purchase price adjustments occurring after the date the Section 338
Indemnity Amount was computed pursuant to Section 8.05(c)(i)). If Purchaser
disputed the amount of any recomputation, the dispute resolution procedure of
Section 8.05(c)(ii) shall apply. Purchaser shall, five (5) Business Days after
receipt of Seller's statement referred to in clause (x) of the preceding
sentence or of the Account's Certificate pursuant to clause (y) of such
sentence, pay to Seller the amount, if clause (i) is applicable, of the Section
338 Indemnity Amount or, if clause (y) is applicable, of any undisputed amount
set forth in the Accountant's Certificate; provided that Purchaser shall,
promptly after the resolution of any dispute pay Seller the excess of the
Section 338 Indemnity Amount as finally determined over the undisputed amount
previously paid by Seller. Any payments to Sellers pursuant to the Section
8.05(c)(iii) are sometimes hereinafter referred to as "Tax Indemnity Payments."
(iv) The Section 338 Indemnity Amount shall be subject to
adjustment in the event of any change in the amounts referred to in clauses (x)
and (y) of Section 8.05(c)(i) as a result of (1) adjustments to the Purchase
Price and other items affecting the Allocation Schedule and (2) any adjustment
by a relevant taxing authority to the Tax Returns reporting the effects of the
Tax Elections. Sellers shall promptly notify Purchaser of any proposed
adjustments by a taxing authority that could result in an adjustment to the
Section 338 Indemnity Amount and shall consult in good faith as to any responses
to such taxing authority and shall not agree to any adjustment without
Purchaser's consent, which shall not be unreasonably withheld. Sellers shall
promptly notify Purchaser if the Section 338 Indemnity Amount is subsequently
increased or decreased and shall provide a statement of Sellers' Accountants
setting forth the amount of, and the reason for, such increase or decrease.
Purchaser's Accountants may review and discuss the computation of the Section
338 Indemnity Amount, as adjusted.
(d) (i) The Taxes incurred by reason of the deemed sale of assets
and liquidation resulting from an election under Section 338(g) and Section
338(h)(10) of the Code or any comparable provision of state or local law made
pursuant to Section 8.05 hereof shall be considered Taxes attributable to the
periods ending on or before the Closing Date for purposes of this Agreement.
Accordingly, Returns with respect to such Taxes shall be prepared and filed in
accordance with Section 8.01 hereof and consistent with the computation of the
Section 338 Indemnity Amount.
(ii) Taxes resulting from an election under Section 338(g) or
any comparable provision of state or local law shall not be considered Taxes
attributable to periods ending on or before the Closing Date for purposes of
this Agreement if an accompanying election under Section 338(h)(10) of the Code
or comparable provision under state or local law is not made, any Return due as
a result of such an election shall be prepared and filed by Purchaser, and
Sellers shall not be required to indemnify Purchaser pursuant to this Article
VIII for such Taxes.
(e) The consideration paid by Purchaser for the Companies,
liabilities of the Companies and other relevant items shall be allocated in
accordance with the rules of Section 338 of the Code and Treasury Regulations
thereunder and in a manner that is consistent with the computation of the
Section 338 Indemnity Amount and the Allocation Schedule. "Allocation Schedule"
means a schedule which shall be prepared by Purchaser and provided to Sellers no
later than 75 days before the Due Date. Such allocation shall be adjusted from
time to time to
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take into account adjustments to the Purchase Price and other relevant items.
All allocations contained in such schedule, as adjusted, shall be used by each
party in preparing the Section 338 Forms and all relevant Tax Returns.
ARTICLE IX
[RESERVED]
ARTICLE X
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
10.01 Survival of Representations, Warranties, Covenants and Agreements.
Notwithstanding any right of Purchaser (whether or not exercised) to investigate
the affairs of either Company or any right of any party (whether or not
exercised) to investigate the accuracy of the representations and warranties of
the other party contained in this Agreement, each of the Sellers and Purchaser
have the right to rely fully upon the representations, warranties, covenants and
agreements of the other contained in this Agreement. The representations,
warranties, covenants and agreements of each of the Sellers and Purchaser
contained in this Agreement will survive the Closing (a) indefinitely with
respect to (i) the representations and warranties contained in Sections 2.02,
2.04, 2.29, 3.02 and 3.07 and (ii) the covenants and agreements contained in
Sections 1.05, 14.03 and 14.05; (b) until thirty days following the expiration
of all applicable statutes of limitation (including all periods of extension,
whether automatic or permissive) with respect to matters covered by Sections
2.11, 2.14, 2.23, 11.01(d), 11.01(e) and Article VIII; (c) two (2) years in the
case of all other representations and warranties and any covenant or agreement
to be performed in whole or in part on or prior to the Closing or (d) with
respect to each other covenant or agreement contained in this Agreement, until
sixty (60) days following the last date on which such covenant or agreement is
to be performed or, if no such date is specified, two (2) years; provided that
any representation, warranty, covenant or agreement that would otherwise
terminate in accordance with clause (b), (c) or (d) above will continue to
survive to the extent set forth in any claim for indemnification set forth in
any Claim Notice or Indemnity Notice (as applicable) that shall have been timely
given under Article XI on or prior to such termination date, until such claim
for indemnification has been satisfied or otherwise resolved as provided in
Article XI.
ARTICLE XI
INDEMNIFICATION
11.01 Indemnification.
(a) Subject to paragraph (c) of this Section and the other Sections
of this Article XI, each of the Sellers shall jointly and severally indemnify
Purchaser Indemnified Parties in respect of, and hold each of them harmless from
and against, any and all Losses suffered, incurred or sustained by any of them
or to which any of them becomes subject, resulting from, arising out of or
relating to any breach of representation or warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of such Seller
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contained in this Agreement (determined in all cases as if the terms "material"
or "materially" were not included therein).
