<PAGE> 1
================================================================================
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
HMI INDUSTRIES INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, no par value, of Bliss Manufacturing Company ("Bliss Common
Stock")
(2) Aggregate number of securities to which transaction applies: 900 shares
of Bliss Common Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): $31,250,000,
determined in accordance with Rule 0-11(c)(2)
(4) Proposed maximum aggregate value of transaction: $31,250,000
(5) Total fee paid: $6,300
[X] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $6,300
(2) Form, Schedule or Registration Statement No.: Schedule 14A
(3) Filing Party: HMI Industries Inc.
(4) Date Filed: January 16, 1998; February 24, 1998; March 10, 1998
================================================================================
<PAGE> 2
HMI INDUSTRIES INC.
3631 PERKINS AVENUE
CLEVELAND, OHIO 44114
(216) 432-1990
March 13, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
HMI Industries Inc., a Delaware corporation (the "Company"), to be held on March
25, 1998, at 10:00 a.m., Eastern Standard time, at the Ritz-Carlton Cleveland,
1515 West 3 Street, Cleveland, Ohio 44113, and any adjournments or postponements
thereof (the "Annual Meeting"). A Notice of the Annual Meeting, a proxy card for
the shares you own, a proxy statement ("Proxy Statement") containing information
about the matters to be acted upon and a copy of the Company's 1997 Annual
Report are enclosed. The Company's 1997 Form 10-K, as amended, and first quarter
1998 Form 10-Q, as amended, are attached as annexes to the Proxy Statement. All
holders of outstanding shares of common stock, par value $1.00 per share, of the
Company ("Common Stock"), as of the close of business on March 2, 1998 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting.
At the Annual Meeting, the Company's stockholders will be asked to consider
and vote upon: the election of three directors to hold office for the term
expiring in the year 2001; the ratification of the selection by the Board of
Directors of the Company (the "Board") of the firm of Coopers & Lybrand L.L.P.
as auditors of the Company for the year ending September 30, 1998; and a
proposal to approve and adopt a Stock Purchase Agreement, dated as of December
17, 1997, as amended as of February 11, 1998 (as so amended, the "Purchase
Agreement"), by and between the Company and Rhone Capital LLC, a Delaware
limited liability company (together with its assigns, "Buyer"), and the
transactions contemplated thereby.
Pursuant to the Purchase Agreement, (i) the Company will sell to Buyer all
of the shares (the "Shares") owned by it of common stock, no par value, of Bliss
Manufacturing Company, an Ohio corporation and a wholly owned subsidiary of the
Company, for a purchase price of $31,250,000 in cash (such transaction, the
"Sale"), (ii) the purchase price is subject to certain adjustments including a
cash payment by the Company of $1,500,000 to satisfy certain vendor and employee
obligations and (iii) $1,000,000 of the purchase price will be withheld in
escrow and will be paid to the Company over a one-year period if not fully
utilized to indemnify Buyer for certain matters in accordance with the
provisions of the Purchase Agreement.
The accompanying Proxy Statement provides a detailed description of the
proposed Sale, and the Purchase Agreement is attached thereto as Annex A. We
urge you to read and consider it carefully.
THE COMPANY'S BOARD OF DIRECTORS (OTHER THAN JAMES R. MALONE, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, WHO DID NOT VOTE DUE TO HIS RELATIONSHIP WITH BUYER, AS
DISCUSSED IN FURTHER DETAIL UNDER "PROPOSED SALE OF BLISS -- POTENTIAL CONFLICTS
OF INTEREST" IN THE PROXY STATEMENT) HAS UNANIMOUSLY APPROVED THE SALE AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT. The Board
reached this decision after careful consideration of a number of factors,
including the opinion of McDonald & Company Securities, Inc., the Company's
financial advisor ("McDonald"), to the effect that the consideration to be
received from the Sale is fair, from a financial point of view, to the Company
and the Company's stockholders. McDonald has consented to the inclusion of its
opinion and the summary of its opinion in the Proxy Statement, and the full text
of the opinion of McDonald, dated as of the date of the accompanying Proxy
Statement, is included as Annex C thereto. Stockholders are urged to and should
read McDonald's opinion in its entirety.
Provided a quorum is present, the affirmative vote of the holders of a
majority of shares of Common Stock present in person or by proxy at the Annual
Meeting will be sufficient to elect directors and to
<PAGE> 3
ratify the selection of Coopers & Lybrand as auditors of the Company. The
affirmative vote of a majority of shares outstanding as of the Record Date will
be required to approve and adopt the Purchase Agreement. Stockholders of the
Company owning approximately 53% of the shares of Common Stock outstanding as of
the Record Date have agreed, pursuant to a Stockholder Voting Agreement, dated
as of December 17, 1997 (the "Voting Agreement"), with Buyer and the Company, to
vote their shares of Common Stock in favor of adopting and approving the
Purchase Agreement and the transactions contemplated thereby and have granted
proxies to certain affiliates of Buyer. Therefore, sufficient votes will be cast
for approval of the Purchase Agreement and the transactions contemplated thereby
to ensure their approval at the Annual Meeting without the vote of any other
stockholder. A copy of the Voting Agreement is attached hereto as Annex B.
In view of the importance of the action to be taken at the Annual Meeting,
we urge you to read the enclosed material carefully and to complete, sign and
date the enclosed proxy card and return it promptly in the enclosed prepaid
envelope whether or not you plan to attend the Annual Meeting. If you attend the
Annual Meeting, you may vote your shares personally whether or not you have
previously submitted a proxy. Your prompt cooperation will be greatly
appreciated.
Sincerely yours,
/s/ Mark A. Kirk
Mark A. Kirk
President, Chief Operating Officer
and Chief Financial Officer
If you have questions or need assistance in voting your shares, you should
contact the Corporate Secretary at (216) 432-1990.
<PAGE> 4
HMI INDUSTRIES INC.
3631 PERKINS AVENUE
CLEVELAND, OHIO 44114
(216) 432-1990
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 25, 1998
------------------------
To the Stockholders of
HMI INDUSTRIES INC.
Notice is hereby given that the Annual Meeting of stockholders (the
"Stockholders") of HMI Industries Inc., a Delaware corporation (the "Company"),
will be held on March 25, 1998, at 10:00 a.m., Eastern Standard time, at the
Ritz-Carlton Cleveland, 1515 West 3 Street, Cleveland, Ohio 44113, and any
adjournments or postponements thereof (the "Annual Meeting") for the following
purposes:
1. To elect three directors to hold office for the term expiring in
the year 2001.
2. To ratify the selection by the Board of Directors of the firm of
Coopers & Lybrand L.L.P. as auditors of the Company for the year ending
September 30, 1998.
3. To consider and vote upon a proposal to approve and adopt the Stock
Purchase Agreement, dated as of December 17, 1997, as amended as of
February 11, 1998 (as so amended, the "Purchase Agreement"), by and between
the Company and Rhone Capital LLC, a Delaware limited liability company
(together with its assigns, "Buyer"), and the transactions contemplated
thereby, pursuant to which (i) Company will sell to Buyer all of the shares
(the "Shares") owned by it of common stock, no par value, of Bliss
Manufacturing Company, an Ohio corporation and a wholly owned subsidiary of
the Company, for a purchase price of $31,250,000 in cash (such transaction,
the "Sale"), (ii) the purchase price is subject to certain adjustments
including a cash payment by the Company of $1,500,000 to satisfy certain
vendor and employee obligations and (iii) $1,000,000 of the purchase price
will be withheld in escrow and will be paid to the Company over a one-year
period if not fully utilized to indemnify Buyer for certain matters in
accordance with the provisions of the Purchase Agreement.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only holders of record of common stock of the Company at the close of
business on March 2, 1998 are entitled to receive notice of and to vote at the
Annual Meeting.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE THE ACCOMPANYING PROXY AND RETURN
IT PROMPTLY IN THE ADDRESSED ENVELOPE ENCLOSED.
<PAGE> 5
You are invited to attend the meeting and vote. Whether or not you attend
the meeting in person, you are requested to sign and date the enclosed proxy
card, and mail it to the Company in the enclosed envelope. If you attend the
meeting in person, you may withdraw your proxy and vote in person if you so
desire.
By Order of the Board of Directors
/s/ John S. Meany, Jr.
John S. Meany, Jr.
Secretary
March 13, 1998
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE AND RETURN YOUR PROXY PROMPTLY.
<PAGE> 6
HMI INDUSTRIES INC.
3631 PERKINS AVENUE
CLEVELAND, OHIO 44114
(216) 432-1990
---------------
PROXY STATEMENT
---------------
INTRODUCTION
This proxy statement (the "Proxy Statement") is furnished to the
stockholders (the "Stockholders") of HMI Industries Inc., a Delaware corporation
(the "Company"), in connection with the solicitation by the Board of Directors
of the Company (the "Board") of proxies, in accompanying form, for use at an
Annual Meeting of Stockholders to be held on March 25, 1998, at 10:00 a.m.,
Eastern Standard time, at the Ritz-Carlton Cleveland, 1515 West 3 Street,
Cleveland, Ohio 44113, and any adjournments or postponements thereof (the
"Annual Meeting").
At the Annual Meeting, Stockholders will be asked to consider and vote upon
(i) the election of three directors to hold office for the term expiring in the
year 2001, (ii) the ratification of the selection by the Board of the firm of
Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as auditors of the Company for
the year ended September 30, 1998 and (iii) the approval and adoption of the
Stock Purchase Agreement, dated as of December 17, 1997, as amended as of
February 11, 1998 (as so amended, the "Purchase Agreement"), by and between the
Company and Rhone Capital LLC, a Delaware limited liability company (together
with its assigns, "Buyer"), and the transactions contemplated thereby. A copy of
the Purchase Agreement is attached hereto as Annex A. This Proxy Statement is
first being mailed to the Stockholders on approximately March 13, 1998.
The record date for the meeting is March 2, 1998 (the "Record Date"). At
that date there were 5,033,996 shares of common stock, par value $1.00 per
share, of the Company ("Common Stock") issued and outstanding. Each share of
Common Stock entitles the holder thereof to one vote on each matter to come
before the meeting. A majority of the Common Stock issued and outstanding as of
the Record Date is necessary for a quorum at any meeting of shareholders.
Provided a quorum is present, the affirmative vote of the holders of a majority
of shares present in person or by proxy at the meeting will be sufficient to
elect directors and to ratify the selection of Coopers & Lybrand as auditors of
the Company. The affirmative vote of a majority of shares of Common Stock
outstanding as of the Record Date will be required to approve and adopt the
Purchase Agreement. Pursuant to the Purchase Agreement, the (i) Company will
sell to Buyer all of the shares (the "Shares") owned by it of common stock, no
par value, of Bliss Manufacturing Company, an Ohio corporation and a wholly
owned subsidiary of the Company ("Bliss"), for a purchase price of $31,250,000
in cash (such transaction, the "Sale"), (ii) the purchase price is subject to
certain adjustments including a cash payment by the Company of $1,500,000 to
satisfy certain vendor and employee obligations and (iii) $1,000,000 of the
purchase price will be withheld in escrow and will be paid to the Company over a
one-year period if not fully utilized to indemnify Buyer for certain matters in
accordance with the provisions of the Purchase Agreement.
Stockholders granting a proxy to vote on one or more issues but abstaining
as to other issues will be counted for purposes of the determination of a
quorum. Officers and directors of the Company and their immediate families
currently own or control in excess of 48% of the outstanding shares of Common
Stock. Such shares should be sufficient to elect the Company's nominees for
directors and ratify the designation of Coopers & Lybrand as auditors of the
Company. Stockholders of the Company owning approximately 53% of the shares of
Common Stock outstanding as of the Record Date have agreed, pursuant to a
Stockholder Voting Agreement, dated as of December 17, 1997 (the "Voting
Agreement"), with Buyer and the Company, to vote their shares of Common Stock in
favor of adopting and approving the Purchase Agreement and the transactions
contemplated thereby and have granted proxies to certain affiliates of Buyer.
Therefore, sufficient votes will be cast for approval of the Purchase Agreement
and the transactions contemplated thereby to ensure their approval at the Annual
Meeting
<PAGE> 7
without the vote of any other Stockholder. A copy of the Voting Agreement is
attached hereto as Annex B.
A Stockholder giving a proxy may revoke the proxy by notifying in writing
to the above address or in person to the Secretary of the Company before it is
exercised, granting a subsequent proxy or appearing in person and voting at the
Annual Meeting. All proxies given and not revoked will be voted at the meeting.
If the Stockholder has indicated a choice on the proxy with respect to any
matters to be voted upon, the shares will be voted as specified. If no choice is
specified, the shares will be voted for the nominees for election to the Board,
for the ratification of Coopers & Lybrand as auditors of the Company, and for
the approval and adoption of the Purchase Agreement and the transactions
contemplated thereby. In the event of the death, disqualification, or inability
of any of the director nominees to serve, the shares will be voted for the
election of such other person as the Board may recommend in place of such
nominee. The Board has no reason to believe that any of the nominees will not be
a candidate or will be unable to serve.
THE DATE OF THIS PROXY STATEMENT IS MARCH 13, 1998.
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<PAGE> 8
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, Suite 13000, New York, New York 10048. Any interested party may obtain
copies of such material at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a Web
Site at http://www.sec.gov. that contains reports and other information
regarding registrants that file electronically with the Commission. In addition,
materials filed by the Company can be inspected and copied at the offices of
Nasdaq, Reports Section, 1735 K Street N.W., Washington, D.C. 20006.
3
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION.................... 3
SUMMARY OF PROXY STATEMENT............... 5
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES............................... 9
ELECTION OF DIRECTORS.................... 10
Class C Directors...................... 10
Class A Directors...................... 10
Class B Directors...................... 10
RATIFICATION OF INDEPENDENT PUBLIC
ACCOUNTANTS............................ 11
PROPOSED SALE OF BLISS................... 11
Business of Bliss...................... 11
Background of the Sale................. 11
The Company's Reasons for the Sale and
Recommendations of the Board......... 14
Financial Advisor; Fairness Opinion.... 15
Interests of Certain Persons in the
Sale................................. 20
Potential Conflicts of Interest........ 21
Accounting Treatment................... 21
Certain Federal Income Tax Consequences
of the Sale.......................... 21
Applicable Federal or State Regulatory
Requirements for the Sale............ 22
THE PURCHASE AGREEMENT................... 22
The Sale and Purchase of Shares;
Purchase Price....................... 22
Representations and Warranties......... 23
Additional Agreements of the Company
and Buyer............................ 23
Conditions to the Sale................. 26
The Closing............................ 27
Indemnification........................ 27
Taxes.................................. 30
Termination............................ 30
Expenses............................... 30
Public Disclosure...................... 31
Survival............................... 31
Assignment............................. 31
SELECTED CONSOLIDATED FINANCIAL DATA..... 32
BLISS UNAUDITED HISTORICAL CONDENSED
FINANCIAL STATEMENTS................... 33
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS............................. 40
Unaudited Pro Forma Condensed Balance
Sheet................................ 41
Unaudited Pro Forma Condensed
Statements of Income................. 42
Notes to Unaudited Pro Forma Condensed
Financial Statements................. 43
HISTORICAL AND PRO FORMA PER SHARE
DATA................................... 44
MARKET PRICE DATA........................ 44
SECURITY OWNERSHIP....................... 45
Security Ownership of Certain
Beneficial Owners of Common Stock of
the Company.......................... 45
Security Ownership of Directors and
Management........................... 45
COMMITTEES AND COMPENSATION OF THE BOARD
OF DIRECTORS........................... 46
Board Committees....................... 46
Compensation........................... 47
Consulting Agreements.................. 47
EXECUTIVE COMPENSATION................... 48
Introduction........................... 48
1992 Omnibus Long-Term Compensation
Plan................................. 49
Report of Compensation Committee....... 50
Compensation of the Chief Executive
Officer.............................. 51
Stay Bonus Agreement................... 51
Employment Contracts and Change-in-
Control Arrangements................. 51
Compensation Committee Interlocks and
Insider Participation................ 52
Performance Comparisons................ 52
RELATED TRANSACTIONS..................... 53
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE................... 54
PROPOSALS OF STOCKHOLDERS................ 54
OTHER MATTERS; SOLICITATION OF PROXIES... 54
ANNEX A -- Stock Purchase Agreement
Exhibit A to Stock Purchase Agreement
Form of Escrow Agreement
Annex A to Stock Purchase Agreement
Matters for Opinion of Squire, Sanders
& Dempsey L.L.P.
Annex B to Stock Purchase Agreement
Matters for Opinion of Howard, Darby &
Levin
ANNEX B -- Stockholder Voting Agreement
ANNEX C -- Opinion of McDonald & Company
Securities, Inc.
ANNEX D -- Form 10-K
ANNEX E -- Form 10-Q
</TABLE>
4
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SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Proxy Statement. It is not, and is not intended to be, complete in itself.
Reference is made to, and this summary is qualified in its entirety by, the more
detailed information contained elsewhere in this Proxy Statement, including the
Annexes hereto which are a part of this Proxy Statement. Stockholders are
encouraged to read carefully all of the information contained in this Proxy
Statement.
STOCKHOLDERS SHOULD CONSIDER CAREFULLY THE INFORMATION PRESENTED HEREIN.
THE COMPANY
HMI Industries Inc......... The Company manufactures and sells floor care and
air filtration products through its Consumer Goods
Division and fabricates and sells commercial and
industrial stamped components, metal formed tubular
products and machined components through its
Manufactured Products Division. The Company was
reorganized in 1968 as a Delaware corporation,
succeeding an Illinois corporation originally
formed in 1928, and was known as Health-Mor Inc.
until January 1995. The principal executive offices
of the Company are located at 3631 Perkins Avenue,
Cleveland, Ohio 44114, and its telephone number is
(216) 432-1990. For additional information on the
Company and its subsidiaries not included elsewhere
in the Proxy Statement, Stockholders should refer
to the Company's 1997 annual report for the year
ended September 30, 1997 on Form 10-K filed with
the Commission (as subsequently amended, the "Form
10-K") and attached hereto as Annex D, the
Company's 1997 Annual Report, a copy of which
accompanies this Proxy Statement (the "Annual
Report"), and the Company's Form 10-Q for the
quarter ended December 31, 1997 attached hereto as
Annex E (as subsequently amended, the "Form 10-Q").
Market Price Data.......... Shares of the Company's Common Stock are listed and
traded on the Nasdaq National Market ("Nasdaq")
under the symbol "HMII." The closing price of the
Company's Common Stock on December 17, 1997, the
last full trading day prior to the public
announcement of the Sale, as reported by Nasdaq,
was $5.38 per share. See "MARKET PRICE DATA."
THE ANNUAL MEETING
Time, Date and Place....... The Annual Meeting will be held on March 25, 1998,
at 10:00 a.m., Eastern Standard time, at the
Ritz-Carlton Cleveland, 1515 West 3 Street,
Cleveland, Ohio 44113.
Purpose of the Annual
Meeting.................... Holders of Common Stock will consider and vote upon
(i) the election of three directors to hold office
for the term expiring in the year 2001, (ii) the
ratification of the selection by the Board of the
firm of Coopers & Lybrand as auditors of the
Company for the year ending September 30, 1998 and
(iii) a proposal to approve and adopt the Purchase
Agreement.
Record Date................ Only stockholders of record of Common Stock at the
close of business on March 2, 1998 are entitled to
notice of and to vote at the
5
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Annual Meeting. On such date, there were
outstanding 5,033,996 shares of Common Stock held
by approximately 241 holders of record.
Voting Rights.............. Each share of Common Stock is entitled to one vote
with respect to all matters presented at the Annual
Meeting.
Quorum; Votes Required..... The presence, in person or by proxy, at the Annual
Meeting of the holders of a majority of the
aggregate number of shares of Common Stock
outstanding as of the Record Date will be necessary
to constitute a quorum. The affirmative vote of the
holders of a majority of shares of Common Stock
present in person or by proxy at the Annual Meeting
will be sufficient to elect directors and to ratify
the selection of Coopers & Lybrand as auditors of
the Company. The affirmative vote of a majority of
shares outstanding as of the Record Date will be
required to approve and adopt the Purchase
Agreement.
Voting Agreement........... Stockholders of the Company owning approximately
53% of the shares of Common Stock outstanding as of
the Record Date have agreed, pursuant to the Voting
Agreement, to vote such stockholders' shares of
Common Stock in favor of adopting and approving the
Purchase Agreement and the transactions
contemplated thereby and have granted proxies to
certain affiliates of Buyer. Therefore, sufficient
votes will be cast for approval of the Purchase
Agreement and the transactions contemplated thereby
to ensure their approval at the Annual Meeting.
Revocability of Proxy...... Any Stockholder who executes and returns a proxy
may revoke such proxy at any time before it is
voted by (i) notifying in writing or in person the
Corporate Secretary of the Company at 3631 Perkins
Avenue, Cleveland, Ohio 44115, (ii) granting a
subsequent proxy, or (iii) appearing in person and
voting at the Annual Meeting. Attendance at the
Annual Meeting will not in and of itself constitute
revocation of a proxy. A holder of shares of Common
Stock will find enclosed a form of proxy for such
shares and should sign and return such proxy.
THE PROPOSED SALE
General.................... At the closing of the Sale, pursuant to the
Purchase Agreement, the Company will sell to Buyer
and Buyer will purchase from the Company all of the
shares outstanding of Bliss held by the Company,
for an aggregate purchase price of $31,250,000,
subject to certain adjustments set forth in the
Purchase Agreement, including a payment by the
Company of $1,500,000 to satisfy certain vendor and
employee obligations. See "THE PURCHASE
AGREEMENT -- The Sale and Purchase of Shares;
Purchase Price."
Closing.................... The closing of the Sale will occur on March 26,
1998, or as soon as practicable following the
approval of the Purchase Agreement by the Company's
stockholders and the satisfaction or waiver of the
other conditions to each party's obligation to
consummate the Sale. See "THE PURCHASE
AGREEMENT -- The Closing."
Escrow Agreement........... The Purchase Agreement provides that Buyer will
deposit $1 million (the "Escrow") of the aggregate
purchase price to be paid at the
6
<PAGE> 12
closing of the Sale (the "Closing") with an escrow
agent ("Escrow Agent"). The Escrow Agent will act
pursuant to an escrow agreement ("Escrow
Agreement"), substantially in the form attached as
Exhibit A to the Purchase Agreement. Generally, the
Escrow Agent will be directed to hold the Escrow
until a specified time following the delivery by
the Company of a final balance sheet relating to
Bliss and its wholly owned subsidiary, Newton Falls
Holding Company, a Delaware corporation ("Sub"),
when Buyer either accepts or does not object to
such balance sheet or the Escrow Agent is otherwise
directed to release funds from the Escrow to the
Company. One-half of the Escrow will remain in the
escrow account to support the Company's
indemnification obligations pursuant to the
Purchase Agreement. See "THE PURCHASE
AGREEMENT -- The Sale and Purchase of Shares;
Purchase Price" and "-- Indemnification" and ANNEX
A (Articles I, II and VIII).
Reasons for the Sale and
Recommendation of the
Board.................... At a meeting held on December 16, 1997, a special
committee of the Board comprising all the members
of the Board other than James R. Malone, Chairman
and Chief Executive Officer (the "Special
Committee"), unanimously approved the Purchase
Agreement and the transactions contemplated
thereby. Mr. Malone did not vote due to his
relationship with Buyer, as discussed in further
detail under "PROPOSED SALE OF BLISS -- Potential
Conflicts of Interest." The Special Committee
considered many factors in reaching its conclusion
to approve the Purchase Agreement. The Board
believes that the Sale is in the best interest of
the Company and the Stockholders and recommends
(other than Mr. Malone who did not vote) that the
Stockholders vote for the approval and adoption of
the Purchase Agreement. See "PROPOSED SALE OF
BLISS -- Background of the Sale" and "-- Potential
Conflicts of Interest."
Opinion of the Company's
Financial Advisor........ McDonald & Company Securities, Inc. ("McDonald")
has delivered its written opinion to the Board to
the effect that, as of the date hereof, the
consideration to be received by the Company
pursuant to the Purchase Agreement is fair, from a
financial point of view. McDonald has consented to
the inclusion of its opinion and of a summary
thereof in the Proxy Statement. The full text of
the written opinion of McDonald, which sets forth
assumptions made, matters considered and
limitations on the review undertaken in connection
with the opinion, is attached hereto as Annex C and
is incorporated herein by reference. See "PROPOSED
SALE OF BLISS -- Financial Advisor; Fairness
Opinion."
Interests of Certain
Persons In the Sale;
Potential Conflicts of
Interest................. In considering the recommendation of the Board with
respect to the Purchase Agreement, Stockholders
should be aware that certain members of Company's
management and the Board have certain interests in
the Sale that are in addition to the interests of
the Stockholders generally. The Special Committee
was aware of these interests and considered them,
among other matters, in approving
7
<PAGE> 13
the Purchase Agreement. See "PROPOSED SALE OF
BLISS -- Interests of Certain Persons in the Sale"
and "-- Potential Conflicts of Interest."
Conditions to the Sale..... The respective obligations of the Company and Buyer
to consummate the Sale are subject to a number of
conditions, including, among others: (a) the
representations and warranties contained in the
Purchase Agreement with respect to the Company and
Buyer shall be true and correct in all respects;
(b) each of the Company and Buyer shall have
performed and complied with all of the covenants
and agreements in the Purchase Agreement in all
material respects and satisfied all the conditions
applicable to each such party required by the
Purchase Agreement, the Escrow Agreement and the
Voting Agreement; (c) the applicable waiting
periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and the rules promulgated
thereunder (the "HSR Act") shall have expired, and
there shall be in effect no injunction or other
order directing that the transactions contemplated
in the Purchase Agreement, or any of them, not be
consummated; (d) each party shall have provided the
other party evidence satisfactory to such other
party that it shall have obtained the consents and
approvals listed in the Purchase Agreement as
applicable to such party; (e) the Escrow Agreement
shall have been duly executed and delivered by the
Company, Buyer and the Escrow Agent; and (f) the
Purchase Agreement and the transactions
contemplated therein shall have been adopted and
approved by the holders of more than 50% of the
shares of common stock of the Company in accordance
with applicable law and the provisions of the
Company's certificate of incorporation and by-laws.
The obligations of Buyer under the Purchase
Agreement are subject to the satisfaction at or
prior to the Closing of each of the additional
following conditions: (a) since the date of the
Purchase Agreement, there shall not have occurred
any Material Adverse Change (as defined in the
Purchase Agreement) or a material adverse change
with respect to the Company; (b) a Phase II Study
(the "Phase II Study") to evaluate soil and
groundwater conditions at the facilities of Bliss,
shall have been completed, Buyer shall have
received a true and complete copy of the written
report prepared by the consultants regarding the
Phase II Study and Buyer shall be satisfied that
the reasonably likely aggregate Environmental
Damages (as defined in the Purchase Agreement)
shall not exceed $2 million; provided, however,
that this condition shall expire ten (10) business
days after receipt by Buyer of any such report on
the Phase II Study; and (c) the Company shall have
entered into a transitional services agreement with
Bliss to provide to Bliss and Sub administrative
services of the same nature and scope as presently
provided, at no cost to Bliss or Sub, for a period
of six (6) months from and after the Closing Date.
Buyer has received the results of Seller's
completed Phase II Study and has agreed that this
condition to the Closing has been satisfied.
Other Acquisition
Proposals.................. The Purchase Agreement provides that, until the
termination of the Purchase Agreement, neither the
Company, Bliss or any of their affiliates may (a)
take any action to solicit or initiate any
Acquisition
8
<PAGE> 14
Proposal (as defined below) or (b) engage in
negotiations with, or disclose any nonpublic
information relating to Bliss or Sub or afford
access to their properties, books or records to,
any person that has advised Bliss or the Company or
otherwise made known the fact that such person may
be considering making, or that has made, an
Acquisition Proposal. An "Acquisition Proposal"
means any offer or proposal for, or any written
indication of interest in, a merger or other
business combination involving Bliss or Sub or the
acquisition of any significant equity interest in,
or a significant portion of the assets of, Bliss or
its subsidiary, other than the transactions with
Buyer contemplated by the Purchase Agreement. See
"THE PURCHASE AGREEMENT -- Additional Agreements of
the Company and Buyer -- Other Offers."
Regulatory Requirements for
the Sale................. The consummation of the Sale is subject to certain
regulatory approvals, including the expiration or
early termination of the relevant waiting periods
under the HSR Act.
Termination................ The Purchase Agreement provides that the Purchase
Agreement may be terminated only by the mutual
written consent of the parties thereto, by the
Company or Buyer if the Closing has not occurred
prior to April 30, 1998 or by Buyer in the event
that the condition set forth in the Purchase
Agreement with respect to Environmental Damages
would not be satisfied as of the Closing. In the
event the Purchase Agreement is terminated, with
certain exceptions, the Purchase Agreement will be
void without liability on the part of any party,
its shareholders, directors or officers.
Certain Federal Income Tax
Consequences of the
Sale..................... Pursuant to the Purchase Agreement, the Company and
Buyer will take such actions as may be required to
treat the Sale as a taxable sale of the assets of
Bliss and Sub under Section 338(h)(10) of the
Internal Revenue Code of 1986, as amended (the
"Code"). As a consequence, the Company will
recognize no gain or loss on the sale of the Shares
but will be required to pay any consolidated
federal and combined state income taxes associated
with the gain on the deemed sale of all of the
assets of Bliss and Sub. The Sale will not have any
federal income tax consequences to the
Stockholders. The Company has neither requested,
nor will it receive, an opinion of counsel
regarding tax matters relating to the Sale.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Proxy Statement contains forward-looking statements within the meaning
of the federal securities laws. As a general matter, forward-looking statements,
including the projections presented herein under "PROPOSED SALE OF
BLISS -- Financial Advisor; Fairness Opinion," are statements focused upon
future plans, objectives or performance as opposed to historical items and
include statements of anticipated events or trends and expectations and beliefs
relating to matters not historical in nature. Such forward-looking statements
are subject to certain uncertainties including the successful completion of the
sale of Bliss, the accuracy of the assumptions used in preparing the projections
presented under "PROPOSED SALE OF BLISS -- Financial Advisor; Fairness Opinion,"
and retention and rebuilding of the Consumer Products Division distribution
network. Such uncertainties are difficult to predict and could cause actual
results of the Company or Bliss to differ materially from those matters
expressed or implied by such forward-looking statements.
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<PAGE> 15
ELECTION OF DIRECTORS
(PROXY ITEM NO. 1)
Three Class C directors have been nominated for a three year term expiring
in the year 2001. Information regarding these nominees for election as director
as well as for those directors whose term of office will continue after the
Annual Meeting is as follows:
CLASS C DIRECTORS: TO SERVE FOR A THREE-YEAR TERM EXPIRING IN THE YEAR 2001
Mark A. Kirk, age 40, became a Director of the Company in May 1997. He was
elected President and Chief Operating Officer of the Company in May 1997. He was
elected Chief Financial Officer of the Company in February 1997. From 1993 to
1997 he served as Senior Vice President and Chief Financial Officer of Anchor
Glass Container Corporation, a manufacturer of glass bottles and other
containers. From 1990 to 1993 he was Senior Vice President and Chief Financial
Officer of Grimes Aerospace Company, a manufacturer of components for the
aircraft industry, including interior and exterior lighting, engine valves,
electronic systems and avionics. In September 1996, a petition was filed in the
United States Bankruptcy Court in Delaware by Anchor Glass under Chapter 11 of
the Bankruptcy Code in order to restructure the debt of Anchor Glass. Mr. Kirk
was an executive officer of that company at that time.
John S. Meany, Jr., age 52, became a Director of the Company in 1986. Mr.
Meany is an attorney in private practice and has served as Secretary of the
Company since 1995. Mr. Meany previously served as Secretary of the Company from
1986 to 1991, as Vice President-Legal of the Company from 1983 to 1990 and as
Vice President and General Counsel from 1990 to 1991.
Barry Needler, age 49, became a Director of the Company in 1989. Mr.
Needler is a private investor. Since 1991 he has been President and Chief
Executive Officer of Steeplechase Corp. and Reldeen Ltd., investment holding
companies, and since 1990 he has been President and Chief Executive Officer of
Fairway, Inc., a personal holding company for business investments.
CLASS A DIRECTORS: TERM EXPIRING IN 1999
Moffat Dunlap, age 56, became a Director of the Company in 1993. Mr. Dunlap
has held a license in the real estate industry since 1962 and has been President
of Moffat Dunlap Real Estate Limited (real-estate broker for residential
estates) since 1972.
Grace McCarthy, age 70, became a Director of the Company in 1993. Mrs.
McCarthy is a former Deputy Premier of the Province of British Columbia. She
served as the leader of the B.C. Social Credit Party in 1993 and 1994. She
served as a member of the legislature for British Columbia for 26 years,
retiring in 1991. She has served as a Cabinet Minister holding various
portfolios including Economic Development, Tourism, Human Resources, Fish and
Wildlife and Provincial Secretary. Mrs. McCarthy has submitted a letter of
resignation to the Board, to be effective as of the Annual Meeting.
Ivan Winfield, age 63, became a Director of the Company in 1995. He is an
independent business and financial consultant. Mr. Winfield was a partner of
Coopers & Lybrand (the Company's auditors) from 1970 to 1994. Mr. Winfield is a
trustee of the Fairport Group of Mutual Funds. He is also a director of Boykin
Lodging Company and International Total Service, Inc.
CLASS B DIRECTORS: TERM EXPIRING IN THE YEAR 2000
Robert J. Abrahams, age 71, became a Director of the Company in 1984. Mr.
Abrahams has been President of Crestwood Consultants, a financial consulting
company, since 1988. Mr. Abrahams is also the President of Health-Mor Acceptance
Corporation and HMI Acceptance Corporation, wholly-owned subsidiaries of the
Company.
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<PAGE> 16
Donald L. Baker, age 68, became a Director of the Company in 1986. Mr.
Baker has been President of Complete Industrial Enterprises, Inc., a distributor
of electrical and industrial equipment, since 1985. Mr. Baker has also served as
Mayor of Peru, Illinois since 1965.
James R. Malone, age 55, became a Director of the Company in 1996. Mr.
Malone was elected Chairman in December 1996, and was elected as Chief Executive
Officer in May 1997. He is also Chairman and Chief Executive Officer of Intek
Capital Corp., a private investment firm. From 1993 to 1997 he was Chairman,
President and Chief Executive Officer of Anchor Glass Container Corporation, a
manufacturer of glass bottles and other containers. From 1990 to 1993 he was
Chairman and Chief Executive Officer of Grimes Aerospace Company, a manufacturer
of components for the aircraft industry, including interior and exterior
lighting, engine valves, electronic systems and avionics. He is a member of the
Board of Directors of AmSouth Bancorporation, a regional bank holding company in
the Southeast, and Ametek Inc., a manufacturer of measuring and controlling
devices, including motors, blowers, sensors, filters and housings. In September
1996, a petition was filed in the United States Bankruptcy Court in Delaware by
Anchor Glass under Chapter 11 of the Bankruptcy Code in order to restructure the
debt of Anchor Glass. Mr. Malone was an executive officer of that company at
that time.
Frank M. Rasmussen, age 63, became a Director of the Company in 1994. Mr.
Rasmussen was a Partner of Squire, Sanders & Dempsey L.L.P., the Company's
principal law firm, from 1970 until his retirement in 1996.
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
(PROXY ITEM NO. 2)
The Board, on the recommendation of its Audit Committee, has selected
Coopers & Lybrand, independent certified public accountants, to audit the
accounts of the Company for the year ended September 30, 1998. Coopers &
Lybrand, which has no other relationship to the Company, served as the Company's
auditors in 1997. It is intended that the shares represented by proxies in the
accompanying form will be voted for the ratification of the selection of Coopers
& Lybrand unless otherwise specified in the space provided on the proxy. A
representative of Coopers & Lybrand is expected to be present at the Annual
Meeting, and will have the opportunity to make a statement if such
representative desires to do so and to respond to appropriate questions.
PROPOSED SALE OF BLISS
(PROXY ITEM NO. 3)
BUSINESS OF BLISS
Bliss engages in the manufacture of various types of sheet metal stamping
and sub-assemblies, and painting and welding in conjunction therewith, for
customers in the automotive and truck manufacturing, materials handling
equipment, military, and plumbing industries. The products manufactured by Bliss
are sold primarily to original equipment manufacturers located mostly in the
midwest United States. For additional information on the Company and its
subsidiaries not included elsewhere in this Proxy Statement, Stockholders should
refer to the Form 10-K attached hereto as Annex D, the Annual Report
accompanying the Proxy Statement and the Form 10-Q attached hereto as Annex E.
BACKGROUND OF THE SALE
In the last fiscal quarter of 1997, the Company began considering various
strategic alternatives that might be available to it. A number of factors
contributed to the Company's determination to commence such an analysis. In
particular, during the last fiscal quarter of 1997, the Company's liquidity was
deteriorating as a result of continuing losses being experienced in the Consumer
Products Division. The Consumer Products Division experienced a decline in both
revenues and operating income attributable
11
<PAGE> 17
to a correction of high inventory levels in the distribution network, lower
sales to end consumers, and a reduction in the distributor base.
In view of these and other factors, in early September 1997 the Company
requested McDonald to consider various strategic alternatives that might be
available to the Company including the possibility of (1) continuing the
business in its present configuration and seeking additional financing, (2) the
leveraged buy-out of the Company, (3) the sale of the Consumer Products
Division, (4) the sale of Bliss, and (5) the sale of both of the Company's
businesses.
McDonald made its presentation to the Board on September 19, 1997. After
consideration of and discussion regarding this presentation, it was determined
by the Board that the best alternative to address the Company's liquidity
problems and to recover shareholder value was to sell Bliss. This decision was
based on, among other things, (i) the favorable condition of the automotive
metal fabricating market which would likely enable the Company to receive a
favorable price for Bliss at this time, (ii) the recent poor performance of the
Consumer Products Division that would greatly depress any price received for it,
and (iii) the likelihood that additional capital would be very difficult to
obtain at a reasonable expense. The Board also concluded that if the Company
continued with no change, the Company would risk a severe liquidity crisis in
its first or second quarter of fiscal 1998. The Board directed the Company's
management to retain an investment banker and proceed with the sale of Bliss.
Management continued discussions with McDonald that led to execution of an
engagement letter directing McDonald to explore the possibility of a sale of
Bliss and to identify companies that would likely have a strong interest in
Bliss. Throughout October 1997, the Company, with the assistance of McDonald,
gathered information to present to potential buyers of Bliss.
In late October 1997, McDonald identified over fifty companies for which
Bliss might represent an attractive acquisition candidate. On November 3, 1997,
the Company announced publicly its intention to sell Bliss and that it had
engaged McDonald as its financial advisor for the sale. At the direction of the
Company, McDonald contacted each of the parties to assess its interest in a
potential transaction involving Bliss. Approximately thirty of the parties
expressed preliminary interest in a possible transaction involving Bliss. In
connection with the Company's agreement to provide confidential information
concerning Bliss, each of these companies, including Buyer, executed a
confidentiality agreement pursuant to which each agreed to keep confidential
information each received concerning Bliss. The Company requested written
expressions of interest on or before December 15, 1997.
During the last week of November and first two weeks of December 1997, nine
companies were scheduled to conduct due diligence visits at the facilities of
Bliss and six companies completed these visits prior to the discontinuation of
the sale process. Mr. Malone introduced Buyer to Seller during that time, though
he did not participate in any of the discussions or negotiations that took place
between Buyer and Seller. During the last week of November and the first week of
December, three written expressions of interest were received for the purchase
of Bliss, including the bid received from Buyer on December 1, 1997.
On December 4, 1997, Buyer met with representatives of the Company and
McDonald to discuss its proposal. Based on these discussions and McDonald's and
the Company's judgment concerning the other expressions of interest and the
likelihood of a higher offer being presented by another party, the Company
executed a letter of intent (as subsequently amended, the "Letter of Intent")
with Buyer to purchase Bliss for an aggregate of $33 million in cash, subject to
the approval of the Board. Because of Mr. Malone's relationship with Buyer, Mr.
Malone did not participate in negotiating the Letter of Intent. For a discussion
of Mr. Malone's relationship with Buyer, see "-- Potential Conflicts of
Interest." Immediately prior to and during these discussions, McDonald, at the
request of the Company, advised one party that had visited Bliss and was
considered a likely bidder that the Company had received an attractive
acquisition proposal, which could result in an acceleration and perhaps early
termination of the sale process and that if such party were interested in a
transaction with the Company, it should act promptly to advise the Company of
its best offer. No additional written expression of interest was received as a
result of such contact.
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<PAGE> 18
At a special meeting of the Board on December 5, 1997, the Board met to
review, with the advice and assistance of the Company's financial and legal
advisors, the details of the Letter of Intent and the proposed transaction with
Buyer. At the start of this meeting, the Board was advised of the interest of
Mr. Malone in Buyer. For a discussion of Mr. Malone's relationship with Buyer,
see "-- Potential Conflicts of Interest." In light of Mr. Malone's relation to
Buyer, the Board voted to establish an independent committee, the Special
Committee, comprising all the Board members except Mr. Malone, for the
evaluation of the proposal received from Buyer and the consideration and
approval of the terms, provisions and conditions of a definitive purchase
agreement. Mr. Malone then left the meeting and had no involvement in Seller's
consideration of Buyer's proposal. The Board meeting concluded and the Special
Committee convened to discuss Mr. Malone's interest in Buyer and concluded that
Mr. Malone's interest had not had an adverse affect on the bidding process.