(b) Subject to the other Sections of this Article XI, Purchaser
shall indemnify the Seller Indemnified Parties in respect of, and hold each of
them harmless from and against, any and all Losses suffered, incurred or
sustained by any of them or to which any of them becomes subject, resulting
from, arising out of or relating to any breach of representation or warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Purchaser contained in this Agreement.
(c) No amounts of indemnity shall be payable in the case of a claim
by a Purchaser Indemnified Party under Sections 11.01(a), 11.01(d) or 11.01(e)
or Seller Indemnified Party under Section 11.01(b) unless and until the
Purchaser Indemnified Parties or the Seller Indemnified Parties, as applicable,
have suffered, incurred, sustained or become subject to Losses referred to in
such Section in excess of $100,000 in the aggregate, in which event the
Purchaser Indemnified Parties shall be entitled to claim indemnity for the full
amount of such Losses and not in excess of $3,000,000; provided that this
paragraph (c) shall not apply to a breach of a representation or warranty
contained in Section 2.02, 2.04, 2.11(l), 2.11(m), 2.11(n), 2.11(o), 2.29, 3.02
or 3.07 or to a breach of a covenant contained in Section 1.06, 4.11, 14.03 or
14.05 or to a breach of any obligation in Article VIII. Indemnity amounts
payable with respect to a claim by a Purchaser Indemnified Party shall be paid
first from amounts on deposit pursuant to the Escrow Agreement, including
interest on amounts on deposit pursuant to the terms thereof, and thereafter
from the assets of the Sellers.
(d) Notwithstanding any other contractual remedies provided
elsewhere in this Agreement, each of the Sellers shall jointly and severally
indemnify, and covenants not to sue for contribution or indemnity from, the
Companies and Purchaser Indemnified Parties in respect of, and hold each of them
harmless from and against, any and all Losses suffered, incurred or sustained by
any of them or to which any of them becomes subject, resulting from, arising out
of or relating to:
(i) actual or threatened Release or disposal of Hazardous
Materials at any location by either Company that occurred at or before the
Closing;
(ii) the presence of Hazardous Materials at or before the
Closing at any property owned, leased or operated by either Company at any time
(including diminution in value of any such property);
(iii) any Environmental Claim related to conditions existing
at or before the Closing; and
(iv) violations of, or liability imposed by, any Environmental
Law related to conditions existing at or before the Closing.
(e) Notwithstanding any other contractual remedies provided
elsewhere in this Agreement, each of the Sellers shall jointly and severally
indemnify, and covenants not to sue for contribution or indemnity from, the
Companies and Purchaser Indemnified Parties in respect of, and hold each of them
harmless from and against, any and all Losses suffered, incurred or
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sustained by any of them or to which any of them becomes subject, resulting
from, arising out of or relating to Product Liability Claims and Product
Warranty Claims made with respect to, and Losses resulting from the recall of or
reduction in inventory of, products manufactured prior to the Closing Date or
sold, leased or delivered by the Companies prior to or following the Closing
Date as a result of the failure of such products to comply with specifications
approved by Underwriters Laboratories or other similar quasi-regulatory bodies
or Governmental or Regulatory Authorities, including without limitation CE/EMC
specifications and specifications of other trade or regulatory bodies in the
Netherlands.
11.02 Method of Asserting Claims. All claims for indemnification under
Article VIII shall be subject to the provisions of Article VIII and not this
Section 11.02. All claims for indemnification by any Indemnified Party under
Section 11.01 will be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which an
Indemnified Party might seek indemnity under Section 11.01 is asserted against
or sought to be collected from such Indemnified Party by a Person other than a
Seller or any Affiliate of a Seller or of Purchaser or the Companies (a "Third
Party Claim"), the Indemnified Party shall deliver a Claim Notice with
reasonable promptness to the Indemnifying Party. If the Indemnified Party fails
to provide the Claim Notice with reasonable promptness after the Indemnified
Party receives notice of such Third Party Claim, the Indemnifying Party will not
be obligated to indemnify the Indemnified Party with respect to such Third Party
Claim to the extent that the Indemnifying Party's ability to defend has been
irreparably prejudiced by such failure of the Indemnified Party. The
Indemnifying Party will notify the Indemnified Party within the Dispute Period
whether the Indemnifying Party disputes its liability to the Indemnified Party
under Section 11.01, and whether the Indemnifying Party desires, at its sole
cost and expense, to defend the Indemnified Party against such Third Party
Claim.
(i) If the Indemnifying Party notifies the Indemnified Party
within the Dispute Period that the Indemnifying Party desires to defend the
Indemnified Party with respect to the Third Party Claim pursuant to this Section
11.02(a) then the Indemnifying Party will have the right to defend, with counsel
reasonably satisfactory to the Indemnified Party, at the sole cost and expense
of the Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings will be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party, which consent will not be unreasonably withheld, in the case
of any settlement that provides for any relief other than the payment of
monetary damages as to which the Indemnified Party will be indemnified in full).