The Special Committee meeting continued with a presentation by the
Company's legal advisors who summarized the material terms and conditions of the
Letter of Intent and the status of negotiations of a definitive purchase
agreement. McDonald reviewed the proposed transaction with Buyer, including the
financial terms of the proposed sale. McDonald representatives reviewed the sale
process, Buyer's proposal and its evaluation of Buyer's proposal. McDonald also
reviewed its discussions with each of the other parties that had visited Bliss
or were scheduled to visit Bliss within a short period of time. McDonald
reviewed the terms of two other written expressions of interest that McDonald
had received on the Company's behalf concerning the acquisition of Bliss, each
of which proposed consideration that was below Buyer's offer. McDonald also
reviewed with the Special Committee oral expressions of interest and valuation
discussions with certain other interested parties, and that such parties had
indicated that an offer involving consideration comparable to that associated
with Buyer's proposal was unlikely to be received.
At the conclusion of the Special Meeting, the Letter of Intent with Buyer
was approved by the Special Committee, exclusive negotiations with Buyer
commenced, and the sale process, including discussions with other interested
parties, was terminated.
Thereafter, members of management, counsel for the Company and
representatives of McDonald continued to hold meetings by telephone and in
person with Buyer and counsel for Buyer to negotiate a more complete agreement
based on the terms of the Letter of Intent. During the week of December 8, 1997,
Seller informed Buyer that certain final results of operations for Bliss in
fiscal 1997 were lower than earlier forecasted results that had been previously
provided to potential buyers. The two other parties that had previously
submitted written expressions of interest were not advised of the revised fiscal
year results because the terms of the Letter of Intent precluded such
discussions. Based on the lower results and several non-recurring income and
expense items included in the final results that were disclosed during Buyer's
due diligence, on or about December 12, 1997, Buyer advised the Company that a
downward adjustment to the purchase price would be required. The Special
Committee was advised of this information and directed management to continue
negotiations with Buyer. On December 12, 1997, a revised Letter of Intent, with
a purchase price of $31.5 million in cash, with $1.5 million of the purchase
price to be paid to certain vendors and to fulfill certain employee obligations,
was executed by management and Buyer while the Company and Buyer continued to
negotiate a definitive purchase agreement.
On December 16, 1997, the Special Committee met to review, with the advice
and assistance of the Company's financial and legal advisors, the proposed sales
agreement with Buyer and the transactions contemplated thereby. All directors of
the Company were present at this meeting except for Mr. Malone. The Company's
legal advisors summarized the material terms and conditions of the sales
agreement. McDonald representatives reviewed the sales process, Buyer's
proposal, and its evaluation of Buyer's proposal. McDonald also reported that no
additional written expressions of interest had been received since the special
meeting held on December 5, 1997.
During this meeting, McDonald rendered to the Special Committee its oral
opinion to the effect that, as of such date, the consideration to be received by
the Company pursuant to the sales agreement
13
<PAGE> 19
was fair, from a financial point of view, to the stockholders of the Company.
Following extended discussions and review of the transaction, the Board (other
than Mr. Malone, Chairman and Chief Executive Officer, who did not vote due to
his relationship with Buyer, as discussed in further detail under "PROPOSED SALE
OF BLISS -- Potential Conflicts of Interest") unanimously approved the sale
agreement with Buyer. On December 17, 1997, the Purchase Agreement was executed
and delivered by Buyer and the Company. On December 18, 1997, Buyer and the
Company issued a joint press release announcing the Purchase Agreement.
Effective February 11, 1998, Buyer and Seller amended the Purchase
Agreement to reduce by $250,000 the purchase price to be paid by Buyer to
address costs associated with the removal of certain underground storage tanks
located at the premises of Bliss. Except for this amendment to the Purchase
Agreement, there are no material differences between the terms of the Letter of
Intent and the Purchase Agreement.
THE COMPANY'S REASONS FOR THE SALE AND RECOMMENDATIONS OF THE BOARD
The Board has carefully considered the terms of the proposed Sale and
believes that the Sale and the related transactions are in the best interests of
the Company and its stockholders. THE BOARD UNANIMOUSLY RECOMMENDS (OTHER THAN
MR. MALONE, WHO DID NOT VOTE DUE TO HIS RELATIONSHIP WITH BUYER, AS FURTHER
DISCUSSED UNDER "PROPOSED SALE OF BLISS -- POTENTIAL CONFLICTS OF INTEREST")
THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY. In reaching its determination, the
Company's Board consulted with its financial and legal advisors and with senior
management and considered all of the following material factors:
(i) the Company is faced with two major issues: (1) the Company's
deteriorating liquidity and immediate need for a cash infusion and (2) the
need to recover shareholder value;
(ii) the Company is comprised of two disparate businesses with little
or no synergy;
(iii) the financial condition, results of operations and business of
the Company, on both a historical and a prospective basis, and the
influence of current industry, economic and market conditions;
(iv) various strategic alternatives, both with respect to their
short-term and long-term implications (including, in addition to a sale of
Bliss, (a) continuing the business in its present configuration and seeking
additional financing, which would be expensive and difficult to obtain, (b)
a leveraged buyout of the Company, (c) the immediate sale of the Consumer
Goods Division while retaining Bliss and (d) the sale of both of the
Company's businesses), none of which appeared to be as favorable to the
Stockholders as the Sale;
(v) the oral opinion of McDonald to the effect that, as of December
17, 1997 (the date of the signing of the Purchase Agreement), and subject
to the assumptions and the limitations therein, the price (which was
determined through arm's-length negotiations between the Company and Buyer)
is fair, from a financial point of view, to the Stockholders;
(vi) the uncertainty, if Buyer's offer were rejected, of negotiating
an alternative transaction on as favorable a basis with another party
within a reasonable timeframe; and
(vii) the terms of the Purchase Agreement and the other documents
executed in connection with the Purchase Agreement.
The Board also considered certain potential risks relating to the Sale
including the risk that the Sale would not be consummated, with resulting
distraction in the interim to Bliss's normal business operations, and the
adverse effect that that might have on Bliss's ability to retain and attract key
employees while the Sale was pending. In addition, the Board considered the fact
that the remaining business (after the sale of Bliss) has been for several
years, and continues to be, unprofitable and generates negative
14
<PAGE> 20
cash flows. The new management team recently put in place is attempting to
address these problems and return the Company to profitability and positive cash
flow.
The foregoing is a list of all the material information and material
factors considered by the Board. In view of the variety of factors considered in
connection with its evaluation of the Sale, the Board did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the Board may have given different weights to different
factors. For a discussion of the interests of certain members of management and
directors in the Sale, which interests were taken into account by the Board in
approving the Sale, see "--Interests of Certain Persons in the Sale."
THE BOARD UNANIMOUSLY RECOMMENDS (OTHER THAN MR. MALONE, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, WHO DID NOT VOTE DUE TO HIS RELATIONSHIP WITH BUYER, AS
DISCUSSED IN FURTHER DETAIL UNDER "PROPOSED SALE OF BLISS -- POTENTIAL CONFLICTS
OF INTEREST") THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
FINANCIAL ADVISOR; FAIRNESS OPINION
On October 3, 1997, the Board retained McDonald to serve as its financial
advisor in connection with the sale of Bliss and to render an opinion to the
Board concerning the fairness, from a financial point of view, to the Company's
stockholders, of the consideration to be paid to the Company pursuant to the
Purchase Agreement. McDonald was retained by the Company on the basis of its
strong investment banking presence, its experience in the sale of industrial
businesses, and its experience, expertise and familiarity with the automotive
industry. As part of its investment banking business, McDonald is customarily
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and estate planning purposes.
Representatives of McDonald participated in a meeting of the Special
Committee on December 5, 1997, at which Buyer's proposal was discussed, and in
another meeting of the Special Committee held on December 16, 1997, at which the
Purchase Agreement was approved. At the December 5, 1997 meeting, McDonald
representatives reviewed various aspects of Buyer's proposal, including the
financial terms and conditions thereof, with the Special Committee. At a meeting
of the Special Committee held on December 16, 1997, McDonald rendered its oral
opinion to the Board to the effect that, as of that date, the consideration to
be received by the Company pursuant to the Purchase Agreement was fair, from a
financial point of view, to the Company's stockholders.
At the request of the Board, McDonald has rendered its written opinion
that, as of the date hereof, the consideration to be paid to the Company
pursuant to the Purchase Agreement is fair, from a financial point of view, to
the Stockholders. MCDONALD HAS INFORMED THE COMPANY THAT NO MATERIAL CHANGES
HAVE OCCURRED SINCE THE DATE WHEN THE ORAL OPINION WAS RENDERED TO THE BOARD
THAT WOULD AFFECT OR OTHERWISE CAUSE MCDONALD TO CHANGE ITS OPINION. MCDONALD
HAS CONSENTED TO THE INCLUSION OF ITS OPINION AND A SUMMARY OF ITS OPINION IN
THIS PROXY STATEMENT, AND THE FULL TEXT OF MCDONALD'S OPINION IS ATTACHED AS
ANNEX C HERETO AND IS INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION OF THE
OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX C.
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF
THE PROCEDURES FOLLOWED, ASSUMPTIONS AND QUALIFICATIONS MADE, MATTERS
CONSIDERED, AND LIMITATIONS UNDERTAKEN BY MCDONALD.
MCDONALD'S OPINION IS DIRECTED TO THE BOARD AND ADDRESSES ONLY THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE COMPANY'S STOCKHOLDERS OF THE
CONSIDERATION TO BE PAID TO THE COMPANY PURSUANT TO THE PURCHASE AGREEMENT. THE
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING.
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<PAGE> 21
In rendering its opinion, McDonald reviewed and analyzed the following: (i)
the Proxy Statement, (ii) the Purchase Agreement, including the exhibits and
schedules thereto; (iii) certain publicly available information concerning the
Company and Bliss, including the Annual Reports on Form 10-K of the Company and
Annual Reports to Stockholders for each of the years in the three-year period
ended September 30, 1997 and the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1997; (iv) certain other internal information,
primarily financial in nature, including projections, concerning the business
and operations of Bliss and the Company furnished to McDonald by the Company for
purposes of its analysis; (v) certain publicly available information concerning
the trading of, and the trading market for, the Company's common stock; (vi)
certain publicly available information with respect to certain other companies
that McDonald believed to be comparable to Bliss and the trading markets for
certain of such other companies' securities; and (vii) certain publicly
available information concerning the nature and terms of certain other
transactions that McDonald considered relevant to its inquiry. McDonald also met
with certain officers and employees of the Company and Bliss to discuss the
business and prospects of the Company and Bliss, as well as other matters that
it believed relevant to its inquiry.
In McDonald's review and analysis and in arriving at its opinion, McDonald
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and assumed and
relied upon the representations and warranties of the Company and Buyer
contained in the Purchase Agreement. McDonald was not engaged to, and did not
independently attempt to, verify any of such information. McDonald also relied
upon the management of the Company as to the reasonableness and achievability of
the financial and operating projections (and the assumptions and bases therefor)
provided to it and, with the Company's consent, assumed that such projections
reflect the best currently available estimates and judgments of the Company's
management and that such projections and forecasts will be realized in the
amounts and in the time periods currently estimated by management. McDonald was
not engaged to assess the achievability of such projections or the assumptions
on which they were based and expressed no view as to such projections or
assumptions. In addition, McDonald did not conduct an evaluation or appraisal of
any of the assets, properties or facilities of Bliss nor was it furnished with
any such evaluation or appraisal, except for the appraisal report of the
Company, dated February 28, 1997, prepared by IPC/Levy. This appraisal of all
the assets of the Company were commissioned at the direction of the Company's
bank in connection with its credit facility and was not material to McDonald's
review. McDonald also assumed that the conditions to the transaction as set
forth in the Purchase Agreement would be satisfied and that the sale of Bliss
would be consummated on a timely basis in the manner contemplated by the
Purchase Agreement.
The following is a summary of the projections provided by the Company to
McDonald that McDonald reviewed and relied upon in connection with rendering its
fairness opinion.
<TABLE>
<CAPTION>
For the years ended September 30,
----------------------------------------
1998 1999 2000 2001
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Sales $64,000 $67,200 $69,200 $71,200
Cost of Goods Sold 54,790 57,020 58,028 58,996
Gross Profit 9.210 10,180 11,172 12,204
Selling, General and Administrative Expenses 4,350 4,401 4,529 4,657
EBITDA 5,700 6,719 7,683 8,587
Depreciation 840 940 1,040 1,040
</TABLE>
The assumptions which underlie the Company's projections for Bliss are: (i)
annual compounded growth rate of 2.9%; (ii) improvement of gross margins of 1%
annually after one year; (iii) exclusion of postretirement medical and insurance
benefits as required by Statement of Financial Accounting Standards No. 106; and
(iv) selling, general and administrative expenses reflecting expenses incurred
as though Bliss operated on a stand-alone basis, with the exception of cash
management, legal and tax compliance, which services have been provided by the
Company. The foregoing projections constitute forward-looking statements within
the meaning of the federal securities laws. There can be no assur-
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<PAGE> 22
ance that future developments will be in accordance with the Company's
expectations or that the effect of future developments of Bliss will be those
anticipated by the Company's management. The foregoing forward-looking
statements are subject to certain uncertainties, including the accuracy of the
assumptions used in preparing the foregoing projections. Such uncertainties are
difficult to predict and could cause actual results of Bliss to differ
materially from those matters expressed or implied by such forward-looking
statements. For actual 1997 results and first quarter 1998 results, see
"SELECTED CONSOLIDATED FINANCIAL DATA" herein.
The following is a summary of the financial and other analyses performed by
McDonald in connection with its opinion.
Comparable Company Analysis. McDonald compared selected historical and
projected market value multiples of nine publicly traded automotive supply
companies that it deemed to be comparable to Bliss (the "Peer Group"). For its
Comparable Company Analysis, McDonald selected public companies whose primary
businesses include the manufacture of fabricated metal components and assemblies
for automotive OEM applications. In selecting the Peer Group, McDonald focused
on a subset of these companies with market capitalizations of approximately $1
billion or less, and whose operations emphasized custom fabrication of metal
components and assemblies to customer specifications. The companies included in
the Peer Group were Arvin Industries, Inc., MascoTech, Inc., Simpson Industries,
Inc., Autocam Corp., Defiance Inc., Dura Automotive Systems, Excel Industries,
Inc., Shiloh Industries, Inc., and Tower Automotive, Inc. No company used in
McDonald's analysis was identical to the Company. Accordingly, McDonald
considered the market multiples for the composite of comparable companies to be
more relevant than the market multiples of any single company.
McDonald calculated a range of implied values based upon the market
multiples of companies in the Peer Group and applied them to the historical and
projected results of Bliss in order to determine a range of implied enterprise
values for Bliss. McDonald calculated the multiples of enterprise market value
to latest twelve months ("LTM") sales, Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), Earnings Before Interest and Taxes
("EBIT") and multiples of equity market value to LTM net income, and projected
net income (based on published third party estimates) for 1998 for each of the
companies in the Peer Group. McDonald applied the multiples of the Peer Group
companies to the Company's LTM sales, EBITDA, EBIT and net income, and to
management's projected fiscal 1998 net income. The companies in the Peer Group
had multiples ranging from 0.3x to 1.9x LTM sales, 3.8x to 15.7x LTM EBITDA,
6.5x to 22.1x LTM EBIT, 13.3x to 23.6x LTM net income and 10.3x to 14.6x
projected 1998 net income. The Peer Group companies had median multiples of 1.0x
LTM sales, 7.5x LTM EBITDA, 12.5x LTM EBIT and 14.9x LTM net income, and 11.5x
projected 1998 net income. McDonald also examined multiples of book value for
the companies in the Peer Group. Those multiples ranged from 1.3x to 4.3x, with
a median multiple of 2.0x.
The companies comprising the Peer Group had significantly larger revenue
bases and market capitalizations than Bliss. Accordingly, in conducting its
comparable company analysis, McDonald applied a 30% discount to the Peer Group
multiples to reflect Bliss's smaller market capitalization and revenue base. The
amount of the discount was determined by McDonald based on its judgment
concerning the appropriate discount to apply based upon its experience in
dealing with sale transactions involving smaller capitalization companies and
its experience in the trading markets for such companies' securities. This
discount resulted in adjusted Peer Group median multiples of 0.7x LTM sales,
5.2x LTM EBITDA, 8.7x LTM EBIT, 10.4x LTM net income and 8.1x projected 1998 net
income.
Application of the adjusted median Peer Group multiples to Bliss resulted
in an implied enterprise value of $44.4 million based on LTM sales, $23.2
million based on LTM EBITDA, $32.2 million based on LTM EBIT, $27.7 million
based on LTM net income and $24.7 million based on projected 1998 net income.
The average enterprise value for Bliss suggested by these multiples was $30.5
million. McDonald also calculated a weighted average enterprise value by
assigning relative weights to each of the various multiples based on its
experience in prior transactions. LTM EBITDA, LTM EBIT and LTM net income
multiples were each given a weighting of 25% for purposes of this analysis,
while sales
17
<PAGE> 23
multiples and projected 1998 net income multiples were given weightings of 10%
and 15%, respectively. The weighted average enterprise value for Bliss suggested
by this analysis was $28.9 million. McDonald then deducted Bliss's outstanding
indebtedness at December 31, 1997, a portion of the provision for retiree
medical benefits required to be made by Bliss pursuant to Statement of Financial
Accounting Standards 106 (the "SFAS 106 Provision"), and an amount for
environmental costs, and added cash at December 31, 1997, in order to derive an
implied equity value for Bliss. This analysis resulted in implied equity values
of $29.2 million (using a straight average approach) and $27.7 million (using a
weighted average approach).
On a stand-alone basis, multiples of LTM sales suggest an equity value of
$43.1 million, as compared to the purchase price of $31.25 million. McDonald
believes that an industrial company's ability to generate sales, while
indicative of its market position and, to a lesser extent, its potential to
generate future cash flows and earnings, is less relevant in the valuation
process than that company's ability to generate cash flows and earnings from
those sales. In that regard, the securities of publicly traded industrial
companies trade based on multiples of historic and expected earnings and cash
flow, and buyers of industrial companies in acquisition transactions typically
value industrial companies on the same basis.
McDonald's assessment of the importance of LTM Sales relative to other
financial measures is indicated by the fact that it was accorded the lowest
weighting of all five financial measures used as explained above. Furthermore,
McDonald believes that the composite average and weighted average enterprise
value results to be more relevant than the enterprise value derived from any
single financial measure.
Analysis of Selected Acquisition Transactions. McDonald reviewed 33
acquisition transactions in the automotive supply industry completed since
January 1, 1995 for which relevant information was available. Transactions were
selected based on the automotive OEM-nature of the target's business and the
availability of relevant financial information about the target and the
transaction. Of the 33 transactions, 13 involved transaction values below $100
million, 13 involved transaction values between $100 million and $500 million,
and 7 involved transaction values greater than $500 million. McDonald believed
that transactions involving consideration of less than $100 million were most
directly comparable to the proposed sale of Bliss. Although information about
those transactions is less readily available than information about larger
transactions, McDonald sought out information about those smaller transactions
for purposes of its acquisition transactions analysis. Since McDonald could only
identify 13 transactions involving transaction values of less than $100 million
for which relevant information was available, it sought additional transactions
to include in its analysis. In McDonald's judgment, a larger pool was needed for
the purposes of its acquisition transactions analysis.
McDonald analyzed the multiples of LTM sales, EBITDA, EBIT, sales and book
value represented by the purchase price paid in the acquisition transactions it
reviewed. Sales multiples ranged from approximately 0.2x to 3.4x, with a median
multiple of 0.8x. EBIT multiples ranged from approximately 4.1x to 25.0x, with a
median multiple of 8.2x. EBITDA multiples ranged from 3.3x to 19.1x, with a
median multiple of 5.8x. Book value multiples ranged from 1.0x to 16.7x, with a
median multiple of 2.6x. Application of these multiples to Bliss resulted in
implied enterprise values ranging from $24.6 million to $44.0 million, with a
mean implied enterprise value of $31.2 million. By deducting Bliss's outstanding
debt at December 31, 1997, a portion of the SFAS Provision, and an amount for
environmental costs, and adding back Bliss's cash at December 31, 1997, to this
implied enterprise value, McDonald derived an equity value for Bliss of $29.9
million.
Discounted Cash Flow Analysis. McDonald estimated the theoretical present
value of Bliss based on the sum of (i) the discounted cash flows which Bliss
could generate over a five year period based on management's projections and
(ii) a terminal value for Bliss assuming that it performs in accordance with
management's projections. McDonald's calculation of a theoretical terminal value
of Bliss was based upon a multiple of EBITDA in the fifth year. This terminal
value and the cash flows generated by Bliss were discounted to a present value
to derive an enterprise value for Bliss. The equity value of Bliss
18
<PAGE> 24
was calculated by deducting outstanding debt, a portion of the SFAS 106
Provision, and an amount for environmental costs from the enterprise value, and
adding back cash. Using discount rates ranging from 14.5% to 18.5% and EBITDA
exit multiples of 3.5x to 7.5x, McDonald estimated that, based on a discounted
cash flow analysis of management's projections, the present equity value of
Bliss would range from $21.9 million to $43.1 million. An EBITDA exit multiple
is a method of determining terminal value in a discounted cash flow analysis.
The range of EBITDA multiples used was 3.5x to 7.5x, with a midpoint of 5.5x.
These were determined through an analysis of the Selected Acquisition
Transactions, which indicated an EBITDA multiple range of 3.3x to 19.1x, with a
median multiple of 5.8x. Using a discount rate of approximately 16.5% and an
EBITDA exit multiple of 5.5x (the mid-points of the ranges discussed above),
McDonald derived an equity value for Bliss of $31.7 million. In determining an
appropriate discount rate for purposes of the Discounted Cash Flow Analysis,
McDonald & Company started with a conventional capital asset pricing model which
calculated a cost of capital of 10.50%. McDonald added a significant premium to
this cost of capital to determine a discount rate which reflected McDonald's
judgment concerning the risks associated with the future cash flows of Bliss.
Among the factors contributing to McDonald's conclusions about an
appropriate discount rate were the Company's small size relative to many of its
direct competitors, its lack of complete management organization structure, its
need to enhance its information technology and quality systems, as well as the
ongoing rationalization of the automotive OEM supply base particularly in the
stamping sector. Furthermore, in McDonald's judgment, Bliss' failure to meet
management's projections for EBITDA for the fiscal year ended September 30, 1997
increased the risks associated with the future growth in cash flows reflected in
management's projections.
Inherent in any discounted cash flow valuation are the use of a number of
assumptions, including those relating to the reasonableness and achievability of
management's projections, and the subjective determination of an appropriate
terminal value and discount rate to apply to the projected cash flows of the
entity under examination. Variations in any of these assumptions or judgments
could significantly alter the results of a discounted cash flow analysis.
Leveraged Buyout Analysis. McDonald also performed a leveraged buyout
analysis of Bliss as a means of establishing the value of Bliss assuming the
sale of Bliss to a typical financial buyer. A leveraged buyout ("LBO") involves
the acquisition or recapitalization of a company financed primarily by incurring
indebtedness that is serviced by the post-LBO operating cash flow of the
company. McDonald used the same projections provided by management used in its
discounted cash flow analysis and assumed, for purposes of the LBO analysis, a
leveraged capital structure (45.6% senior debt, 36.3% subordinated debt and
18.1% equity). Management's projections supported an aggregate purchase price
under an LBO analysis of $25.9 million. This purchase price and capital
structure resulted in a total debt to 1997 EBITDA multiple of 4.98x, an EBITDA
to fixed charges ratio of 1.52x, and cash flow to fixed charges ratio of 1.18x.
Based on management's projections, the LBO equity holders would earn an internal
rate of return of 44.9%. The internal rate of return of 44.9% is an expected
internal rate of return based on management's projections of Bliss. Actual
internal rates of return would most likely vary. In McDonald's judgment, an
expected internal rate of return of 44.9% is appropriate due to risks associated
with the projected future cash flows of Bliss. Furthermore, the leverage ratios
and asset base in this LBO analysis indicate that any additional debt service in
the initial one-year period following the LBO, in McDonald's judgment, may not
be supportable.
Solicitation Process. In rendering its opinion, McDonald also considered
the fact that it conducted a wide ranging solicitation process on behalf of the
Company with respect to the sale of Bliss. During the course of that process,
McDonald contacted over 50 potential strategic and financial buyers to determine
their interest in participating in the solicitation of acquisition proposals for
Bliss. That process, which was approaching completion at the time Buyer's
initial proposal was received, had resulted in preliminary indications of
interest from approximately 30 companies and in the receipt of two written
expressions of interest in addition to the offer submitted by Buyer. The two
other written expressions of interest were lower in value than Buyer's initial
and reduced ($31.25 million in cash) proposal. In addition, McDonald's
discussions with certain other parties that had expressed interest in
19
<PAGE> 25
Bliss indicated that an offer involving consideration comparable to that
associated with Buyer's proposal was unlikely to be received.
Other Matters. No company or transaction used in the above analyses for
comparative purposes is identical to the Company. Accordingly, an analysis of
the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company or transaction data.
While the summary of the analyses set forth above does not purport to be a
complete description of the analyses conducted by McDonald, all material
analyses conducted by McDonald for the purpose of rendering its opinion have
been described above. The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. McDonald believes that
its analyses and the summary set forth above must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, or of
the above summary, without considering all factors and analyses, would create an
incomplete view of the process underlying the analyses set forth in McDonald's
opinion. In addition, McDonald may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to represent the
actual value of Bliss.
The term "fair, from a financial point of view," is a standard phrase
contained in investment banking fairness opinions and refers to the fact that
McDonald's opinion is addressed solely to the financial attributes of the
consideration to be paid in connection with the sale of Bliss. In performing its
analyses, McDonald made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of the Company and Bliss. The analyses performed by
McDonald are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of McDonald's analysis
of the fairness of the consideration to be paid pursuant to the Purchase
Agreement. The analyses do not purport to be appraisals or to reflect the prices
at which a company might actually be sold or the prices at which any securities
may trade at the present time or at any time in the future. In addition, as
described above, McDonald's oral opinion to the Board was one of many factors
taken into consideration by the Board in making its determination to approve the
Purchase Agreement. Consequently, the McDonald analyses described above should
not be viewed as determinative of the Board's conclusions with respect to the
value of Bliss.
McDonald has expressed no opinion as to the prices at which the Company's
shares may trade following the date of its opinion.
The Company has agreed to pay McDonald a fee of $717,500 for its services
as its financial advisor in connection with the sale of Bliss. All of McDonald's
fee is contingent upon the closing of the transaction. The Company also has
agreed to reimburse McDonald for its reasonable out-of-pocket expenses and to
indemnify McDonald against certain liabilities, including liabilities under the
federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE SALE
General
Certain directors and executive officers of the Company have interests in
the Sale that are in addition to the interests of the Company and the
Stockholders generally. The Company's Board was aware of these interests and
considered them, among other matters, in approving the Purchase Agreement.
Stay Bonus and Change of Control Agreements
As an inducement to retain the continued services, following the Sale, of
certain key executives and individuals employed by the Company, the Company
entered into separate agreements in October 1997
20
<PAGE> 26
with such executives and individuals to provide for the payment of bonuses upon
the consummation of the Sale and severance allowances in the event of a
termination of employment as a result of a change of control of the Company (as
defined in such agreements). The amount of the bonuses to be awarded varies by
individual and is dependent on the amount of the purchase price ultimately
received in the sale of Bliss by the Company. The current executive officers of
the Company, Messrs. Malone, Kirk and Young will each receive stay bonuses in
the amount of $300,000 (less applicable withholding taxes) upon the consummation
of the Sale pursuant to the terms of such agreements.
POTENTIAL CONFLICTS OF INTEREST
Affiliates
James R. Malone, Chairman and Chief Executive Officer, holds a nonvoting
limited partnership interest of less than one percent in Buyer. Mr. Malone
serves on Buyer's advisory committee, which committee from time to time may give
general advice to Buyer but has no management or investment authority or
function. In addition, Mr. Malone introduced Buyer to Seller during the last
week of November and first two weeks of December 1997; however, he did not
participate in any of the discussions or negotiations that took place between
Buyer and Seller. Due to his role at the Company, Mr. Malone was excluded from
deliberations by Buyer regarding an investment in Bliss, both prior to and
following the formation of the Special Committee. In light of Mr. Malone's
relationship with Buyer, the Board voted to establish an independent committee,
the Special Committee, comprising all the Board members except Mr. Malone, for
the evaluation of the proposal received from Buyer and the consideration and
approval of the terms, provisions and conditions of the Purchase Agreement. The
Company understands that Buyer and Mr. Malone have not discussed Mr. Malone's
role in the management of, or acquisition of an equity interest in, Bliss
following the Sale. The Company also understands that it is currently intended
that no other member of the Board will receive an equity or any other interest
in Bliss, or have an ongoing affiliation with Bliss, following the Sale.
ACCOUNTING TREATMENT
The sale of Bliss and Sub has been accounted for in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Effects of Disposal
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). Pursuant to APB No. 30, operations of Bliss and
Sub have been treated as discontinued operations and have been reported
separately from continuing operations as a component of income before
extraordinary items in the Company's consolidated statement of income for the
period ended September 30, 1997. Additionally, the related gain from the Sale to
be realized at the Closing, estimated to be $9.35 million, net of taxes, will be
reported as a gain on disposal presented below income from continuing operations
when the Sale is consummated. See "-- Certain Federal Income Tax Consequences of
the Sale."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SALE
Pursuant to the Purchase Agreement, the Company and Buyer will take such
actions as may be required to treat the Sale as a taxable sale of the assets of
Bliss and Sub under section 338(h)(10) of the Code. As a consequence, the
Company will recognize no gain or loss on the sale of the Shares but will be
required to pay any consolidated federal and combined state income taxes
associated with the gain on the deemed sale of all of the assets of Bliss and
Sub.
The Sale will not have any federal income tax consequences to the
Stockholders.
The deemed sale of Bliss and Sub is expected to result in a pre-tax gain
approximating $16,500,000, net of estimated transaction expenses. A combined
federal and state statutory income tax rate of 40% would result in current
income taxes of approximately $6,600,000. As of December 31, 1997, the Company
has approximately $3,500,000 of federal net operating loss carryforwards which
will partially offset this income tax gain. The timing and amount of tax
payments ultimately due as a result of this transaction will depend on the
future taxable events of the Company's continuing operations.
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<PAGE> 27
The Company has neither requested, nor will it receive, and opinion of
counsel regarding tax matters relating to the Sale.
APPLICABLE FEDERAL OR STATE REGULATORY REQUIREMENTS FOR THE SALE
The regulatory filings and approvals described below must be made before
the Sale can be effected and certain of such approvals may take a significant
period of time to obtain. Although the Company and Buyer believe that such
approvals will be obtained, there can be no assurance that this will be the case
or that such approvals will be obtained or that such approvals will not be
conditioned temporarily or otherwise encumbered.
Antitrust
The Sale is subject to the expiration or termination of the 30-day waiting
period under the HSR Act and no action having been instituted by the Department
of Justice (the "DOJ") or Federal Trade Commission (the "FTC") which is not
withdrawn or terminated prior to the Closing. The HSR Act, and the rules and
regulations thereunder, provide that certain sale transactions (including the
Sale) may not be consummated until required information and materials have been
furnished to the DOJ and the FTC and certain waiting periods have expired or
been terminated. The Company and Buyer made their respective filings with the
DOJ and the FTC on March 3, 1998.
The DOJ and FTC frequently scrutinize the legality under the antitrust laws
of transactions such as the Sale. Notwithstanding the expiration of the HSR Act
waiting period, any time before or after the Closing, the FTC, the DOJ or others
can take action under the antitrust laws, including seeking to enjoin the
consummation of the Sale, or seeking the divestiture by Buyer of all or any part
of the stock or assets of Bliss. There can be no assurance that a challenge to
the Sale on antitrust grounds will not be made, or if such a challenge is made,
that it would not be successful.
THE PURCHASE AGREEMENT
The following is a summary of the material provisions of the Purchase
Agreement not summarized elsewhere in this Proxy Statement. A copy of the
Purchase Agreement is attached as Annex A to this Proxy Statement and is
incorporated herein by reference. THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PURCHASE
AGREEMENT. STOCKHOLDERS ARE URGED TO READ THE PURCHASE AGREEMENT IN ITS ENTIRETY
AND TO CONSIDER IT CAREFULLY.
The Sale and Purchase of Shares; Purchase Price
The Purchase Agreement provides that, following the approval of the
Purchase Agreement and the transactions contemplated therein by the Company's
shareholders, and the satisfaction or waiver of the other conditions to each
party's obligation to consummate the Sale, the Company will sell, assign,
transfer and convey to Buyer, and Buyer will purchase, acquire and accept from
the Company, all of the Company's right, title and interest in and to the
Shares. In consideration for the sale and transfer of the Shares, at the
Closing, Buyer will deliver (i) to the Company an amount equal to $30,250,000 by
wire transfer of immediately available funds and (ii) to the Escrow Agent,
$1,000,000 by wire transfer of immediately available funds to an interest
bearing account specified by the Escrow Agent (the amounts described in clauses
(i) and (ii) are referred to as the "Purchase Price"). The Purchase Agreement
provides that the Company will make certain closing payments (the "Closing
Payments") at the Closing, including $500,000 to be paid to Bliss to fund future
employee benefits and $1,000,000 to Liberty Steel, a supplier of Bliss. The
Purchase Agreement provides that the Purchase Price will be subject to certain
post-closing adjustments in accordance with the procedures set forth in the
Purchase Agreement.
Generally, the Escrow Agent will be directed to hold the Escrow until a
specified time following the delivery by the Company of a final balance sheet
relating to Bliss and Sub, when Buyer either accepts or does not object to such
balance sheet or the Escrow Agent is otherwise directed to release
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<PAGE> 28
funds from the Escrow to the Company. One-half of the Escrow will remain in the
escrow account to support the Company's indemnification obligations pursuant to
the Purchase Agreement. See "--Indemnification" and ANNEX A (Articles I, II and
VIII).
Representations and Warranties
The Purchase Agreement contains various customary representations and
warranties of each of the Company and Buyer as to (i) organization, existence
and good standing, (ii) authority to enter into and perform its respective
obligations under the Purchase Agreement, the Escrow Agreement and the Voting
Agreement, (iii) the absence of material violations, breaches or defaults under
any charter documents, agreements, law, regulation, order or decree, (iv)
consents and approvals, (v) absence of material litigation relative to the
Purchase Agreement, (vi) the accuracy of information provided for inclusion in
this Proxy Statement and (vii) brokers being entitled to fees in connection with
the Sale.
Buyer has also made representations and warranties as to (i) the investment
intent of Buyer with respect to the Shares, (ii) financing and (iii) the absence
of undisclosed arrangements with any affiliate of the Company.
The Company has also made representations and warranties with respect to
the Company, Bliss and/or Sub as to (i) providing to Buyer complete and correct
copies of the certificates of incorporation of Bliss and Sub and respective
by-laws and regulations, (ii) the capitalization of Bliss and Sub, (iii) the
ownership of Bliss and Sub, (iv) the authorized shares of Bliss and Sub, (v) the
financial statements for Bliss and Sub, (vi) ownership of real and tangible
personal property, (vii) intellectual property, (viii) real property necessary
to the conduct of the Business (as defined in the Purchase Agreement), (ix)
absence of undisclosed material contracts to which either Bliss or Sub is a
party and absence of material breaches or defaults thereunder, (x) accounts
receivable and collection of accounts receivable in the ordinary course of
business, (xi) inventory and use and sale of inventory in the ordinary course of
business, (xii) absence of undisclosed material litigation, labor disturbances,
and compliance by Bliss and Sub with applicable laws, regulations, rules and
orders (other than Environmental Laws (as defined in the Purchase Agreement))
and conditions reasonably expected to result in a Material Adverse Change (as
defined in the Purchase Agreement), (xiii) absence of undisclosed violations of
Environmental Laws and disposal of hazardous or toxic materials, (xiv) absence
of undisclosed events of default and franchises, licenses, ordinances and
permits relating to the Business, (xv) insurance, (xvi) environmental matters,
(xvii) employee benefit matters, (xviii) employee matters, (xix) taxes, (xx)
absence of material changes, (xxi) vendors and customers, (xxii) accounts
payable and (xxiii) related party transactions.
Additional Agreements of the Company and Buyer
Ordinary Course. Pursuant to the Purchase Agreement, the Company and Buyer
have agreed that, during the period from the date of the Purchase Agreement
until the Closing, except as consented to by Buyer or as contemplated by the
Purchase Agreement, the Company will cause Bliss and Sub to conduct their
business in the ordinary course consistent with past practice. In addition,
neither the Company nor Sub will: (a) borrow any sums or enter into any
financial guarantees or otherwise incur any indebtedness, including for the
payment of trade payables, other than in the ordinary course of business
consistent with past practice; (b) with certain exceptions, make or authorize
any compensation increase for any employee of Bliss or Sub whether such increase
relates to base compensation, commissions, bonuses, or benefits, or otherwise
unless such increase is consistent with Bliss's prior practices with regard to
such increases and Buyer consents to such increases; (c) except for the sale by
Bliss of inventory or work-in-process and in the ordinary course of business
consistent with past practice, sell, assign, transfer, lease, mortgage, pledge
or make or cause to become subject to any Claim (as defined in the Purchase
Agreement), any of the assets of Bliss or Sub; (d) enter into any agreement with
respect to the Business pursuant to which the aggregate obligation of Bliss and
Sub subsequent to the date of the Purchase Agreement may exceed $50,000
individually or in the aggregate, and which is not terminable by Bliss without
penalty upon 90 days' notice or less; (e) manage inventories and other supplies
and
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<PAGE> 29
parts other than in the ordinary course of business consistent with past
practice; (f) issue or sell any shares of its capital stock of any class, or
issue or sell any securities convertible into, or options with respect to, or
warrants to purchase or rights to subscribe to, any shares of its capital stock
of any class, nor make any commitment to issue or sell any such shares or
securities; (g) except as disclosed to Buyer, declare, pay or set aside for
payment any dividend, distribution or return of capital in respect of its
capital stock nor, directly or indirectly, redeem, purchase or otherwise acquire
any shares of its capital stock; (h) settle or compromise any Tax (as defined in
the Purchase Agreement) liability; (i) without limiting the generality of the
foregoing, take any action or omit to take any action, which act or omission
would result in a breach of any of the representations or warranties set forth
in the Company's representation regarding the absence of material changes; or
(j) otherwise enter into any transaction not in the ordinary course of business.
Filings and Other Actions. Pursuant to the Purchase Agreement, the parties
have agreed to use their reasonable efforts to file within twenty (20) business
days after the receipt of the Phase II Study, all requisite notifications under
the HSR Act (such notifications, "HSR Filings"), and documentary material that
comply with the provisions of the HSR Act, and will promptly file any additional
information requested as soon as practicable after receipt of the request. The
parties have also agreed not to take any action that is designed to have the
effect of delaying, impairing or impeding the receipt of any required approvals,
including the consents referred to in respective representations and warranties
of the Company and Buyer, and will use their reasonable efforts to secure such
approvals as promptly as possible. See "PROPOSED SALE OF BLISS -- Applicable
Federal or State Regulatory Requirements for the Sale."
Insurance. Pursuant to the Purchase Agreement, the Company and Buyer have
agreed that, if, on or prior to the Closing Date (as defined in the Purchase
Agreement), any property owned or leased by Bliss or Sub suffers any material
damage, destruction or loss, the Company shall surrender to Buyer (i) all
insurance proceeds received by the Company or Bliss with respect to such damage
or loss and (ii) all rights of the Company or Bliss with respect to any causes
of action, whether or not litigation has commenced on the Closing, in connection
with such damage or loss.
Employee and Employee Benefit Matters. The Purchase Agreement provides
that, on and after the Closing, the Company shall have no liability whatsoever,
except as provided for in the Purchase Agreement, for providing or causing Bliss
to provide employee welfare benefits for the employees of Bliss or fulfilling
collective bargaining agreement obligations or negotiations. Pursuant to the
Purchase Agreement, Buyer has agreed to cause Bliss to fulfill the collective
bargaining obligations of Bliss in accordance with the Basic Labor Agreement
effective as of September 1, 1995, between Bliss and the Bliss Manufacturing
Employees Association (the "Collective Bargaining Agreement") during the term
thereof, and to cause Bliss to maintain for no less than 12 months after the
Closing Date, employee welfare benefits, arrangements and commitments to
employees of Bliss substantially comparable in the aggregate to those currently
in effect for such employees. Specifically, and not by way of limitation, Buyer
has agreed to cause Bliss to recognize employees' vacation time and sick leave
accrued prior to the Closing and to fulfill the Company's obligations existing
at the date of the Closing under the employee and retiree plans disclosed to
Buyer.