The Indemnifying Party will have full control of such defense and proceedings,
including (except as provided in the immediately preceding sentence) any
settlement thereof; provided, however, that the Indemnified Party may, at the
sole cost and expense of the Indemnified Party, at any time prior to the
Indemnifying Party's delivery of the notice referred to in the first sentence of
this clause (i), file any motion, answer or other pleadings or take any other
action that the Indemnified Party reasonably believes to be necessary or
appropriate to protect its interests; and provided further, that if requested by
the Indemnifying Party, the Indemnified Party will, at the sole cost and expense
of the Indemnifying Party, provide reasonable cooperation to the Indemnifying
Party in contesting any Third Party Claim that the Indemnifying Party elects to
contest. The Indemnified Party may
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retain separate counsel to represent it in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying Party
pursuant to this clause (i), and the Indemnified Party will bear its own costs
and expenses with respect to such separate counsel, except as provided in the
preceding sentence and except that the Indemnifying Party will pay the costs and
expenses of such separate counsel if (x) in the Indemnified Party's good faith
judgment, it is advisable, based on advice of counsel, for the Indemnified Party
to be represented by separate counsel because a conflict or potential conflict
exists between the Indemnifying Party and the Indemnified Party or (y) the named
parties to such Third Party Claim include both the Indemnifying Party and the
Indemnified Party and the Indemnified Party determines in good faith, based on
advice of counsel, that defenses are available to it that are unavailable to the
Indemnifying Party. Notwithstanding the foregoing, the Indemnified Party may
retain or take over the control of the defense or settlement of any Third Party
Claim the defense of which the Indemnifying Party has elected to control if the
Indemnified Party irrevocably waives its right to indemnity under Section 11.01,
with respect to such Third Party Claim. The Indemnifying Party shall be deemed
to have waived its right to dispute its liability to the Indemnified Party under
Section 11.01 with respect to any Third Party Claim unless it gives notice of
such dispute within 90 days after receipt of the notice of the Third Party Claim
pursuant to the first sentence of this Section 11.02(a)(i). Upon the giving of
such notice, the Indemnifying Party shall cease to have the right to control the
defense of the Third Party Claim if the Indemnified Party asserts such right.
(ii) If the Indemnifying Party fails to notify the Indemnified
Party within the Dispute Period that the Indemnifying Party desires to defend
the Third Party Claim pursuant to Section 11.02(a), or if the Indemnifying Party
gives such notice but fails to prosecute vigorously and diligently or settle the
Third Party Claim, then the Indemnified Party will have the right to defend, at
the sole cost and expense of the Indemnifying Party, the Third Party Claim by
all appropriate proceedings, which proceedings will be prosecuted by the
Indemnified Party in good faith or will be settled at the discretion of the
Indemnified Party (with the consent of the Indemnifying Party, which consent
will not be unreasonably withheld). The Indemnified Party will have full control
of such defense and proceedings, including (except as provided in the
immediately preceding sentence) any settlement thereof; provided, however, that
if requested by the Indemnified Party, the Indemnifying Party will, at the sole
cost and expense of the Indemnifying Party, provide reasonable cooperation to
the Indemnified Party and its counsel in contesting any Third Party Claim which
the Indemnified Party is contesting. Notwithstanding the foregoing provisions of
this clause (ii), if the Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party disputes its liability
hereunder to the Indemnified Party with respect to such Third Party Claim and if
such dispute relating to the liability of the Indemnifying Party under this
Agreement for such Third Party Claim is resolved in favor of the Indemnifying
Party in the manner provided in clause (iii) below, the Indemnifying Party will
not be required to bear the costs and expenses of the Indemnified Party's
defense pursuant to this clause (ii) or of the Indemnifying Party's
participation therein at the Indemnified Party's request, and the Indemnified
Party will reimburse the Indemnifying Party in full for all reasonable costs and
expenses incurred by the Indemnifying Party in connection with such litigation.
The Indemnifying Party may retain separate counsel to represent it in, but not
control, any defense or settlement controlled by the Indemnified Party pursuant
to this clause (ii), and the Indemnifying Party will bear its own costs and
expenses with respect to such participation.
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(iii) If the Indemnifying Party notifies the Indemnified Party
that it does not dispute its liability to the Indemnified Party with respect to
the Third Party Claim under Section 11.01, the Loss arising from such Third
Party Claim will be deemed a liability of the Indemnifying Party under Section
11.01, as applicable, and the Indemnifying Party shall pay the amount of such
Loss to the Indemnified Party on demand following the final determination
thereof. If the Indemnifying Party has disputed its liability with respect to
such claim, the Indemnifying Party and the Indemnified Party will proceed in
good faith to negotiate a resolution of such dispute, and if not resolved
through negotiations within the Resolution Period, such dispute shall be
resolved by arbitration in accordance with paragraph (c) of this Section 11.02.
(b) In the event any Indemnified Party should have a claim under
Section 11.01, against any Indemnifying Party that does not involve a Third
Party Claim, the Indemnified Party shall deliver an Indemnity Notice with
reasonable promptness to the Indemnifying Party. The failure by any Indemnified
Party to give the Indemnity Notice shall not impair such party's rights
hereunder except to the extent that an Indemnifying Party demonstrates that it
has been irreparably prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim described in such Indemnity
Notice or fails to notify the Indemnified Party within the Dispute Period
whether the Indemnifying Party disputes the claim described in such Indemnity
Notice, the Loss arising from the claim specified in such Indemnity Notice will
be conclusively deemed a liability of the Indemnifying Party under Section
11.01, and the Indemnifying Party shall pay the amount of such Loss to the
Indemnified Party on demand following the final determination thereof. If the
Indemnifying Party has timely disputed its liability with respect to such claim,
the Indemnifying Party and the Indemnified Party will proceed in good faith to
negotiate a resolution of such dispute, and if not resolved through negotiations
within the Resolution Period, such dispute shall be resolved by arbitration in
accordance with paragraph (c) of this Section 11.02.
(c) Any dispute submitted to arbitration pursuant to this Section
11.02 shall be finally and conclusively determined by the decision of a board of
arbitration consisting of three (3) members (hereinafter sometimes called the
"Board of Arbitration") selected as hereinafter provided. Each of the
Indemnified Party and the Indemnifying Party shall select one (1) member and the
third member shall be selected by mutual agreement of the other members, or if
the other members fail to reach agreement on a third member within twenty (20)
days after their selection, such third member shall thereafter be selected by
the American Arbitration Association upon application made to it for a third
member possessing expertise or experience appropriate to the dispute jointly by
the Indemnified Party and the Indemnifying Party. The Board of Arbitration shall
meet in Seattle, Washington, and shall reach and render a decision in writing
(concurred in by a majority of the members of the Board of Arbitration) with
respect to the amount, if any, which the Indemnifying Party is required to pay
to the Indemnified Party in respect of a claim filed by the Indemnified Party.