In addition to the foregoing, subject to certain provisions of the Purchase
Agreement, as of the Closing, Buyer will cause Bliss to be fully responsible for
the maintenance and administration of the Plans (as defined in the Purchase
Agreement) and for all expenses, liabilities, and obligations with respect
thereto arising on or after the Closing.
In addition, subject to certain provisions of the Purchase Agreement, Buyer
has agreed to cause Bliss to be fully responsible and to indemnify and hold the
Company harmless for any and all liabilities, obligations, expenses, losses or
taxes arising on or after the Closing with respect to: (v) any and all benefits
and claims for benefits under any Plan; (w) compliance with the reporting and
disclosure requirements of the Code, and the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), for plan years ending on and after the
Closing with respect to each Plan; (x) the minimum
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<PAGE> 30
funding obligations under the Code and ERISA with respect to any Plan for plan
years ending after the Closing; (y) the termination of any Plan that occurs
after the Closing; and (z) any act or omission of Buyer that adversely affects
the qualification of any Plan under section 401(a) of the Code for any year.
With respect to Pension Plans (as defined in the Purchase Agreement),
pursuant to the Purchase Agreement, the Company has agreed to cause Bliss to
make to such Pension Plans all contributions required to be made with respect to
the time period prior to the Closing in accordance with the terms of the
Collective Bargaining Agreement, and Buyer has agreed to cause to be made to
such Pension Plans all contributions required to be made with respect to the
time period beginning on the Closing in accordance with the terms of the
Collective Bargaining Agreement as long as such agreement remains in force.
Subject to the indemnification provisions contained in Article VIII of the
Purchase Agreement, Buyer has agreed that it will cause Bliss to indemnify the
Company against all contributions required and liabilities assessed under such
Pension Plans after the Closing.
Accounts Receivable and Inventory. Pursuant to the Purchase Agreement, the
Company and Buyer have agreed that, with respect to certain representations and
warranties made by the Company relating to accounts receivable and inventory of
Bliss, in the event that (i) (x) 90% of the accounts receivable of Bliss
reflected on the Final Balance Sheet (as defined in the Purchase Agreement) are
not collected within ninety (90) days after the Closing Date, at Buyer's option,
Buyer will assign to the Company, and the Company will purchase from Buyer, the
uncollected accounts receivable reflected on the Final Balance Sheet so that
Bliss will have received cash for 90% of the accounts receivable reflected on
the Final Balance Sheet and (y) the remaining 10% of the accounts receivable of
Bliss reflected on the Final Balance Sheet are not collected within 180 days
after the Closing Date, at Buyer's option, Bliss will assign to the Company, and
the Company will purchase from Buyer, the uncollected accounts receivable
reflected on the Final Balance Sheet so that Bliss shall have received cash for
such remaining 10% of the accounts receivable reflected on the Final Balance
Sheet; and (ii) the inventory of Bliss reflected on the Final Balance Sheet is
not useable and saleable within, with respect to certain matters disclosed to
Buyer, twelve months, with respect to all other work-in-process and finished
goods, 90 days, and, with respect to all other raw materials, six (6) months,
after the Closing Date, at Buyer's option, Bliss will sell to the Company, and
the Company will purchase from Bliss, such unuseable and unsaleable inventory.
The purchase price for any such uncollected accounts receivable or unuseable and
unsaleable inventory, as the case may be, will be an amount equal to the amount
reflected on the Final Balance Sheet for such items, less applicable prorated
reserves.
Other Offers. The Purchase Agreement provides that, until the termination
of the Purchase Agreement, neither the Company, Bliss nor any of their
respective affiliates will, nor will they authorize the officers, directors,
employees, representatives or other agents of the Company, Bliss or any of such
affiliates to, directly or indirectly, (a) take any action to solicit or
initiate any Acquisition Proposal (as defined below) or (b) engage in
negotiations with, or disclose any nonpublic information relating to Bliss or
Sub or afford access to the properties, books or records of Bliss or Sub to, any
person that has advised Bliss or the Company or otherwise made known the fact
that such person may be considering making, or that has made, an Acquisition
Proposal. Bliss will promptly notify Buyer orally and in writing after receipt
of any Acquisition Proposal or any notice that any person is considering making
an Acquisition Proposal or any request for nonpublic information relating to
Bliss or Sub or for access to the properties, books or records of Bliss or its
Sub by any person that has advised Bliss or the Company or otherwise made known
the fact that such person may be considering making, or that has made, an
Acquisition Proposal and will promptly disclose to Buyer the status and details
of any such Acquisition Proposal, indication or request. The Company has agreed
that it will (i) immediately cease and cause to be terminated as of the date of
the Purchase Agreement any ongoing discussions or negotiations with any third
parties concerning an Acquisition Proposal and direct such third parties to
return to the Company all information received by them from Bliss or the Company
or their respective representatives and (ii) direct and cause all of its
representatives to cease engaging in the foregoing.
Miscellaneous Other Agreements. Pursuant to the Purchase Agreement, the
Company has agreed that, for a three year period starting on the Closing, it
will not solicit for hire any employee of Bliss or
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<PAGE> 31
Sub or compete with Bliss or Sub and will not, directly or indirectly, conduct
any business competitive with Bliss or Sub for five years after the Closing. The
Company has also agreed to provide to Buyer 30-days advance notice of any
proposed transaction to liquidate, sell all or substantially all of the property
or assets of the Company or dissolve. The Purchase Agreement also provides that
the Company may amend or supplement prior to the Closing Date the schedules to
the Purchase Agreement, subject to certain limitations set forth therein.
Contribution to Profit Sharing Plan. The Company will, pursuant to the
Purchase Agreement, make a discretionary contribution to Bliss's profit sharing
plan from the Purchase Price in an amount not to exceed $1,000,000.
Conditions to the Sale
The Company. The obligations of the Company under the Purchase Agreement
are subject to the satisfaction at or prior to the Closing of each of the
following conditions, but compliance with any or all of such conditions may be
waived by the Company: (a) the representations and warranties of Buyer that are
contained in the Purchase Agreement shall be true and correct in all respects;
(b) Buyer shall have performed and complied with all of the covenants and
agreements in all material respects, including the delivery of certain documents
specified in the Purchase Agreement, and satisfied all the conditions applicable
to Buyer required by the Purchase Agreement, the Escrow Agreement and the Voting
Agreement to be performed or complied with or satisfied by Buyer at or prior to
the Closing; (c) the applicable waiting periods under the HSR Act shall have
expired, and there shall be in effect no preliminary or permanent injunction or
other order of a court or governmental or regulatory agency of competent
jurisdiction directing that the transactions contemplated in the Purchase
Agreement, or any of them, not be consummated; (d) Buyer shall have provided the
Company evidence satisfactory to the Company that Buyer shall have obtained the
consents and approvals listed in the Purchase Agreement as applicable to Buyer;
(e) the Escrow Agreement shall have been duly executed and delivered by Buyer
and the Escrow Agent; and (f) the Purchase Agreement and the transactions
contemplated therein shall have been adopted and approved by the holders of more
than 50% of the shares of common stock of the Company in accordance with
applicable law and the provisions of the Company's certificate of incorporation
and by-laws.
Buyer. The obligations of Buyer under the Purchase Agreement are subject to
the satisfaction at or prior to the Closing of each of the following conditions,
but compliance with any or all of any such conditions may be waived by Buyer:
(a) the representations and warranties of the Company that are contained in the
Purchase Agreement shall be true and correct in all respects; (b) the Company
shall have performed and complied with all the covenants and agreements in all
material respects, including the delivery of certain documents specified in the
Purchase Agreement, and satisfied all the conditions applicable to the Company
required by the Purchase Agreement, the Escrow Agreement and the Voting
Agreement to be performed or complied with or satisfied by it at or prior to the
Closing; (c) the applicable waiting periods under the HSR Act shall have
expired, and there shall be in effect no preliminary or permanent injunction or
other order of a court or governmental or regulatory agency of competent
jurisdiction directing that the transactions contemplated therein, or any of
them, not be consummated; (d) since the date of the Purchase Agreement, there
shall not have occurred any Material Adverse Change (as defined in the Purchase
Agreement) or a material adverse change with respect to the Company; (e) the
Phase II Study shall have been completed, Buyer shall have received a true and
complete copy of the written report prepared by the consultants regarding the
Phase II Study and Buyer shall be satisfied that the reasonably likely aggregate
Environmental Damages (as defined in the Purchase Agreement) shall not exceed $2
million; provided, however, that this condition shall expire ten (10) business
days after receipt by Buyer of any such report on the Phase II Study; (f) the
Company shall have provided Buyer evidence satisfactory to Buyer that the
Company and Bliss shall have obtained the consents and approvals listed in the
Purchase Agreement as applicable to the Company and Bliss; (g) the Escrow
Agreement shall have been duly executed by the Company and the Escrow Agent; (h)
the Company shall have entered into a transitional services agreement with
Bliss, in form and
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<PAGE> 32
substance reasonably satisfactory to Buyer, to provide to Bliss and Sub
administrative services of the same nature and scope as presently provided, at
no cost to Bliss or Sub, for a period of six (6) months from and after the
Closing Date; and (i) the Purchase Agreement and the transactions contemplated
therein shall have been adopted and approved by the holders of more than 50% of
the shares of common stock of the Company in accordance with applicable law and
the provisions of the Company's certificate of incorporation and by-laws.
With respect to the condition to Closing in the foregoing clause (e), Buyer
has received the results of Seller's completed Phase II Study and has agreed
that this condition to the Closing has been satisfied.
The Closing
The Company's Deliveries. Pursuant to the Purchase Agreement, at the
Closing, Buyer shall receive from the Company the following documents: (a)
copies of duly adopted resolutions of the Company's board of directors and the
Company's shareholders approving the execution, delivery and performance of the
Purchase Agreement and the transactions contemplated thereby, as required,
certified by the Company's Secretary; (b) a certificate of good standing as to
the corporate status of Bliss from the Secretary of State of the State of Ohio
and of Sub from the Secretary of State of the State of Delaware; (c) a complete
and correct copy of the certificate of incorporation of each of the Company,
Bliss and Sub certified by the Secretary of State of the State of Ohio or
Delaware, as the case may be; (d) a complete and correct copy of the by-laws or
regulations of the Company, Bliss and Sub, each certified by the Secretary of
the Company, Bliss or Sub, as the case may be; (e) a certificate, dated the
Closing Date, from the Company's and Bliss's Secretary to Buyer stating that the
Company's, Bliss's and Sub's certificate of incorporation and regulations or
by-laws, as the case may be, have not been amended since the date hereof; (f) a
certificate, dated the Closing Date, of an appropriate officer or agent of the
Company with respect to certain matters described in the Purchase Agreement; (g)
a certificate or certificates representing the Shares with valid stock powers
attached, together with the stock ledger of Bliss and Sub; (h) a Certification
of Non-Foreign Status under and in accordance with Section 897 and Section 1445
of the Code; (i) the resignations of all of the directors of Bliss and Sub; (j)
the resignations of all of the officers of Bliss and Sub; (k) an opinion of
Squire, Sanders & Dempsey L.L.P., counsel to the Company, with respect to the
matters described on Annex A to the Purchase Agreement; (l) the Company shall
have paid the Closing Payments specified in the Purchase Agreement; and (m) such
other documents and certificates as Buyer may reasonably request in connection
with the consummation of the transactions contemplated by the Purchase
Agreement.
Buyer's Deliveries. Pursuant to the Purchase Agreement, at the Closing, the
Company shall have received from Buyer the following documents: (a) copies of
duly adopted resolutions of Buyer's member, if required, approving the
execution, delivery and performance of the Purchase Agreement and the
transactions contemplated thereby, as required, certified by an appropriate
officer of Buyer; (b) a certificate of good standing as to the limited liability
company status of Buyer from the Secretary of State of the State of Delaware;
(c) a complete and correct copy of the certificate of formation of Buyer
certified by the Secretary of State of the State of Delaware; (d) a complete and
correct copy of the operating agreement or similar governing agreement of Buyer
certified by an appropriate officer of Buyer; (e) a certificate, dated the
Closing Date, of a principal officer of Buyer with respect to certain matters
described in the Purchase Agreement; (f) evidence satisfactory to the Company of
the wire transfer by Buyer to the Company of $30,250,000 and of the wire
transfer by Buyer to the Escrow Agent of $1,000,000; (g) an opinion of Howard,
Darby & Levin, counsel to Buyer, with respect to matters described on Annex B to
the Purchase Agreement; and (h) such other documents and certificates as the
Company may reasonably request in connection with the consummation of the
transactions contemplated by the Purchase Agreement.
Indemnification
Indemnification by Buyer. The Purchase Agreement provides that, from and
after the Closing, Buyer will, without any further responsibility or liability
of or recourse to the Company or its affiliates
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<PAGE> 33
or any of the Company's or its affiliates' directors, shareholders,
beneficiaries, officers, employees, agents, consultants, representatives,
successors or assigns (collectively, the "Company Indemnified Parties"),
indemnify the Company Indemnified Parties from and against any and all losses,
liabilities, obligations, damages (whether actual or punitive), deficiencies,
costs or expenses (including interest, penalties and reasonable attorneys' fees
and disbursements) (individually, a "Loss"; collectively, "Losses") of any of
the foregoing persons, after netting any related tax benefit realized or to be
realized by such persons, arising from, asserted against or associated with (a)
a breach of any representation or warranty made by Buyer in the Purchase
Agreement, the Escrow Agreement or the Voting Agreement, (b) the failure to
perform any covenant, obligation or agreement of Buyer made in the Purchase
Agreement, the Escrow Agreement or the Voting Agreement, or (c) any and all
actions, suits, proceedings, demands, judgments, costs and legal and other
expenses incident to any of the matters referred to in the immediately foregoing
clauses (a) and (b).
Indemnification by the Company. The Purchase Agreement provides also that,
from and after the Closing, the Company shall, without any further
responsibility or liability of or recourse to Buyer or its affiliates or any of
Buyer's or its affiliates' directors, shareholders, partners, members,
beneficiaries, officers, employees, agents, consultants, representatives,
successors or assigns (collectively, the "Buyer Indemnified Parties"), indemnify
the Buyer Indemnified Parties from and against any and all Losses of any of the
foregoing persons after netting any related tax benefit realized or to be
realized by such persons, arising from, asserted against or associated with (a)
a breach of any representation or warranty made by the Company in the Purchase
Agreement, the Escrow Agreement or the Voting Agreement, (b) failure to perform
any covenant, obligation or agreement of the Company made in the Purchase
Agreement, the Escrow Agreement or the Voting Agreement, (c) the business
formerly conducted by Bliss regarding the manufacture of metal vacuum cleaner
tubular components and the sale of such business, including (without limitation)
any and all obligations under the Asset Purchase Agreement and the Supply
Transition Agreement, each dated as of August 27, 1997, between Bliss and H-P
Products, Inc., (d) any product sold by Bliss or Sub or any product processed or
manufactured by Bliss or Sub but not yet sold by Bliss or Sub prior to the
Closing, (e) in connection with the Company's classification of the different
inventory valuation method adopted by the Company as a change in method rather
than a change in principle, or (f) any and all actions, suits, proceedings,
demands, judgments, costs and legal and other expenses incident to any of the
matters referred to in the immediately foregoing clauses (a) through (e).
Limitation on Indemnity. The Purchase Agreement provides that, except with
respect to certain representations and warranties contained in the Purchase
Agreement or claims arising out of fraud (collectively, "Excluded Claims"),
liability for which shall be unlimited, the Company's, on the one hand, and
Buyer's, on the other hand, maximum aggregate liability shall in no event exceed
$5,000,000. With certain exceptions, no claim for indemnification (except with
respect to environmental matters discussed below) may be made more than two
years after the Closing.
Environmental Matters. Pursuant to the Purchase Agreement, (i) the Company
agreed to cause Bliss to conduct the Phase II Study, including soil and ground
water sampling, on the premises owned or leased by Bliss and such adjacent areas
with respect to which Bliss or Sub might reasonably be expected to have
liability, and that the Company would make, or would cause Bliss to make,
available to Buyer all data collected and reports prepared in connection with
the Phase II Study, or (ii), at Buyer's option, the Company would perform an
analysis, which would be based on existing data (to the extent existing data is
sufficient for such purpose), to determine if any contaminants which might
reasonably be expected to be found would not present unreasonable risks to
health or the environment under continued industrial use of the property. The
Phase II Study would be conducted by environmental consultants reasonably
acceptable to Buyer, and the scope of work in the Phase II Study would be
reasonably acceptable to Buyer. Buyer and its representatives would also have
the right pursuant to the Purchase Agreement to observe Bliss's environmental
consultants during the course of their on-site examination of the relevant
properties, review the findings of such consultants and discuss with Bliss, the
Company and their respective representatives, including such environmental
consultants, the nature
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<PAGE> 34
of the study and the findings therefrom. The Company has agreed pursuant to the
Purchase Agreement to be solely responsible for providing any required
notifications under any federal, state or local law, regulation, standard,
order, decree, rule, ordinance, permit, franchise, license or judgment now
existing or hereafter developing, relating to protection of health, safety or
the environment, including Environmental Laws (as defined in the Purchase
Agreement). The Phase II Study has been completed to Buyer's satisfaction, as
discussed above under "-- Conditions to the Sale -- Buyer."
The Purchase Agreement contains certain provisions (Section 8.5 of the
Purchase Agreement) which govern the allocation between the Company Indemnified
Parties, on the one hand, and the Buyer Indemnified Parties and the Company and
Sub (collectively, the "Buyer Environmental Indemnitees"), on the other hand, of
Environmental Damages to any Buyer Indemnified Party, the Company or Sub arising
from or in connection with (A) the operations of the Business or of any
predecessor-in-interest of the Company or Sub on or prior to the Closing, (B)
any environmental condition existing as of the Closing (including any future
spreading of contamination existing at such time) on any real property owned or
leased by the Company or Sub and on any property adjacent to such owned or
leased real property, provided, that the Environmental Damages do not result
from acts or omissions of Buyer after the Closing (whether or not caused by the
Company or Sub), (C) in response to a claim, demand, investigation or inquiry
made against any Buyer Environmental Indemnitee by any third party, including
any governmental authority or agency, or (D) to correct or remediate any
environmental condition as required by authority or any Environmental Law or a
governmental authority or agency, to achieve compliance with any Environmental
Law. For the purpose of the Purchase Agreement, "Environmental Damages" means
any and all Losses, including, without limitation, costs of investigation,
attorneys and consultants, analysis, cleanup, containment or other environmental
remediation, actually incurred by any Buyer Environmental Indemnitee in
connection with any matter described in any of immediately foregoing clauses (A)
through (D).
The Purchase Agreement provides that, with respect to any Environmental
Damages pursuant to which a claim is made by any Buyer Environmental Indemnitee
against the Company: (a) before or on the second anniversary of the Closing, the
Company shall indemnify Buyer to the extent of 90% of such Environmental Damages
and Buyer shall pay for 10% of such Environmental Damages; (b) after the second
anniversary but before or on the third anniversary of the Closing, the Company
shall indemnify Buyer to the extent of 80% of such Environmental Damages, and
Buyer shall pay for 20% of such Environmental Damages; (c) after the third
anniversary but before or on the fourth anniversary of the Closing, the Company
shall indemnify Buyer to the extent of 70% of such Environmental Damages, and
Buyer shall pay for 30% of such Environmental Damages; (d) after the fourth
anniversary but before or on the fifth anniversary of the Closing, the Company
shall indemnify Buyer to the extent of 60% of such Environmental Damages, and
Buyer shall pay for 40% of such Environmental Damages; or (e) after the fifth
anniversary but before or on the seventh anniversary of the Closing, the Company
shall indemnify Buyer to the extent of 50% of such Environmental Damages, and
Buyer shall pay for 50% of such Environmental Damages.
With certain exceptions, the Purchase Agreement provides that no claim for
indemnification with respect to environmental matters made pursuant to the
Purchase Agreement may be made more than seven years after the Closing.