In connection with rendering its decisions, the Board of Arbitration shall adopt
and follow such rules and procedures as a majority of the members of the Board
of Arbitration deems necessary or appropriate. To the extent practical,
decisions of the Board of Arbitration shall be rendered no more than thirty (30)
days following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to the Indemnified
Party and the Indemnifying Party. Any decision made by the Board of Arbitration
(either prior to or after the expiration of such thirty (30) calendar day
period) shall be final, binding and conclusive on the Indemnified Party and the
Indemnifying
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Party and entitled to be enforced to the fullest extent permitted by law and
entered in any court of competent jurisdiction. Each party to any arbitration
shall bear its own expense in relation thereto, including but not limited to
such party's attorneys' fees, if any, and the expenses and fees of the Board of
Arbitration shall be divided between the Indemnifying Party and the Indemnified
Party in the same proportion as the portion of the related claim determined by
the Board of Arbitration to be payable to the Indemnified Party bears to the
portion of such claim determined not to be so payable.
11.03 Exclusivity. Following the Closing, except as set forth in Section
4.11(c) and except for any claims based upon fraud, the indemnities set forth in
Article VIII and this Article XI shall be the exclusive remedies of Purchaser
and Sellers and their respective officers, directors, employees, agents and
Affiliates for any misrepresentation, breach of warranty or nonfulfillment or
failure to be performed of any covenant or agreement contained in this
Agreement.
ARTICLE XII
TERMINATION
12.01 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned:
(a) at any time before the Closing, by mutual written agreement of
each of the Sellers and Purchaser;
(b) at any time before the Closing, by each of the Sellers or
Purchaser, in the event (i) of a material breach hereof by the non-terminating
party if such non-terminating party fails to cure such breach within five (5)
Business Days following notification thereof by the terminating party or (ii)
upon notification of the non-terminating party by the terminating party that the
satisfaction of any condition to the terminating party's obligations under this
Agreement becomes impossible or impracticable with the use of commercially
reasonable efforts if the failure of such condition to be satisfied is not
caused by a breach hereof by the terminating party;
(c) at any time after April 15, 2000, by each of the Sellers or
Purchaser upon notification of the non-terminating party by the terminating
party if the Closing shall not have occurred on or before such date and such
failure to consummate is not caused by a breach of this Agreement by the
terminating party; or
(d) by Purchaser pursuant to Section 1.04(c) hereof upon
notification to Sellers; or
(e) by Purchaser by written notice delivered to Sellers at any time
on or prior to February 25, 2000 if the lenders under Purchaser's credit
facility have not consented in writing to the transactions contemplated by this
Agreement.
12.02 Effect of Termination. If this Agreement is validly terminated
pursuant to Section 12.01, this Agreement will forthwith become null and void,
and there will be no liability or obligation on the part of each of the Sellers
or Purchaser (or any of their respective officers, directors, employees, agents
or other representatives or Affiliates), except as provided in the next
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succeeding sentence and except that the provisions with respect to expenses in
Section 14.03 and confidentiality in Section 14.05 will continue to apply
following any such termination. Notwithstanding any other provision in this
Agreement to the contrary, upon termination of this Agreement pursuant to
Section 12.01(b), (c) or (d), each of the Sellers will remain liable to
Purchaser for any willful breach of this Agreement by such Seller existing at
the time of such termination, and Purchaser will remain liable to such Seller
for any willful breach of this Agreement by Purchaser existing at the time of
such termination, and such Seller or Purchaser may seek such remedies, including
damages and fees of attorneys, against the other with respect to any such breach
as are provided in this Agreement or as are otherwise available at Law or in
equity.
ARTICLE XIII
DEFINITIONS
13.01 Definitions.
(a) Defined Terms. As used in this Agreement, the following defined
terms have the meanings indicated below:
"Acquisition Proposal" means any proposal for a merger or other
business combination to which either Company is a party or for the acquisition
of any or all of the capital stock or a substantial portion of the assets of
either Company, other than the transactions contemplated by this Agreement.
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
"Affiliate" means any Person that directly, or indirectly through
one of more intermediaries, controls or is controlled by or is under common
control with the Person specified. For purposes of this definition, control of a
Person means the power, direct or indirect, to direct or cause the direction of
the management and policies of such Person whether by Contract or otherwise and,
in any event and without limitation of the previous sentence, any Person owning
ten percent (15 %) or more of the voting securities of another Person shall be
deemed to control that Person.
"Agreement" means this Stock Purchase Agreement and the Exhibits,
the Disclosure Schedule and the Schedules hereto and the certificates delivered
in accordance with Sections 6.03 and 7.03, as the same shall be amended from
time to time.
"Assets and Properties" of any Person means all assets and
properties of every kind, nature, character and description (whether real,
personal or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person, including without
limitation cash, cash equivalents, Investment Assets, accounts and notes
receivable, chattel paper, documents, instruments, general intangibles, real
estate, equipment, inventory, goods and Intellectual Property.
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"Benefit Plan" means any Plan established by either Company, or any
predecessor or Affiliate of any of the foregoing, existing at the Closing Date
or prior thereto, to which such Company contributes or has contributed, or under
which any employee, former employee or director of such Company or any
beneficiary thereof is covered, is eligible for coverage or has benefit rights.
"Board of Arbitration" has the meaning ascribed to it in Section
11.02(c).
"Books and Records" means all files, documents, instruments, papers,
books and records relating to the business or Assets of the Companies, including
without limitation financial statements, Tax Returns and related work papers and
letters from accountants, budgets, pricing guidelines, ledgers, journals, deeds,
title policies, minute books, stock certificates and books, stock transfer
ledgers, Contracts, Licenses, customer lists, computer files and programs,
retrieval programs, operating data and plans and environmental studies and
plans.
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the States of New York and California are authorized or
obligated to close.
"Business or Condition of the Companies" means the business,
condition (financial or otherwise), results of operations, Assets and Properties
and prospects of the Companies taken as a whole.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and the rules and
regulations promulgated thereunder.
"CERCLIS" means the CERCLA Information System, as defined in 40
C.F.R. Section 300.5.
"Claim Notice" means written notification pursuant to Section
11.02(a) of a Third Party Claim as to which indemnity under Section 11.01 is
sought by an Indemnified Party, enclosing a copy of all papers served, if any,
and specifying the nature of and basis for such Third Party Claim and for the
Indemnified Party's claim against the Indemnifying Party under Section 11.01,
together with the amount or, if not then reasonably determinable, the estimated
amount, determined in good faith, of the Loss arising from such Third Party
Claim.
"Closing" means the closing of the transactions contemplated by
Section 1.03.
"Closing Date" means (a) the earlier of (i) the later of (A) the
date on which the transactions between Xantrex Technology Inc. and Purchaser
contemplated by that certain Letter of Intent dated December 8, 1999 have been
consummated and (B) fifteen (15) Business Days following the date on which the
Purchase Price has been adjusted pursuant to Section 1.04(b) hereof and (ii) the
later of (A) March 15, 2000 and (B) fifteen (15) Business Days following the
date on which the Purchase Price has been adjusted pursuant to Section 1.04(b)
hereof, or (b) such other date as Purchaser and each of the Sellers mutually
agree upon in writing.
"Code" means the Internal Revenue Code of 1986.
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"Combined" means the combined financial statements of Heart and LECO
prepared in accordance with GAAP and after giving effect to all intercompany
eliminations in accordance with GAAP.
"Combined EBITDA" means the earnings of the Companies on a Combined
basis before interest, taxes, depreciation and amortization of the Companies on
a Combined basis for the year ended December 31, 1999 and as determined from the
Audited Financial Statements.
"Company" has the meaning ascribed to it in the forepart of this
Agreement.
"Contract" means any agreement, lease, license, evidence of
Indebtedness, mortgage, indenture, security agreement or other contract (whether
written or oral).
"Deficiency" means the amount, if any, by which the Net Working
Capital as determined from the Closing Date Balance Sheet is less than
$4,997,708.
"Defined Benefit Plan" means each Benefit Plan which is subject to
Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA.
"Disclosure Schedule" means the record delivered to Purchaser by
Sellers herewith and dated as of the date hereof, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Sellers pursuant to this Agreement.
"Dispute Period" means the period ending ninety (90) days following
receipt by an Indemnifying Party of either a Claim Notice or an Indemnity
Notice.
"Environmental Claim" means, with respect to any Person, any written
or oral notice, claim, demand or other communication (collectively, a "claim")
by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, Governmental or Regulatory Authority
response costs, damages to natural resources or other property, personal
injuries, fines or penalties arising out of, based on or resulting from (a) the
presence, or Release into the environment, of any Hazardous Material at any
location, whether or not owned by such Person, or (b) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law. The term
"Environmental Claim" shall include, without limitation, any claim by any
Governmental or Regulatory Authority for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law, and any claim by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from the presence of Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.
"Environmental Law" means any Law or Order relating to the
regulation or protection of human health, safety or the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or wastes
into the environment (including, without limitation, ambient air, soil, surface
water, ground water, wetlands, land or subsurface strata), or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals or industrial,
toxic or hazardous substances or wastes.
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"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means any Person who is in the same controlled
group of corporations or who is under common control with a Seller or, before
the Closing, either or both of the Companies (within the meaning of Section 414
of the Code).
"Escrow Agent" and "Escrow Agreement" have the respective meanings
ascribed to them in Section 1.03.
"Financial Statement Date" means December 31, 1998.
"Financial Statements" means the Financial Statements of the
Companies delivered to Purchaser pursuant to Section 2.08.
"GAAP" means United States generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.
"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality of
the United States, any foreign country or any state, county, city or other
political subdivision.
"Hazardous Material" means (A) any petroleum or petroleum products,
explosives, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, and transformers or other equipment
that contain polychlorinated biphenyls (PCBs); (B) any chemicals or other
materials or substances which are now or hereafter become defined as or included
in the definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants" or words of similar import under any
Environmental Law; and (C) any other chemical or other material or substance,
exposure to which is now or hereafter prohibited, limited or regulated by any
Governmental or Regulatory Authority under any Environmental Law.
"HSR Act" means Section 7A of the Clayton Act (Title II of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and the rules
and regulations promulgated thereunder.
"Indebtedness" of any Person means all obligations of such Person
(i) for borrowed money and for amounts drawn on accounts in excess of amounts on
deposit therein or overdrafts, (ii) evidenced by notes, bonds, debentures or
similar instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables or accruals incurred in the ordinary course of
business), (iv) under capital leases and (v) in the nature of guarantees of the
obligations described in clauses (i) through (iv) above of any other Person.
"Indemnified Party" means any Person claiming indemnification under
any provision of Article XI.
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"Indemnifying Party" means any Person against whom a claim for
indemnification is being asserted under any provision of Article XI.