Pursuant to the Purchase Agreement, the parties have also agreed, among
other things, as follows: (i) to act in good faith in undertaking work to
address environmental matters that give rise to a claim for indemnification
under the Purchase Agreement with a view toward avoiding unnecessary costs; (ii)
Environmental Damages shall be limited to damages directly related to rectifying
the environmental matter to the minimum extent (A) satisfactory to the
governmental authority or agency with responsibility for such matter or (B) that
a prudent business owner would, in its reasonable business judgment, consider
reasonably necessary, in light of prior use of the properties and facilities of
Bliss and demonstrated unreasonable risks associated with the environmental
conditions; (iii) at Buyer's election, Buyer shall have the right to control and
manage all discussions with third parties and all proceedings and activities
regarding the satisfaction and discharge of any Environmental Damages, and
planning or
29
<PAGE> 35
performing any work at such property, provided that the Company shall have the
right, at its expense, to participate in all such discussions and all
proceedings and activities; (iv) if the Company is required to investigate,
clean up or otherwise address Environmental Damages, Buyer shall give the
Company and its authorized representatives and agents reasonable access to
Bliss's property, all natural materials (including without limitation, water,
dirt, clay and related materials) on such property and all equipment, facilities
and utilities on such property; (v) Buyer will take all reasonable measures to
reduce the cost of any required remediation, including, without any limitation,
permitting the Company to file on or prior to Closing a deed permanently
restricting use of Bliss's property for commercial or industrial purposes,
provided that Buyer will take such reasonable measures commensurate with
existing zoning with respect to adjacent property; (vi) the party performing the
remedial or other work relating to Environmental Damages shall advise the other
party of any studies or other significant documents relating to the project and
provide reasonable advance notice of any planned activities; and (vii) if
Environmental Damages arise which are attributable to transactions or
occurrences that take place before and after the Closing Date and to which both
the Company and a Buyer Environmental Indemnitee contributed, the Company's
liability shall be apportioned.
Taxes
Pursuant to the Purchase Agreement, the Company and Buyer have agreed,
among other things, to take such actions as may be required (including such
elections under Section 338(h)(10) of the Code and corresponding provisions of
state law) to treat the Sale, for federal and, if permissible, state income tax
purposes, as a taxable sale of the assets of Bliss and Sub. The Company will
include the income of Bliss and Sub in its consolidated federal income tax and
combined state income tax returns for all pre-closing tax periods of Bliss and
Sub, including the taxable period that ends at the Closing, and will bear the
burden of any consolidated federal and combined state income taxes associated
with the gain on the deemed sale of assets as reflected in such returns. The
Company has also agreed that the Company will indemnify Buyer against taxes of
the Company and its affiliates and Bliss for all pre-closing periods to the
extent such taxes exceed tax reserves established by the Company. In addition,
Buyer has agreed that it shall indemnify the Company against taxes relating to
Bliss, or any affiliated group of which Bliss becomes a member, for all
post-Closing tax periods. Any payment by the Company or Buyer with respect to
the tax indemnification provisions contained in the Purchase Agreement will be
treated for tax purposes as an adjustment to the Purchase Price.
Termination
The Purchase Agreement provides that the Purchase Agreement may be
terminated only (a) by the mutual written consent of the parties to the Purchase
Agreement, (b) by Buyer or the Company if, for any reason, the Closing has not
occurred prior to April 30, 1998 or (c) by Buyer in the event that the condition
set forth in the Purchase Agreement with respect to Environmental Damages would
not be satisfied as of the Closing; provided that if the failure to close by
such date is due to Buyer's or the Company's breach of the Purchase Agreement,
such party shall not be entitled to terminate the Purchase Agreement. In the
event the Purchase Agreement is terminated, with certain exceptions, the
Purchase Agreement will be void without liability on the part of any party, its
shareholders, directors or officers.
Expenses
Except as otherwise provided in the Purchase Agreement, the parties have
agreed to bear their own respective expenses (including, but not limited to, all
compensation and expenses of counsel, financial advisors, consultants, actuaries
and independent accountants) incurred in connection with the preparation and
execution of the Purchase Agreement and consummation of the transactions
contemplated thereby.
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<PAGE> 36
Public Disclosure
Pursuant to the Purchase Agreement, each of the parties to the Purchase
Agreement has agreed that, except as and to the extent required to comply with
the requirements of applicable law, no press releases or similar public
announcement or communication will be made or caused to be made concerning the
execution, terms or performance of the Purchase Agreement unless specifically
approved in advance by all parties. The parties have agreed to consult with one
another prior to making any press release or announcement required to be
disclosed by law and to use their reasonable efforts to reach agreement on any
such press release or announcement.
Survival
Subject to certain specified provisions contained in the Purchase
Agreement, the representations, warranties, covenants and agreements made by the
parties pursuant to the Purchase Agreement shall survive the Closing for a
period of two years.
Assignment
The Purchase Agreement provides that Buyer may assign its rights under the
Purchase Agreement as collateral security to parties providing financing to
Buyer in connection with the Sale and to one or more affiliates of Buyer that
will take title to the Shares and assume all obligations of Buyer thereunder.
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<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical financial data of the
Company and its consolidated subsidiaries for the periods indicated. The
financial data for the five years ended September 30, 1997 and the quarter ended
December 31, 1997 was derived from the respective audited and unaudited
consolidated financial statements of the Company for such periods and excludes
Bliss from continuing operations as it was presented as a discontinued operation
for both periods. The data should be read in conjunction with the consolidated
financial statements, related notes and other financial information of the
Company incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
FIRST QUARTER
1998 ENDED
DECEMBER 31,
1997 1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue From Continuing Operations $ 9,011,515 $50,490,250 $59,548,908 $62,785,302 $52,759,037 $44,224,939
Operating Costs and Expenses 11,483,252 68,603,306 63,882,184 60,509,044 50,539,058 41,416,946
Other Income (Expense), net (548,532) (2,650,313) (4,272,428) (1,282,491) (1,080,894) (1,080,413)
Income (loss) Before Discontinued Operations
Before Taxes (3,020,269) (20,763,369) (8,605,704) 993,767 1,139,085 1,727,580
Income (loss) Margin Before Discontinued
Operations Before Taxes (33.5%) (41.1%) (14.5%) 1.6% 2.2% 3.9%
Income Taxes (benefits) (915,442) (7,285,949) (2,838,259) (614,791) (69,510) 145,512
Income Tax Rate 30.0% 35.1% 33.0% 69.1% 6.1% 8.4%
Income (loss) before Discontinued Operations (2,104,827) (13,477,420) (5,767,445) 1,608,558 1,208,595 1,582,068
Income (loss) Margin Before Discontinued
Operations (23.4%) (26.7%) (9.7%) 2.6% 2.3% 3.6%
Income (loss) From Discontinued Operations 944,423 2,347,039 (1,965,815) 3,833,317 3,422,894 3,287,695
Loss on Disposals -- (5,519,684) (2,280,844) -- -- --
Cumulative Effect --
Change of Accounting for Income Taxes -- -- -- -- 719,016 --
Net Income (loss) (1,160,404) (16,650,065) (10,014,104) 5,441,875 5,350,505 4,869,763
Net Income (loss) Margin (12.9%) (33.0%) (16.8%) 8.7% 10.1% 11.0%
Basic Per Share Data:[1]
Income (loss) Before Discontinued Operations $ (.42) $ (2.72) $ (1.18) $ 33 $ .25 $ .33
Net Income (loss) From Discontinued
Operations .19 .47 (.40) .79 .71 .70
Loss on disposals -- (1.11) (0.46) -- -- --
Net Income (loss) (.23) (3.36) (2.04) 1.12 1.11 1.03
Cash Dividends .000 .000 .263 .346 .329 .309
Weighted Average Number of Common Shares
Outstanding 5,032,105 4,956,276 4,912,135 4,876,599 4,820,275 4,727,925
Diluted Per Share Data:[1]
Income (loss) Before Discontinued Operations $ (.42) $ (2.72) $ (1.18) $ 33 $ .25 $ .33
Income (loss) From Discontinued Operations .19 .47 (.40) .79 .70 .68
Loss on disposals -- (1.11) (0.46) -- -- --
Net Income (loss) (23) (3.36) (3204) 1.12 1.09 1.01
Cash Dividends .000 .000 .263 .346 .324 3.01
Weighted Average Number of Common Shares
Outstanding 5,032,105 4,956,276 4,912,135 4,876,599 4,888,395 4,851,192
Total Assets 54,948,043 55,390,133 92,511,124 85,191,635 78,642,212 65,102,797
Long-Term Debt 552,860 762,777 22,334,613 14,050,715 13,176,973 8,800,956
Stockholders' Equity 13,196,437 14,551,505 30,882,960 40,350,913 37,901,982 34,442,194
Book Value Per Share 2.62 2.94 6.29 8.27 7.75 7.10
Working Capital 1,732,937 3,793,541 24,981,647 23,771,993 22,941,184 18,189,328
Ratio of Current Assets to Current
Liabilities 1.04 1.10 1.77 1.91 1.99 1.90
Percent of Earnings on Average Stockholders'
Equity (17.6) (73.3%) (28.1%) 13.9% 14.8% 14.8%
Percent of All Dividends to Net Income -- -- (12.9%) 31.0% 29.7% 30.0%
Stock High 6 8 1/8 15 17 19 1/8 13 3/4
Stock Low 4 5/8 3 7/8 4 3/4 13 1/4 11 1/4 5 5/8
Average Annual Price to Earnings Ratio (23.0) (1.8) (4.8) 13.5 13.9 9.6
Average Annual Dividend Yield -- -- 2.7% 2.3% 2.1% 3.1%
</TABLE>
- ---------------
[1] Amounts have been restated to comply with FAS 128.
32
<PAGE> 38
BLISS
UNAUDITED HISTORICAL CONDENSED FINANCIAL STATEMENTS
The following presents the unaudited consolidated financial statements of
Bliss and related notes thereto. The Bliss consolidated financial statements and
notes are based upon and should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Form 10-K and Form 10-Q and other financial information of the
Company filed with the Commission from time to time.
For purposes of the Bliss financial presentation, goodwill arising from the
purchase of Bliss by the Company has been pushed down to the Bliss consolidated
financial statements. The value of all other assets and liabilities of Bliss as
reported on the Company's financial statements have also been pushed down to the
Bliss consolidated financial statements. In addition, as there is no tax
allocation agreement between Bliss and the Company and due to the fact that all
matters of taxation are the responsibility of the Company until the date of the
Sale, the related tax expense of Bliss is presented on the Bliss income
statements and is offset against the intercompany receivable presented on the
consolidated balance sheet.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 472,273 $ -- $ 100,146
Trade accounts receivable (net of allowance of
$166,509, $250,000 and $60,000) 8,150,169 8,135,942 9,124,178
Inventories 7,863,087 6,649,099 7,961,667
Prepaid expenses 309,460 309,760 366,761
Other current assets -- 47,873 --
----------- ----------- -----------
Total current assets 16,794,989 15,142,674 17,552,752
----------- ----------- -----------
Property, plant and equipment, net 5,472,617 5,590,407 5,315,378
----------- ----------- -----------
Other assets:
Cost in excess of net assets of acquired
business (net of amortization of $999,177,
$958,138 and $825,981) 4,295,100 4,328,139 4,460,296
Other 11,289 11,289 12,289
----------- ----------- -----------
Total other assets 4,306,389 4,339,428 4,472,585
----------- ----------- -----------
Total assets $26,573,995 $25,072,509 $27,340,715
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,939,513 $ 7,700,209 $ 9,322,940
Accrued expenses and other liabilities 2,231,215 1,923,338 2,660,322
Long-term debt due within one year 415,351 458,589 449,096
----------- ----------- -----------
Total current liabilities 8,586,079 10,082,136 12,432,358
----------- ----------- -----------
Long-term liabilities:
Long-term debt (less amounts due within one
year) 69,638 144,069 626,282
Postretirement benefits other than pensions 4,380,339 4,237,000 3,749,000
----------- ----------- -----------
Total long-term liabilities $ 4,449,977 $ 4,381,069 $ 4,375,282
----------- ----------- -----------
Stockholders' equity:
Capital in excess of par value 15,262,500 15,262,500 15,262,500
Intercompany receivable, net (28,139,454) (30,595,922) (28,348,829)
Retained earnings 26,414,893 25,942,726 23,619,404
----------- ----------- -----------
Total stockholders' equity 13,537,939 10,609,304 10,533,075
----------- ----------- -----------
Total liabilities and stockholders' equity $26,573,995 $25,072,509 $27,340,715
=========== =========== ===========
</TABLE>
33
<PAGE> 39
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------- ---------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net product sales $14,875,614 $13,771,431 $61,813,388 $47,158,912 $55,242,351
Operating costs and
expenses:
Cost of products sold 13,285,999 12,126,130 54,121,643 39,805,173 43,465,499
Selling, general and
administrative expenses 783,372 869,059 3,959,869 4,540,812 3,612,274
Interest expense 10,408 19,970 70,555 33,607 41,359
Other expenses 34,275 28,939 60,859 152,316 567,765
----------- ----------- ----------- ----------- -----------
Total expenses 14,114,054 13,044,098 58,212,926 44,531,908 47,686,897
----------- ----------- ----------- ----------- -----------
Income before income taxes 761,560 727,333 3,600,462 2,627,004 7,555,454
Provision for income taxes 289,393 276,386 1,277,140 1,050,801 3,022,579
----------- ----------- ----------- ----------- -----------
Net income $ 472,167 $ 450,947 $ 2,323,322 $ 1,576,203 $ 4,532,875
=========== =========== =========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
EXCESS OF INTERCOMPANY RETAINED STOCKHOLDERS'
PAR VALUE RECEIVABLE, NET EARNINGS EQUITY
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at September
30, 1994 $15,262,500 $(21,600,003) $17,510,326 $11,172,823
Net income -- -- 4,532,875 4,532,875
Capital distribution (4,906,764) (4,906,764)
----------- ------------ ----------- -----------
Balance at September
30, 1995 15,262,500 (26,506,767) 22,043,201 10,798,934
Net income -- -- 1,576,203 1,576,203
Capital distribution (1,842,062) (1,842,062)
----------- ------------ ----------- -----------
Balance at September
30, 1996 15,262,500 (28,348,829) 23,619,404 10,533,075
Net income -- -- 2,323,322 2,323,322
Capital distribution (2,247,093) (2,247,093)
----------- ------------ ----------- -----------
Balance at September
30, 1997 15,262,500 (30,595,922) 25,942,726 10,609,304
Net Income -- -- 472,167 472,167
Capital distribution 2,456,468 2,456,468
----------- ------------ ----------- -----------
Balance at December 31,
1997 $15,262,500 $(28,139,454) $26,414,893 $13,537,939
=========== ============ =========== ===========
</TABLE>
34
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------- ---------------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 472,167 $ 450,947 $ 2,323,322 $ 1,576,203 $ 4,532,875
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 250,539 220,539 886,033 949,602 888,676
Provision for losses on
receivables -- -- 190,000 -- --
Net increase in
postretirement liability 143,339 122,000 488,000 435,000 288,000
Changes in operating assets
and liabilities:
Decrease (increase) in
receivables (14,227) 1,711,596 798,236 (3,288,146) 1,662,358
Decrease (increase) in
inventories (1,213,988) 986,041 1,312,568 (2,611,981) 188,387
Decrease (increase) in
prepaid expenses 300 59,850 57,001 (111,320) 189,252
Decrease (increase) in
other current assets 75,805 -- (47,873) 18,000 (18,000)
Increase (decrease) in
accounts payable (1,760,696) (3,057,333) (1,622,731) 4,820,478 143,103
Increase (decrease) in
accrued expenses and
other liabilities 279,945 219,093 (736,987) 508,010 (1,094,848)
Other, net -- -- 1,000 904 (904)
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities (1,766,816) 712,733 3,648,569 2,296,750 6,778,899
----------- ----------- ----------- ----------- -----------
Cash flow from investing
activities:
Capital expenditures (99,710) (42,376) (1,028,902) (912,243) (1,823,650)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (99,710) (42,376) (1,028,902) (912,243) (1,823,650)
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Payment of long term debt (117,669) (109,840) (472,720) (360,942) (165,384)
Proceeds from long term debt -- -- -- 815,470 --
Capital distribution 2,456,468 (586,917) (2,247,093) (1,842,062) (4,906,764)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by financing activities 2,338,799 (696,757) (2,719,813) (1,387,534) (5,072,148)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 472,273 (26,400) (100,146) (3,027) (116,899)
Cash and cash equivalents,
beginning of period -- 100,146 100,146 103,173 220,072
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end
of period $ 472,273 $ 73,746 $ -- $ 100,146 $ 103,173
=========== =========== =========== =========== ===========
</TABLE>
35
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Nature of Business
Bliss is a wholly owned subsidiary of the Company. Bliss engages in
the manufacture of various types of sheet metal stamping and subassemblies,
and painting and welding in conjunction therewith, for customers in the
automotive and truck manufacturing, materials handling equipment, military,
and plumbing industries. The products manufactured by Bliss are sold
primarily to original equipment manufacturers located mostly in the midwest
United States.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of Bliss and Sub. All significant inter-company accounts and
transactions have been eliminated.
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 any contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Cash Equivalents
Bliss considers all highly liquid instruments purchased with a
maturity date of less than three months to be cash equivalents.
Allowance for Doubtful Accounts
On a periodic basis, Bliss's management performs a review of
potentially uncollectible trade accounts receivable to provide its best
estimate of the net realizable value of the receivables. This review
consists of a detailed specific customer analysis and a focus on aging
categorization, days sales outstanding and other related analytical
procedures.
Cost in Excess of Net Assets of Acquired Businesses
Goodwill, resulting from the acquisition of Bliss by the Company which
has been pushed down to the Bliss consolidated financial statements and
comprising cost in excess of net assets of the business acquired, is being
amortized on a straight-line basis over 40 years.
The Company periodically evaluates the recoverability of goodwill and
measures the amount of impairment, if any, by assessing current and future
levels of income and cash flows as well as other factors, such as business
trends and market and economic conditions. If there is an impairment in
value, recorded balances will be adjusted.
Inventories
Inventories are stated at the lower of cost or market and are valued
using the first-in, first-out (FIFO) cost method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided on the straight-line and declining balance methods over estimated
useful lives of 10 to 40 years for buildings and improvements and 3 to 10
years for machinery and equipment. Improvements which extend the useful
life of property, plant and equipment are capitalized, and maintenance and
repairs are
36
<PAGE> 42
expensed. When property, plant and equipment is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the
appropriate accounts and any gain or loss is included in current income.
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash,
accounts and notes receivable, accounts payable, accrued expenses and other
liabilities, and short and long-term debt in which the fair value of these
financial instruments approximates the carrying value.
Revenue Recognition
Product revenues are recognized upon the shipment of product.
Income Taxes
Bliss accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standard No. 109 ("SFAS 109"),
"Accounting for Income Taxes." Under SFAS 109, the tax consequences in the
future years for differences between the financial and tax basis of assets
and liabilities at year end are reflected as deferred income taxes. For
income tax purposes, Bliss is included in the consolidated tax return of
the Company. No tax allocation agreement exists between Bliss and the
Company. The Company allocates taxes to Bliss and other members of the
consolidated group at the Company's U.S. effective tax rate.
3. Inventories
Components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ -------------- -------------
<S> <C> <C> <C>
Finished goods.......................... $2,524,518 $2,594,123 $2,303,572
Work-in-process, raw materials, and
supplies.............................. 5,338,569 4,054,976 5,658,095
---------- ---------- ----------
$7,863,087 $6,649,099 $7,961,667
========== ========== ==========
</TABLE>
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Land..................................... $ 491,909 $ 491,909 $ 486,268
Buildings and improvements............... 4,301,744 4,287,102 4,043,547
Machinery and equipment.................. 13,604,524 13,519,526 12,739,817
----------- ----------- -----------
18,398,177 18,298,537 17,269,632
Accumulated depreciation................. 12,925,560 12,708,130 11,954,254
----------- ----------- -----------
Property, plant and equipment net........ $ 5,472,617 $ 5,590,407 $ 5,315,378
=========== =========== ===========
</TABLE>
37
<PAGE> 43
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Accrued compensation..................... $ 266,195 $ 101,000 $ 238,000
Accrued commissions...................... 363,000 365,000 306,000
Pension and profit sharing............... 933,000 996,000 1,705,000
Accrued workers compensation............. 192,000 166,000 150,000
Accrued payroll taxes.................... 36,000 125,000 230,000
Other.................................... 441,020 170,338 31,322
---------- ---------- -----------
$2,231,215 $1,923,338 $ 2,660,322
========== ========== ===========
</TABLE>
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Capitalized lease obligations bearing interest at
3.74% to 8.04% due in monthly installments of
$14,413 (including interest) through July
1999........................................... $484,989 $602,658 $1,075,378
Less amounts due within one year................. 415,351 458,589 449,096
-------- -------- ----------
Long-term debt................................... $ 69,638 $144,069 $ 626,282
======== ======== ==========
</TABLE>
The principal amount of long-term debt payable is $458,589 in the year
ended September 30, 1998 and $144,069 in the year ended September 30, 1999.