"Indemnity Notice" means written notification pursuant to Section
11.02(b) of a claim for indemnity under Article XI by an Indemnified Party,
specifying the nature of and basis for such claim, together with the amount or,
if not then reasonably determinable, the estimated amount, determined in good
faith, of the Loss arising from such claim.
"Intellectual Property" means all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, trade secrets, industrial
models, processes, designs, methodologies, computer programs (including all
source codes) and related documentation, technical information, manufacturing,
engineering and technical drawings, know-how and all pending applications for
and registrations of patents, trademarks, service marks and copyrights.
"Investment Assets" means all debentures, notes and other evidences
of Indebtedness, stocks, securities (including rights to purchase and securities
convertible into or exchangeable for other securities), interests in joint
ventures and general and limited partnerships, mortgage loans and other
investment or portfolio assets owned of record or beneficially by either of the
Companies and issued by any Person other than such Company (other than trade
receivables generated in the ordinary course of business of such Company).
"IRS" means the United States Internal Revenue Service.
"Knowledge of Sellers" or "Known to Sellers" means the actual
knowledge of any executive officer of Holdings including Keith McGowan, and the
knowledge after due inquiry of Warren Stokes, Mike Hirata, Steve Spitzer,
William Ovitt, Carol Williams and William Merkes.
"Laws" means all laws, statutes, rules, regulations, ordinances and
other pronouncements having the effect of law of the United States, any foreign
country or any domestic or foreign state, county, city or other political
subdivision or of any Governmental or Regulatory Authority.
"Liabilities" means all Indebtedness, obligations and other
liabilities of a Person (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due).
"Licenses" means all licenses, permits, certificates of authority,
authorizations, approvals, registrations, franchises and similar consents
granted or issued by, or filed with, any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or
any conditional sale Contract, title retention Contract or other Contract to
give any of the foregoing.
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"Loss" means any and all damages, fines, fees, penalties,
deficiencies, losses and expenses (including without limitation interest, court
costs, fees of attorneys, accountants and other experts or other expenses of
litigation or other proceedings or of any claim, default or assessment) less
insurance proceeds actually received with respect to the applicable loss.
"NPL" means the National Priorities List under CERCLA.
"Net Working Capital" means (i) the sum of all current assets
(excluding cash and marketable securities) of the Companies determined in
accordance with GAAP minus (ii) the sum of all current liabilities and negative
cash balances of the Companies determined in accordance with GAAP, as reflected
on the Closing Balance Sheet as finally determined pursuant to Section 1.05(a)
hereof.
"Operative Agreements" means the Escrow Agreement and any support or
other agreements to be entered into in connection with the transaction.
"Option" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right or other Contract that
gives the right to (i) purchase or otherwise receive or be issued any shares of
capital stock of such Person or any security of any kind convertible into or
exchangeable or exercisable for any shares of capital stock of such Person or
(ii) receive or exercise any benefits or rights similar to any rights enjoyed by
or accruing to the holder of shares of capital stock of such Person, including
any rights to participate in the equity or income of such Person or to
participate in or direct the election of any directors or officers of such
Person or the manner in which any shares of capital stock of such Person are
voted.
"Order" means any writ, judgment, decree, injunction or similar
order of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"PBGC" means the Pension Benefit Guaranty Corporation established
under ERISA.
"Pension Benefit Plan" means each Benefit Plan which is a pension
benefit plan within the meaning of Section 3(2) of ERISA.
"Permitted Lien" means (i) any Lien for Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent and (iii) any
minor imperfection of title or similar Lien which individually or in the
aggregate with other such Liens does not materially impair the value of the
property subject to such Lien or the use of such property in the conduct of the
business of the Companies taken as a whole.
"Person" means any natural person, corporation, limited liability
company, general partnership, limited partnership, proprietorship, other
business organization, trust, union, association or Governmental or Regulatory
Authority.
51
<PAGE>
"Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock option,
stock ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation, day or dependent care, legal services, cafeteria, life,
health, accident, disability, workmen's compensation or other insurance,
severance, employment separation or other employee benefit plan, practice,
policy agreement or arrangement of any kind, whether written or oral, including,
but not limited to, any "employee benefit plan" within the meaning of Section
3(3) of ERISA.
"Product Liability Claim" means any claim arising out of any injury
to individuals or property as a result of the ownership, possession or use of
any product manufactured, sold, leased or delivered by either of the Companies.
"Product Warranty Claim" means any claim arising out of alleged
breach of warranty with respect to any product manufactured, sold, leased or
delivered by either of the Companies.
"Purchase Price" has the meaning ascribed to it in Section 1.02.
"Purchaser" has the meaning ascribed to it in the forepart of this
Agreement.
"Purchaser Indemnified Parties" means Purchaser and its officers,
directors, employees, agents and Affiliates and the Companies.
"Qualified Plan" means each Benefit Plan which is intended to
qualify under Section 401 of the Code.
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment, including, without limitation, the movement
of Hazardous Materials through ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata.
"Representatives" has the meaning ascribed to it in Section 4.03.
"Resolution Period" means the period ending thirty (30) days
following receipt by an Indemnified Party of a written notice from an
Indemnifying Party stating that it disputes all or any portion of a claim set
forth in a Claim Notice or an Indemnity Notice.
"Seller" and "Sellers" has the meaning ascribed to it in the
forepart of this Agreement.
"Seller Indemnified Parties" means each of the Sellers and its
officers, directors, employees, agents and Affiliates.
"Shares" has the meaning ascribed to it in the forepart of this
Agreement.
"Subject Defined Benefit Plan" means each Benefit Plan and Defined
Benefit Plan listed and described in Section 2.14(a)(iii) of the Disclosure
Schedule.