7. Income taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
-------------------- --------------------------------------
1997 1996 1997 1996 1995
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal....................... $264,258 $301,406 $1,302,688 $1,521,485 $2,658,393
State......................... 34,270 32,730 162,020 118,215 339,995
-------- -------- ---------- ---------- ----------
298,528 334,136 1,464,708 1,639,700 2,998,388
Deferred........................ (9,135) (57,750) (187,568) (588,899) 24,191
-------- -------- ---------- ---------- ----------
$289,393 $276,386 $1,277,140 $1,050,801 $3,022,579
======== ======== ========== ========== ==========
</TABLE>
Because Bliss is included in the consolidated tax returns of the
Company, all taxes are paid on Bliss's behalf by the Company. As of
December 31, 1997 and September 30, 1997 and 1996, tax related balances due
to the Company amounted to $10,833,690, $11,779,430, and $10,914,300,
respectively, and were included in the intercompany receivable, net for the
respective periods presented.
8. Profit Sharing and Pension Plans
Bliss has a defined contribution plan which covers substantially all
employees. The Bliss plan contribution is at management's discretion and is
allocated based on a percentage of each employee's wages. Profit sharing
and pension expense for the quarters ended December 31, 1997 and
38
<PAGE> 44
1996, and the years ended September 30, 1997, 1996 and 1995 were $225,000,
$118,800, $475,000, $1,915,000 and $1,045,000, respectively.
9. Postretirement Benefits Other than Pensions
Bliss provides postretirement health care and life insurance benefits
to certain employees.
The components of the postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1995
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Service costs........ $ 93,500 $ 84,750 $339,000 $309,000 $213,000
Interest costs....... 75,250 66,250 265,000 232,000 192,000
Net amortization and
deferral........... -- -- -- -- (20,000)
-------- -------- -------- -------- --------
$168,750 $151,000 $604,000 $541,000 $385,000
======== ======== ======== ======== ========
</TABLE>
The status of the plans was as follows at:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
(APBO):
Retirees....................................... $(1,643,000) $(1,642,000) $(1,639,000)
Actives fully eligible......................... (199,000) (195,000) (181,000)
Actives not yet fully eligible................. (2,380,339) (2,242,000) (1,769,000)
----------- ----------- -----------
Total APBO....................................... (4,222,339) (4,079,000) (3,589,000)
Fair value of plan assets........................ -- -- --
----------- ----------- -----------
Funded status (4,222,339) (4,079,000) (3,589,000)
Unrecognized (gain)/loss....................... (158,000) (158,000) (160,000)
----------- ----------- -----------
Accrued postretirement benefit costs........... $(4,380,339) $(4,237,000) $(3,749,000)
=========== =========== ===========
Assumed weighted average discount rate........... 7.5% 7.5% 7.5%
</TABLE>
The assumed health care cost trend rate used in measuring the health
care portion of the postretirement benefit cost for 1997 is 10.5%,
gradually declining to 5.5% by the year 2007 and remaining at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by 1 percentage point in each year would
increase the APBO as of September 30, 1997 by $849,000 and the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by $165,000.
10. Commitments and Contingencies, Guarantees and Leases
The Company is obligated under certain operating leases for equipment
which expire on various dates through December 1999. The minimum annual
lease payments, under these agreements including renewal options, if
exercised, are $71,583, $4,183 and $0 for the years ending September 30,
1998, 1999, and 2000, respectively. Rental expense for leases was $54,105
and $23,979 for the quarters ended December 31, 1997 and 1996, and $95,917,
$58,573, and $68,870 for the years ended September 30, 1997, 1996 and 1995,
respectively.
39
<PAGE> 45
11. Litigation
Various other claims arising in the ordinary course of business are
pending against Bliss. In the opinion of management, none of the matters
will have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
12. Related Parties
Long-term intercompany receivables reflect transactions between Bliss
and the Company, which consist primarily of cash transfers from Bliss to
the Company. Such intercompany receivable is not expected to be settled
upon the sale of Bliss and therefore this amount is presented as a
reduction to shareholders' equity on the Bliss consolidated balance sheet.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following tables present selected pro forma financial information and
per share financial data of the Company and its consolidated subsidiaries giving
effect to the Sale. See note 1 of Notes to Unaudited Pro Forma Condensed
Financial Statements below. The pro forma consolidated financial statements are
based upon and should be read in conjunction with the consolidated financial
statements and the related notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Form 10-K and
Form 10-Q, the Notes to Unaudited Pro Forma Condensed Financial Statements
presented below, and other financial information of the Company filed with the
Commission from time to time.
40
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
The following unaudited pro forma condensed balance sheet as of December
31, 1997, gives effect to (i) the Sale and (ii) the related pro forma
adjustments described in the Notes below. This balance sheet is presented as
though the transaction had occurred at December 31, 1997.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
FOR THE QUARTER ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA PRO FORMA
DEC. 31, 1997 ADJUSTMENTS RESULTS
------------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 819,321 $ 17,691(2)(3) $ 837,012
Trade accounts receivable, net 7,989,924 -- 7,989,924
Other receivables 709,392 -- 709,392
Inventories 4,261,655 -- 4,261,655
Income tax receivable 3,372,644 -- 3,372,644
Deferred income taxes 8,349,167 5,948,747(2) 2,400,420
Other current assets 195,254 -- 195,254
Net assets held for sale at realizable value 15,317,503 (13,005,503)(2)(3) 2,312,000
------------ ------------ -----------
Total current assets 41,014,860 (18,936,559) 22,078,301
------------ ------------ -----------
Property, plant and equipment, net 5,734,508 -- 5,734,508
------------ -----------
Other assets:
Long-term receivables 917,733 -- 917,733
Cost in excess of net assets of acquired businesses 6,659,047 -- 6,659,047
Other 621,895 -- 621,895
------------ ------------ -----------
Total other assets 8,198,675 -- 8,198,675
------------ ------------ -----------
Total assets $ 54,948,043 $(18,936,559) $36,011,484
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 465,870 $ (465,870)(3) $ --
Trade accounts payable 7,585,880 (2,000,000)(3) 5,585,880
Income taxes payable 674,870 -- 674,870
Accrued expenses and other liabilities 7,186,265 (535,000)(3) 6,651,265
Long-term debt due within one year 23,369,038 (23,369,038)(3) --
------------ ------------ -----------
Total current liabilities 39,281,923 (26,369,908) 12,912,015
------------ ------------ -----------
Long-term liabilities: 2,469,683 (420,148)(2) 2,049,535
------------ ------------ -----------
Stockholders' equity:
Preferred stock, $5 par value: authorized, 300,000 shares;
issued, none -- -- --
Common stock, $1 par value: authorized, 10,000,000 shares;
issued, 5,295,556 5,295,556 -- 5,295,556
Capital in excess of par value 8,094,719 -- 8,094,719
Retained Earnings 2,917,367 7,853,497(2)(3) 10,770,864
Cumulative translation adjustment (1,885,676) -- (1,885,676)
------------ ------------ -----------
14,421,966 7,853,497 22,275,463
Less treasury stock 261,560 shares, at cost 1,225,529 -- 1,225,529
------------ ------------ -----------
Total stockholders' equity 13,196,437 7,853,497 21,049,934
------------ ------------ -----------
Total liabilities and stockholders' equity $ 54,948,043 $(18,936,559) $36,011,484
============ ============ ===========
</TABLE>
41
<PAGE> 47
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
The following unaudited pro forma condensed statements of income for the
fiscal year ended September 30, 1997 and the quarter ended December 31, 1997,
give effect to the related pro forma adjustments described in the notes
following this table. The "as reported" columns of the unaudited pro forma
condensed statements of income exclude Bliss from continuing operations as it
was presented as a discontinued operation at September 30, 1997 and December 31,
1997. The pro forma statements of income are presented as though the Sale had
occurred on October 1, 1997.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 ADJUSTMENTS RESULTS
------------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 49,878,534 $ -- $ 49,878,534
Financing revenue and other 611,716 -- 611,716
------------ ----------- ------------
50,490,250 -- 50,490,250
Operating costs and expenses:
Cost of products sold 36,009,821 -- 36,009,821
Selling, general and administrative
expenses 32,593,485 -- 32,593,485
Interest expense 2,217,781 2,104,871(3)(4) 112,910
Other expenses 432,532 -- 432,532
------------ ----------- ------------
Total expenses 71,253,619 2,104,871 69,148,748
Loss before income taxes (20,763,369) 2,104,871 (18,658,498)
(Benefit) provision for income taxes (7,285,949) 841,948 (6,444,001)
------------ ----------- ------------
Loss from continuing operations $(13,477,420) $ 1,262,923 $(12,214,497)
============ =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 4,956,276 4,956,276 4,956,276
PER SHARE OF COMMON STOCK (BASIC AND
DILUTED):
Loss from continuing operations $ (2.72) $ .25 $ (2.47)
============ =========== ============
</TABLE>
42
<PAGE> 48
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE QUARTER ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA PRO FORMA
DECEMBER 31, 1997 ADJUSTMENTS RESULTS
------------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 8,911,190 $ -- $ 8,911,190
Financing revenue and other 100,325 -- 100,325
------------ ---------- ------------
Total revenues 9,011,515 -- 9,011,515
Operating costs and expenses:
Cost of products sold 6,130,494 -- 6,130,494
Selling, general and administrative
expenses 5,352,758 -- 5,352,758
Interest expense 532,675 504,447(3)(4) 28,228
Other expenses 15,857 -- 15,857
------------ ---------- ------------
Total expenses 12,031,784 504,447 11,527,337
------------ ---------- ------------
Loss before income taxes (3,020,269) 504,447 (2,515,822)
(Benefit) provision for income taxes (915,442) 201,779 (713,663)
------------ ---------- ------------
Loss from continuing operations $ (2,104,827) $ 302,668 $ (1,802,159)
============ ========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,032,105 5,032,105 5,032,105
============ ========== ============
PER SHARE OF COMMON STOCK (BASIC AND
DILUTED):
Loss from continuing operations $ (0.42) $ 0.06 $ (0.36)
============ ========== ============
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In December 1997, a definitive agreement was signed to sell the stock
of Bliss for an amount of $31,250,000 (reflecting an adjustment pursuant to
an amendment dated February 11, 1998), subject to post-closing adjustments.
The sale is expected to close in March 1998, subject to regulatory and
shareholder approval and the satisfaction of other conditions. The "As
Reported" columns on the above balance sheet and statements of income is a
condensed presentation of the consolidated financial statements included in
the Company's respective Form 10-K and Form 10-Q filings. The "As Reported"
columns reflect Bliss as a discontinued operation whereby its statement of
income presentation is included below the loss from continuing operations
(not presented herein) and the balance sheet presentation includes Bliss'
net assets as net assets held for sale at realizable value. The "Pro Forma
Adjustment" column for the statements of income represents the recording of
the transaction as if the sale occurred on the first day of October 1996
and is explained in the following Notes. The "Pro Forma Adjustment" column
for the balance sheet reflects the transaction as if the sale occurred on
December 31, 1997. "Pro Forma Results" represent the financial results for
continuing operations as if the transaction occurred on the dates stated
above.
2. Sale of Bliss
The proceeds from the Sale are expected to be $31,250,000, however,
the purchase agreement contains a mechanism to adjust the final sales price
at Closing based upon the net change in the current assets less current
liabilities. Based on the changes at December 31, 1997, the price would be
$33,739,000, however, the final change will not be known until Closing. It
is difficult to determine what the final purchase price adjustment will be
as many unknown factors can affect the changes in net current assets
between December 31, 1997 and the Closing Date, which is expected to occur
sometime in late March 1998. However, based on the best information
available today, the
43
<PAGE> 49
Company estimates that the final purchase price adjustment should be in the
range of $0 to $1,000,000 higher. The proceeds from the sale will be offset
by the net assets held for sale of $13,005,503 (Net Accounts Receivable
$8,150,168, Net Inventory $7,863,087, Net Property, Plant and Equipment
$5,472,617, Other Assets $292,953 and Goodwill $4,295,100 netted against
Accounts Payable $5,939,513, Miscellaneous Accruals $6,643,920 and Debt
$484,989) resulting in an estimated gain of $7,853,497 (net of estimated
transaction expenses of $1,005,000, certain employee benefit payments of
$1,415,000, and income taxes of $8,710,000). The $8,710,000 of income taxes
was calculated on the gain after transaction and related expenses using
combined federal and state statutory income tax rates of 40% and has been
recorded to reflect the net reduction of deferred income taxes of
$5,528,599 (a $5,948,747 decrease in deferred tax assets from continuing
operations, and a $420,148 decrease in deferred tax liabilities from
continuing operations) and the income tax liability expected to be due as a
result of this transaction ($3,181,401).
3. Use of Proceeds from the Sale of Bliss
The Company expects the proceeds from the Sale to be applied to the
retirement of substantially all of its debt ($23,369,038 current portion of
long-term debt, $465,870 line of credit), certain vendor obligations
($2,000,000 continuing trade accounts payable and $1,000,000 of Bliss
accounts payable not assumed by Buyer and included in net assets held for
sale at realizable value), transaction costs and related expenses
($1,005,000), certain employee benefit payments ($1,950,000 of which
$535,000 was accrued in fiscal 1997), funding for Bliss profit sharing
($750,000 not assumed by Buyer and included in net assets held for sale at
realizable value) and amounts necessary to fund future tax obligations
arising from the gain on the Sale ($3,181,401). The vendor obligation and
employee benefit payments described above include the price adjustment of
$1,500,000 discussed elsewhere in this Proxy Statement. See "THE PURCHASE
AGREEMENT -- The Sale and Purchase of Shares; Purchase Price." The timing
and amount of tax payments ultimately due as a result of this transaction
will depend on the future taxable events of the Company's continuing
operations. The debt retirement results in a fiscal year 1997 reduction in
interest expense of $2,104,871 and a fiscal year quarter 1998 reduction in
interest expense of $504,447.
4. Restructured Debt
Because the Company intends to retire a substantial amount of its debt
outstanding with the proceeds from the Sale, the Company anticipates
putting in place a new credit line during the second quarter of fiscal
1998. The Company's additional debt capacity will be used for future
working capital needs.
Each of the foregoing unaudited pro forma condensed balance sheet and
statements of income should be read in conjunction with the preceding notes
and with the historical consolidated financial statements of the Company
and the notes thereto included in the reports filed by the Company with the
Commission from time to time.
HISTORICAL AND PRO FORMA PER SHARE DATA
See "SELECTED CONSOLIDATED FINANCIAL DATA" and "UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS."
MARKET PRICE DATA
The high/ask, low/bid and closing prices on December 17, 1997, the last
full trading day prior to the public announcement of the proposed Sale, were
$5.44, $5.38 and $5.38 per share, respectively, as reported by Nasdaq.
44
<PAGE> 50
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK OF THE COMPANY
The following table sets forth the names and share ownership as of March 2,
1998 of those persons who, to the knowledge of the Company, are the beneficial
owners of more than 5% of the Company's outstanding Common Stock based upon
information furnished to the Company by such person. Each beneficial owner has
sole power to vote and dispose of the shares indicated, except as otherwise
stated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS AS OF MARCH 2, 1998 OWNERSHIP COMMON STOCK
------------------------------------- ---------- ------------
<S> <C> <C>
Steeplechase Corp. (1) 1,704,750 33.86%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Barry L. Needler 1,869,000(2) 37.06%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Kirk W. Foley 635,016(3) 12.42%
12700 Lake Avenue, #2006
Lakewood, OH 44107
Amherst Tanti U.S. Inc. (4) 520,148 10.33%
12700 Lake Avenue, #2006
Lakewood, Ohio 44107
John S. Meany, Jr. 376,354(5) 7.45%
9200 S. Winchester Ave.
Chicago, Illinois 60620
Dimensional Fund Advisors 325,925 6.47%
1299 Ocean Drive
Santa Monica, CA 90401
</TABLE>
- ---------------
(1) Mr. Needler is the President and Chief Executive Officer of Steeplechase
Corp.
(2) Includes shares owned of record and beneficially by Fairway Inc. (150,750
shares) and Steeplechase Corp. (1,704,750 shares), and beneficially by
Reldeen Ltd. (4,500 shares). Includes 9,000 shares subject to issuance upon
the exercise of stock options exercisable within 60 days of the date hereof.
Mr. Needler controls these corporations and serves as a Director and Chief
Executive Officer of these corporations.
(3) Includes 520,148 shares owned of record by Amherst Tanti U.S. Inc.; 10,300
shares in a retirement fund; and 80,000 shares subject to issuance upon the
exercise of stock options exercisable within 60 days of the date hereof.
(4) Amherst Tanti U.S. Inc. is owned by Mr. Foley and his wife. Mr. Foley serves
as President of this corporation.
(5) Includes 20,250 shares subject to issuance upon the exercise of stock
options exercisable within 60 days hereof. Also includes 9,000 shares owned
by members of Mr. Meany's immediate family, beneficial ownership of which is
disclaimed.
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth, as of March 2, 1998, information concerning
the number of shares of Common Stock beneficially owned by each nominee
individually, each named executive officer, and by all executive officers and
directors as a group. The totals shown below for each person and for the group
include shares held personally, shares held by immediate family members, and
shares acquirable within sixty days of the date hereof by the exercise of stock
options.
45
<PAGE> 51
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
DIRECT EXERCISABLE
NAME OF BENEFICIAL OWNER OWNERSHIP OPTIONS(2) TOTAL PERCENT(3)
- ------------------------ --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Robert J. Abrahams 28,175 20,250 48,425 *
Donald L. Baker 143,536(4) 20,250 163,786 3.24%
Kevin Dow (5) 17,075 0 17,075 *
Moffat Dunlap 0 20,250 20,250 *
Chuck Ellens 16,350(6) 0 16,350 *
Kirk W. Foley 555,016(7) 80,000 635,016 12.42%
Mark A. Kirk 32,500 75,000 107,500 2.10%
James R. Malone 12,500 76,500 89,000 1.74%
Grace McCarthy 1,100(8) 20,250 21,350 *
John S. Meany, Jr. 356,104(9) 20,250 376,354 7.45%
Barry L. Needler (5) 1,860,000(10) 9,000 1,869,000 37.06%
Frank M. Rasmussen 0 11,250 11,250 *
Ivan Winfield 2,800 104,500 107,300 2.09%
Carl H. Young, III 32,500 75,000 107,500 2.10%
All Executive Officers and Directors as a
Group 3,057,656 532,500 3,590,156 64.50%
</TABLE>
- ---------------
(1) Each person has sole voting and investment power with respect to all shares
shown except as indicated below.
(2) Represents shares subject to stock options that are currently exercisable
or become exercisable within 60 days hereof.
(3) Unless otherwise indicated, the percentage of Common Stock owned is less
than one percent of the Common Stock outstanding.
(4) Includes 138,136 shares owned by Mr. Baker's wife, beneficial ownership of
which is disclaimed. Mr. Baker owns 2,700 shares jointly with his wife.
(5) Mr. Dow and Mr. Needler are first cousins.
(6) Includes 10,350 shares owned jointly with his spouse.
(7) Includes 520,148 shares owned by Amherst Tanti U.S. Inc. and 10,300 shares
in a retirement fund.
(8) These shares are owned by her spouse. Mrs. McCarthy disclaims beneficial
ownership of these shares.
(9) Includes 9,000 shares owned by members of his immediate family, beneficial
ownership of which is disclaimed.
(10) Shares are owned of record and beneficially by Fairway Inc. (150,750
shares) and Steeplechase Corp. (1,704,750 shares), and beneficially by
Reldeen Ltd. (4,500 shares). These corporations are controlled by Mr.
Needler.
COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
The Company's Board held four regularly scheduled and eight special
meetings during 1997. The Board has a standing Audit Committee, Compensation
Committee, Executive Committee and Finance Committee. During 1997, each director
attended at least 75% of the meetings of the Board and those committees on which
the director served.
BOARD COMMITTEES
The Audit Committee is composed of Robert J. Abrahams, Donald L. Baker
(Chairman), Grace McCarthy and Ivan Winfield. The function of the Audit
Committee is to recommend to the Board the engagement of the independent
auditors; to review with the independent auditors the plan and scope of the
audit; to review the audit report with the independent auditors; to review the
financial statements and the scope and results of the independent auditors'
examinations and report such matters to the Board; and to perform such other
duties as may be required by the Board. The Audit Committee held one meeting in
1997.
The Compensation Committee is composed of Messrs. Abrahams (Chairman),
Baker and Needler. The Compensation Committee considers matters relating to the
compensation of senior officers of the Company and subsidiaries, the employee
benefit plans of the Company, including the 1992 Omnibus Long-Term Compensation
Plan, and such other matters as may be referred to it by the Board. The
Compensation Committee held two meetings in 1997.