52
<PAGE>
"Surplus" means the amount, if any, by which the Net Working Capital
as determined from the Closing Date Balance Sheet is more than $4,997,708.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Taxes" means any income, gross receipts, property, sales, use,
capital gain, transfer, excise, license, production, franchise, employment,
social security, occupation, payroll, registration, governmental pension or
insurance, withholding, royalty, severance, stamp or documentary, value added,
or other tax, charge, assessment, duty, levy, compulsory loan, or other direct
or indirect impost of any nature whatsoever (including any interest, additions
to tax, or civil or criminal penalties thereon) of the United States or any
jurisdiction therein, or of any other nation or any jurisdiction therein.
"Third Party Claim" has the meaning ascribed to it in Section
11.02(a).
(b) Construction of Certain Terms and Phrases. Unless the context of
this Agreement otherwise requires, (i) words of any gender include each other
gender; (ii) words using the singular or plural number also include the plural
or singular number, respectively; (iii) the terms "hereof," "herein," "hereby"
and derivative or similar words refer to this entire Agreement; (iv) the terms
"Article" or "Section" refer to the specified Article or Section of this
Agreement; and (v) the phrases "ordinary course of business" and "ordinary
course of business consistent with past practice" refer to the business and
practice of each of the Companies. Whenever this Agreement refers to a number of
days, such number shall refer to calendar days unless Business Days are
specified. All accounting terms used herein and not expressly defined herein
shall have the meanings given to them under GAAP.
ARTICLE XIV
MISCELLANEOUS
14.01 Notices. All notices, requests and other communications hereunder
must be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:
If to Purchaser, to:
Trace Engineering
5916 195th Northeast
Arlington, Washington 98223
Facsimile No.: (360) 435-6623
Attn: William Roppenecker
53
<PAGE>
with a copy to:
Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017-5735
Facsimile No.: (213) 629-5063
Attn: Deborah Baumgart, Esq.
And a further copy to:
GFI Energy Ventures LLC
11611 San Vicente Boulevard, Suite 710
Los Angeles, California 90049
Facsimile No.: (310) 442-0540
Attn: Ian Schapiro
And a further copy to:
Xantrex Technology, Inc.
7725 Lougheed Highway
Burnaby, BC V5A 4V8
Facsimile No.: (604) 420-7431
Attn: Mossadiq S. Umedaly
If to Sellers, to:
Key Components, LLC
200 White Plains Road
Tarrytown, New York 10591
Facsimile No.: (914) 332-1441
Attn: Alan L. Rivera
with a copy to:
RubinBaum LLP
30 Rockefeller Plaza
New York, New York 10112
Facsimile No.: (212) 698-7825
Attn: Michael J. Emont
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by mail in the manner described above to the address as provided in this
Section, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice, request or other communication is to be delivered pursuant
to this Section). Any party from time to time
54
<PAGE>
may change its address, facsimile number or other information for the purpose of
notices to that party by giving notice specifying such change to the other party
hereto.
14.02 Entire Agreement. This Agreement supersedes all prior discussions
and agreements between the parties with respect to the subject matter hereof,
including without limitation that certain non-binding letter of intent between
the parties dated December 13, 1999, as modified by letters dated December 16,
1999 and December 27, 1999, and contains the sole and entire agreement between
the parties hereto with respect to the subject matter hereof and thereof.
14.03 Expenses. Except as otherwise expressly provided in this Agreement
(including without limitation as provided in Section 12.02), whether or not the
transactions contemplated hereby are consummated, each party will pay its own
costs and expenses, and Sellers shall pay their own costs and expenses and the
costs and expenses of the Companies.
14.04 Public Announcements. At all times at or before the Closing, Sellers
and Purchaser will not issue or make any reports, statements or releases to the
public with respect to this Agreement or the transactions contemplated hereby
without the consent of the other, which consent shall not be unreasonably
withheld. If either party is unable to obtain the approval of its public report,
statement or release from the other party and such report, statement or release
is, in the opinion of legal counsel to such party, required by Law in order to
discharge such party's disclosure obligations, then such party may make or issue
the legally required report, statement or release and promptly furnish the other
party with a copy thereof. Each of the Sellers and Purchaser will also obtain
the other party's prior approval of any press release to be issued immediately
following the Closing announcing the consummation of the transactions
contemplated by this Agreement.
14.05 Confidentiality. Each party hereto will hold, and will use its best
efforts to cause its Affiliates, and their respective Representatives to hold,
in strict confidence from any Person (other than any such Affiliate or
Representative or Xantrex Technology Inc. in the case of Purchaser), unless (i)
compelled to disclose by judicial or administrative process (including without
limitation in connection with obtaining the necessary approvals of this
Agreement and the transactions contemplated hereby of Governmental or Regulatory
Authorities) or by other requirements of Law or (ii) disclosed in an Action or
Proceeding brought by a party hereto in pursuit of its rights or in the exercise
of its remedies hereunder, all documents and information concerning the other
party or any of its Affiliates furnished to it by the other party or such other
party's Representatives in connection with this Agreement or the transactions
contemplated hereby, except to the extent that such documents or information can
be shown to have been (a) previously known by the party receiving such documents
or information, (b) in the public domain (either prior to or after the
furnishing of such documents or information hereunder) through no fault of such
receiving party or (c) later acquired by the receiving party from another source
if the receiving party is not aware that such source is under an obligation to
another party hereto to keep such documents and information confidential;
provided that following the Closing the foregoing restrictions will not apply to
Purchaser's use of documents and information concerning each of the Companies
furnished by Sellers hereunder.
55
<PAGE>
14.06 Waiver. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
14.07 Amendment. This Agreement may be amended, supplemented or modified
only by a written instrument duly executed by or on behalf of each party hereto.
14.08 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other Person other
than any Person entitled to indemnity under Article XI.
14.09 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any party hereto without the
prior written consent of the other party hereto and any attempt to do so will be
void, except for assignments and transfers as part of an assignment or transfer
of all or substantially all of the assets of the assignor and assignments of
rights to indemnity hereunder to any third party lender in connection with a
bona fide financing. Notwithstanding the preceding sentence, Purchaser may
assign all of its rights and interests and delegate all of its obligations
hereunder to Xantrex Technology Inc. or its Affiliates at any time prior to or
following the Closing, provided that such assignment shall not relieve Purchaser
of any of its obligations hereunder. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and their respective successors and assigns.
14.10 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
14.11 Consent to Jurisdiction. Each party hereby irrevocably submits to
the exclusive jurisdiction of the United States District Court for the Western
District of Washington or any court of the State of Washington located in the
City of Seattle in any such action, suit or proceeding arising out of or
relating to this Agreement or any of the Operative Agreements or any of the
transactions contemplated hereby or thereby, and agrees that any such action,
suit or proceeding shall be brought only in such court, provided, however, that
such consent to jurisdiction is solely for the purpose referred to in this
Section 14.11 and shall not be deemed to be a general submission to the
jurisdiction of said courts or in the State of Washington other than for such
purpose. Each party hereby irrevocably waives, to the fullest extent permitted
by Law, any objection that it may now or hereafter have to the laying of the
venue of any such action, suit or proceeding brought in such a court and any
claim that any such action, suit or proceeding brought in such a court has been
brought in an inconvenient forum. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by Law or to commence legal
proceedings or otherwise proceed against the other in any other jurisdiction.
56
<PAGE>
14.12 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof, and (c)
the remaining provisions of this Agreement will remain in full force and effect
and will not be affected by the illegal, invalid or unenforceable provision or
by its severance herefrom.
14.13 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of New York applicable to a Contract
executed and performed in such State, without giving effect to the conflicts of
laws principles thereof.
14.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
57
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.
TRACE HOLDINGS LLC
By:___________________________________
Name:
Title:
KEY COMPONENTS, LLC
By:___________________________________
Name:
Title:
KCLLC HOLDINGS, INC.
By:___________________________________
Name:
Title:
58
<PAGE>
EXHIBIT 21.1
KEY COMPONENTS, LLC AND SUBSIDIARIES
Atlantic Guest, Inc.
B.W. Elliott Manufacturing Co., LLC
Cruising Equipment Company
ESP Lock Products, LLC
Gits Manufacturing Company, LLC
Guest Building, LLC
Heart Interface Corporation
Hudson Lock, LLC
KCLLC Holdings, Inc.
Key Components, LLC
Key Components Finance Corp.
Marine Industries Company, LLC
Turner Electric, LLC
VFC Acquisition Company, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1065418
<NAME> KEY COMPONENTS, LLC
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 4,171 13,119 0
<SECURITIES> 0 0 0
<RECEIVABLES> 19,455 8,164 0
<ALLOWANCES> (511) (175) 0
<INVENTORY> 22,372 8,487 0
<CURRENT-ASSETS> 61,237 30,036 0
<PP&E> 26,380 17,735 0
<DEPRECIATION> (7,342) (5,513) 0
<TOTAL-ASSETS> 180,558 93,144 0
<CURRENT-LIABILITIES> 20,201 4,710 0
<BONDS> 80,000 80,000 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 9,411 7,674 0
<TOTAL-LIABILITY-AND-EQUITY> 180,558 93,144 0
<SALES> 144,125 61,862 27,318
<TOTAL-REVENUES> 144,125 61,862 27,318
<CGS> 85,079 39,130 15,798
<TOTAL-COSTS> 122,490 49,798 22,176
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 164 111 27
<INTEREST-EXPENSE> 14,542 7,641 3,007
<INCOME-PRETAX> 7,394 4,716 2,139
<INCOME-TAX> 2,551 97 889
<INCOME-CONTINUING> 4,843 4,619 1,250
<DISCONTINUED> (28) 0 0
<EXTRAORDINARY> 0 4,616 0
<CHANGES> 0 0 0
<NET-INCOME> 4,815 3 1,250
<EPS-BASIC> 0 0 0<F1>
<EPS-DILUTED> 0 0 0
<FN>
No EPS for the Company has been calculated as the Company's equity
is privately held
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1065419
<NAME> KEY COMPONENTS FINANCE CORP
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 4,171 13,119 0
<SECURITIES> 0 0 0
<RECEIVABLES> 19,455 8,164 0
<ALLOWANCES> (511) (175) 0
<INVENTORY> 22,372 8,487 0
<CURRENT-ASSETS> 61,237 30,036 0
<PP&E> 26,380 17,735 0
<DEPRECIATION> (7,342) (5,513) 0
<TOTAL-ASSETS> 180,558 93,144 0
<CURRENT-LIABILITIES> 20,201 4,710 0
<BONDS> 80,000 80,000 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 9,411 7,674 0
<TOTAL-LIABILITY-AND-EQUITY> 180,558 93,144 0
<SALES> 144,125 61,862 27,318
<TOTAL-REVENUES> 144,125 61,862 27,318
<CGS> 85,079 39,130 15,798
<TOTAL-COSTS> 122,490 49,798 22,176
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 164 111 27
<INTEREST-EXPENSE> 14,542 7,641 3,007
<INCOME-PRETAX> 7,394 4,716 2,139
<INCOME-TAX> 2,551 97 889
<INCOME-CONTINUING> 4,843 4,619 1,250
<DISCONTINUED> (28) 0 0
<EXTRAORDINARY> 0 4,616 0
<CHANGES> 0 0 0
<NET-INCOME> 4,815 3 1,250
<EPS-BASIC> 0 0 0<F1>
<EPS-DILUTED> 0 0 0
<FN>
No EPS for the Company has been calculated as
the Company's equity is privately held
</FN>
</TABLE>