46
<PAGE> 52
The Executive Committee is composed of Messrs. Abrahams, Malone (Chairman)
and Needler. The Executive Committee is authorized to exercise, between meetings
of the Board, the powers of the Board in the management of business and affairs
of the Company, except for those powers reserved by law or resolution to the
Board. The Executive Committee also considers such other matters as may be
referred to it by the Board. The Executive Committee did not meet in 1997.
The Finance Committee is composed of Messrs. Malone, Needler and Winfield
(Chairman). The Finance Committee was established to oversee the Company's
financial reporting and to periodically review the Company's financial structure
with a view to enhancing shareholder value. The Finance Committee did not meet
in 1997.
COMPENSATION
A director who is an employee of the Company or a subsidiary is not
separately compensated for service as a director. Other directors receive a
retainer of $10,000 per year, payable quarterly, and $600 per meeting for each
committee meeting attended which is held on a day other than a day on which
there is a Board of Directors meeting.
Pursuant to the Company's Omnibus Plan, on the first business day of each
calendar year each non-employee director automatically receives an option to
purchase 6,000 shares of Common Stock of the Company (as adjusted for stock
splits).
CONSULTING AGREEMENTS
Several members of the Board have entered into consulting contracts with
the Company relating to various matters within their fields of expertise.
Information regarding these contracts follows.
In 1990, the Company entered into a consulting agreement with Mr. Abrahams,
a director of the Company, for consulting services relating to retail financing
programs for distributors of the Company's Consumer Goods Division. In 1991,
this agreement was amended to include services to Health-Mor Acceptance
Corporation and HMI Acceptance Corporation, subsidiaries of the Company. Mr.
Abrahams is paid a total of $50,000 per year, plus expenses, for such services.
The consulting agreements with Mr. Abrahams are for one year periods and are
anticipated to be renewed. A total of $50,000 was paid in fiscal 1997 under this
agreement.
The Company pays a management fee in the amount of $25,000 per quarter to
Fairway Inc. for the consulting services of Mr. Needler relating to various
matters requested by the Company. Mr. Needler, a director of the Company, owns a
majority of the outstanding shares of Fairway Inc. and is President of that
company. A total of $50,000 was paid to Fairway Inc. in 1997.
In 1996, the Company entered into a consulting agreement with Mr. Winfield,
a director of the Company, for services relating to issues involving the capital
structure of the Company, proposed acquisitions and divestitures, oversight of
the Company's capital structure, cash flow, debt management, long term corporate
planning and such other matters as may be required by the Chief Executive
Officer. Mr. Winfield was paid $12,500 per month for his services from October
1996 through March 1997, and $6,250 per month from April through September 1997.
A total of $112,500 was paid to Mr. Winfield in 1997 under this consulting
agreement. This agreement was terminated at the end of November 1997.
In 1995, the Company entered into an agreement with Mr. Meany, a director
of the Company, to act as Administrator of the Company's profit sharing plan.
Also in 1995, the Company entered into an agreement with Mr. Meany to act as
corporate Secretary of the Company and to oversee the functions of the corporate
Secretary's office. Mr. Meany received $2,700 per month under these agreements
from October 1996 through June 1997. Effective July 1997, the amount was raised
to $4,167 per month. In 1997, the Company paid Mr. Meany a total of $38,300
under these agreements.
47
<PAGE> 53
EXECUTIVE COMPENSATION
INTRODUCTION
The following table sets forth the respective amounts of compensation for
the individuals who served as the Chief Executive Officer in 1997, and the four
most highly compensated executive officers of the Company other than the Chief
Executive Officer for each of the years 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION(5)
---------------------------------- ---------------------------------
AWARDS
OTHER ANNUAL RESTRICTED STOCK PHANTOM ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK($) OPTIONS STOCK COMPENSATION
PRINCIPAL POSITION YEAR (1) (2) ($)(3) (4) (#)(6) ($)(7) (8)
------------------ ---- ------ ----- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Malone (9) 1997 $277,642 $ 0 $ 0 $ 75,000 76,500 $ 0 $ 0
Chairman and Chief 1996 -- -- -- -- -- -- --
Executive Officer 1995 -- -- -- -- -- -- --
since May 1997
Kirk W. Foley (10) 1997 $451,667 $ 0 $127,200 $ 0 20,000 $ 0 $ 3,956(11)
President & Chief 1996 $449,802 $ 0 $182,613 $ 0 20,000 $ 0 $ 5,549(11)
Executive Officer to 1995 $368,316 $382,121 $ 96,155 $ 0 40,000 $1,734,375 $ 4,790(11)
May 1997
Chuck Ellens (12) 1997 $324,066 $ 0 -- $ 0 0 $ 0 $ 0
Vice President, Sales and 1996 $344,878 $ 0 -- $ 0 0 $ 0 $ 685
Marketing 1995 $499,305 $ 0 -- $ 0 0 $ 0 $ 775
Mark A. Kirk (13) 1997 $204,333 $ 0 -- $200,000 75,000 $ 0 $108,040(14)
President, Chief Operating 1996 -- -- -- -- -- -- --
Officer & Chief Financial 1995 -- -- -- -- -- -- --
Officer
Carl H. Young, III (15) 1997 $204,333 $ 0 -- $200,000 75,000 $ 0 $ 0
Executive Vice President 1996 -- -- -- -- -- -- --
and General Counsel 1995 -- -- -- -- -- -- --
Kevin Dow 1997 $130,400 $ 0 -- $ 0 0 $ 0 $ 0
Vice President, Corporate 1996 $130,400 $ 0 -- $ 0 0 $ 0 $ 685
Services & Assistant 1995 $126,300 $ 71,875 -- $ 0 0 $ 0 $ 775
Treasurer
</TABLE>
- ---------------
(1) Salary amounts include automobile allowance and automobile insurance.
Amount for Mr. Foley also includes $38,317 paid in 1997, $27,250 paid in
1996 and $10,500 paid in 1995 as an allowance for living expenses pursuant
to his employment agreement with the Company. Amounts for Messrs. Kirk and
Young include an employment bonus of $65,000 each.
(2) Amounts paid in the fiscal year pursuant to the Company's incentive bonus
plans. Incentive bonuses are calculated on a calendar year basis.
(3) Mr. Foley is the only named executive officer who received perquisites or
other benefits required to be disclosed under applicable regulations. The
amounts identified consist of repayments of interest and principal made by
the Company on behalf of Mr. Foley in accordance with his employment
agreement for loans taken out by Mr. Foley. See "-- Compensation of the
Chief Executive Officer" for more information.
(4) Reflects the fair market value of grants of restricted stock on the dates
of grant. Messrs. Kirk and Young each received an award of 20,000 shares of
restricted stock which vested on February 1, 1998. Messrs. Malone, Kirk and
Young each received an award of 25,000 shares of restricted stock which
vested in equal amounts of 12,500 shares on October 1, 1997 and January 1,
1998. Subsequently, Messrs. Malone, Kirk and Young each surrendered to the
Company the 12,500 shares of stock vesting on October 1, 1997. The value of
these shares was not included in the value of the restricted stock awards
in the table above. The value of the shares, which were still restricted at
September 30, 1997, including the shares subsequently surrendered, was
$603,750. No dividends have been paid on the shares awarded in the above
table because no dividends have been declared by the Company since those
shares were awarded.
(5) Reflects the number of shares of Common Stock of the Company covered by
stock options granted during the year, and the fair market value on the
date of grant of phantom stock and restricted stock. No stock appreciation
rights ("SAR"), either in conjunction with or separate from stock options,
were granted to the named executives during the years shown.
48
<PAGE> 54
(6) The Company maintains plans under which stock options may be awarded. The
Company does not, however, make "long term compensation awards" as that
term is used in applicable Commission rules, because the amount of Company
incentive awards is not measured by performance of the Company over longer
than a one-year period.
(7) Phantom shares were deemed issued October 4, 1994 when Mr. Foley signed his
employment agreement with the Company. This agreement provides that the
shares vest in installments in 1995, 1996 and 1997, with the final
installment vesting on January 1, 1999. See "Compensation of the Chief
Executive Officer" regarding the surrender of a portion of the phantom
shares vesting in 1996.
(8) Except as otherwise noted, reflects contributions made by the Company under
defined contribution plans maintained by the Company.
(9) Mr. Malone was elected as Chairman of the Company in December 1996 and
Chief Executive Officer in May 1997.
(10) The amount shown as salary for 1995 and 1996 represents compensation paid
to Mr. Foley as President of HMI Inc. and as Chairman and Chief Executive
Officer of the Company. The amount shown as salary for 1997 includes
amounts paid through September 30, 1997.
(11) Premiums on life insurance paid pursuant to Mr. Foley's employment
agreement. For a description of additional compensation received by Mr.
Foley in connection with his termination of employment, see also "Related
Transactions" in this Proxy Statement.
(12) Mr. Ellens was elected an executive officer of the Company in 1996.
(13) Mr. Kirk was elected Vice President-Finance and Chief Financial Officer in
February 1997 and President and Chief Operating Officer in May 1997.
(14) Represents a relocation allowance for Mr. Kirk's relocation to Cleveland,
Ohio.
(15) Mr. Young was elected Executive Vice President and General Counsel in May
1997 and previously served as Vice President-Administration and General
Counsel from February 1997 to May 1997.
1992 OMNIBUS LONG-TERM COMPENSATION PLAN
In 1992, the Stockholders of the Company adopted the Omnibus Long-Term
Compensation Plan (the "Plan"). The purpose of the Plan is to advance the
long-term interests of the Company by motivating executive personnel by means of
long-term stock based or derivative compensation, to align the interests of
participants with those of the Stockholders, and to permit the Company to
attract and retain directors and executive personnel.
The Plan provides for the grant of the following types of awards: stock
options, including incentive stock options; SARs, in tandem with stock options
or freestanding; common stock awards; phantom stock; restricted stock; and
performance shares. Awards are determined by the Compensation Committee.
The following table sets forth certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table during
fiscal 1997.
Option Grants in 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM
OPTIONS GRANTED TO EXERCISE EXPIRATION -----------------------
NAME GRANTED EMPLOYEES PRICE(1) DATE 5%($) 10%($)
---- ---------- ------------- -------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James R. Malone 6,000 2% $5.50 January 2, 2002 $ 9,117 $ 20,147
James R. Malone 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
Kirk W. Foley 20,000 6% $6.05 January 2, 2007 $ 58,178 $164,312
Mark A. Kirk 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
Carl H. Young, III 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
</TABLE>
- ---------------
(1) Stock options issued to Mr. Foley were granted pursuant to his Employment
Agreement with the Company and have an exercise price equal to 110% of fair
market value on the date of grant, which is the first business day of the
year. The closing price on Nasdaq on January 2, 1997 was $5.50. The stock
options issued to Mr. Malone on January 2, 1997 were valued at the closing
price on the date of grant. The stock options issued to Messrs. Malone, Kirk
and Young on July 2, 1997, were valued at
49
<PAGE> 55
the average between the high and the low sale price for the ten trading days
preceding the date of grant. The closing price on Nasdaq on July 2, 1997,
the date of grant, was $6.00.
The following table sets forth information regarding stock options held at
the end of the fiscal year by the named executive officers. There were no stock
option exercises in 1997 by any named executive officer.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT SEPTEMBER 30, 1997(1) SEPTEMBER 30, 1997(2)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Malone 57,395 23,605 $0 $0
Kirk W. Foley 80,000 0 $0 $0
Kevin Dow 0 0 $0 $0
Chuck Ellens 0 0 $0 $0
Mark A. Kirk 57,395 17,605 $0 $0
Carl H. Young, III 57,395 17,605 $0 $0
</TABLE>
- ---------------
(1) There were no SARs outstanding at September 30, 1997 and none granted during
the fiscal year.
(2) The "value of unexercised in-the-money options at September 30, 1997" was
calculated by determining the difference between the fair market value of
the underlying shares of Common Stock at September 30, 1997 ($5.25 per
share) and the exercise price of the option. An option is "in-the-money"
when the fair market value of the underlying shares of Common Stock exceeds
the exercise price of the option. None of the options held by the named
executive officers was "in the money" on September 30, 1997.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board is responsible for recommending to
the Board the compensation of executive officers and key employees of the
Company and its subsidiaries. The Compensation Committee consists of Messrs.
Abrahams, Baker and Needler.
The Compensation Committee annually reviews compensation of the Chief
Executive Officer, other executive officers and key employees of the Company and
its subsidiaries. The Compensation Committee meets periodically during the year
to monitor performance and fix awards based on performance standards and to
review compensation decisions. The Committee's policy in evaluating and
compensating executive officers and key employees is to consider the performance
of the Company as a whole, the performance of the business unit for which the
individual has responsibility and the individual's contribution toward the
Company's attainment of established Company and individual goals. Factors
considered in evaluating performance are both subjective (such as the
individual's performance and development) and objective (such as the attainment
of specified financial goals).
The composition of compensation varies broadly among executive officers and
key employees of the Company based on their responsibilities and the business
unit to which they are assigned. Generally, base salary is targeted at
competitive rates believed by the Committee members to be necessary in their
experience to retain qualified personnel. The Company maintains an incentive
bonus plan under which participating employees may be eligible for a bonus if
the pretax profits of the Company for the year exceed a specified target which
is established annually by the Compensation Committee. Beginning in 1995, the
target was changed from an after-tax to a pretax amount in order to put more
emphasis on meeting operating goals, and to remove from consideration those
factors over which the Company has no control, such as tax rates. The maximum
bonus payable to an individual is a percentage of base salary ranging from 25%
to 150% of base salary. Bonuses are based on varying performance criteria,
including the Company's pretax profits, return on assets, divisional net
contribution, cost containment programs and departmental gross margins. Specific
incentive performance criteria for each participating individual are determined
by the Committee at the beginning of the year based upon the individual's
duties. The targets for 1995, 1996 and 1997 were not met, and no bonuses were
awarded for those years
50
<PAGE> 56
under this plan. Key employees of subsidiaries who do not participate in the
incentive bonus plan have bonus or incentive arrangements based on criteria
deemed by the Compensation Committee to be effective in aligning the financial
interest of the employee with those of Company's stockholders. Among the
criteria that are utilized in incentive compensation of key employees of
subsidiaries include percentage of profits or net income, commissions based on
sales, net profit contribution, and balance sheet measures such as inventory and
account receivable turnover and working capital improvements. From time to time,
the Company engages outside compensation consultants to provide information and
advice about competitive levels of compensation and particular compensation
techniques.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Foley's compensation was paid pursuant to his employment agreement with
the Company, which was approved by stockholders at the 1995 annual meeting. In
the 1997 fiscal year, Mr. Foley was paid total salary of $396,850. No bonus
relating to the 1997 calendar year was earned.
Mr. Foley's employment agreement also provided that he receive options to
purchase 20,000 shares of Common Stock on the first business day of each year
through 1998. The option price is equal to 110% of the fair market value on the
date of grant, and the options are immediately exercisable. The period of
exercisability will be determined by the Compensation Committee and may last for
up to ten years. Mr. Foley's contract also provided that he receive 125,000
shares of phantom stock. The phantom stock was to vest in increments of 21,857
shares on each of June 30, 1995, January 1 and June 30, 1996, and January 1 and
June 30, 1997, with the final 37,571 shares vesting on January 1, 1999.
Dividends that would have been paid had the phantom shares been issued will be
used to "purchase" additional phantom shares, which will vest on the same
schedule as the other phantom shares. Mr. Foley deferred the vesting of one half
of the phantom shares and accrued dividends scheduled to vest on January 1, 1996
for three years. In 1996, his employment agreement was amended so that the
phantom shares that were scheduled to vest on January 1, 1996 and were deferred
and the phantom shares scheduled to vest on June 30, 1996 were surrendered in
exchange for cash payments of $150,000 on June 30, 1997 and June 30, 1998. In
addition, Mr. Foley would be entitled to receive an award of shares in the
Company in the event of an increase in the price of the Common Stock between
June 30, 1996 and June 30, 1998. The increase in share price will be multiplied
by the number of phantom shares surrendered, and the result will be divided by
the share price on June 30, 1998 to determine the number of shares to be
awarded.
Mr. Foley's employment agreement also provided that the Company would
guarantee a loan to him and to pay interest on the loan. The unpaid principal on
the loan at September 30, 1997 was $486,750.
Mr. Foley's employment with the Company was terminated by the Board on May
13, 1997. See "RELATED TRANSACTIONS" for information regarding the settlement
entered into by the Company with Mr. Foley in connection with the termination of
his employment.
Mr. Malone, who became Chief Executive Officer on May 13, 1997, is paid a
base salary of $325,000 per year and participates in the incentive bonus plan.
Mr. Malone also receives other benefits available generally to all executives.
STAY BONUS AGREEMENTS
As described elsewhere in this Proxy Statement, the Company entered into
separate agreements in October 1997 with certain key executives and individuals
that provide for the payment of bonuses contingent upon the consummation of the
Sale. See "PROPOSED SALE OF BLISS -- Interest of Certain Persons in the
Sale -- Stay Bonus and Change of Control Agreements."
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Messrs. Malone, Kirk and Young each have employment agreements which state
that they are to receive one year's salary in the event of termination of
employment without cause. Certain executives of the Company, including Messrs.
Malone, Kirk and Young, also have agreements which provide that in
51
<PAGE> 57
the event of termination of employment without cause (other than for death or
disability, or voluntary termination by the employee) in the twelve months
following a change in control (as defined in the agreement), the executives are
to receive compensation equal to a certain number of months of salary. In the
case of Messrs. Malone, Kirk and Young, this compensation is equal to two years'
base salary. See "PROPOSED SALE OF BLISS -- Interest of Certain Persons in the
Sale -- Stay Bonus and Change of Control Payments."
For the Compensation Committee
Robert J. Abrahams
Donald L. Baker
Barry L. Needler
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Abrahams, Chairman of the Compensation Committee, provides consulting
services to the Company and its finance company subsidiaries (Health-Mor
Acceptance Corporation, HMI Acceptance Corporation and Health-Mor Acceptance PTY
Ltd.) and serves as President of these subsidiaries. He received $50,000 for
these services in fiscal 1997. Fairway Inc., a company controlled by Mr.
Needler, provides management consulting services to the Company and received
$50,000 in 1997. Mr. Needler is Vice Chairman of the Company and is a member of
the Compensation Committee.
PERFORMANCE COMPARISONS
The following chart compares the cumulative shareholder return of the
Company for the five years ended September 30, 1997 to the Nasdaq Composite
Index and a Company-determined peer group. The Company's Common Stock trades on
Nasdaq. The chart assumes the investment of $100 on September 30, 1992 and the
immediate reinvestment of all dividends. The ten companies making up the peer
group are in industries believed to be comparable to the Company's lines of
business in 1997 and the peer group, in the aggregate, is believed to
approximate the Company's mix of consumer and industrial business in 1997.
52
<PAGE> 58
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG THE
COMPANY, PEER GROUP INDEX AND NASDAQ COMPOSITE INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ
(FISCAL YEAR COVERED) COMPANY PEER GROUP COMPOSITE INDEX
<S> <C> <C> <C>
1992 100 100 100
1993 227.43 142.79 130.05
1994 236.1 159.96 137.62
1995 252.65 160.07 167.1
1996 125.28 197.17 195.08
1997 97.44 235.62 265.16
</TABLE>
The Company business in 1997 consisted of two segments: a Consumer Goods
segment and a Manufactured Products segment. The peer companies include
companies believed to be in similar lines of business as the Company. The
companies in the peer group are: Amcast Industrial Corporation, Black and Decker
Corporation, Material Sciences Corporation, National Presto Industries Inc.,
Rival Co., SPS Technologies Inc., Steel Technologies Inc., Sunbeam Corporation,
Toastmaster Inc. and Worthington Industries Inc. Some of the Company's direct
competitors are divisions of larger corporations, privately held corporations or
foreign corporations and are not included in the peer comparisons since the
pertinent information is not available to the public.
RELATED TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its Chief Executive
Officer, that it was terminating his employment which triggered certain
obligations as per Mr. Foley's employment contract, including an $800,000
severance payment, an assumption of a $518,000 personal bank loan made to Mr.
Foley, other compensation obligations of approximately $79,000 and an obligation
to purchase Mr. Foley's Company stock at current market value (approximately
$325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube Fab Ltd, a Canadian
subsidiary of the Company ("Tube Fab Ltd.") headquartered in Mississauga,
Ontario, Canada, that an independent appraiser valued at $1,512,000. The
Tube-Fab Ltd. stock had been carried on the Company's books at a value of
$2,157,500 and was accordingly written down to its appraised value.
53
<PAGE> 59
The settlement transaction with Mr. Foley closed on January 8, 1998. It
entailed a transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr. Foley's
payment of $303,000 to the Company; cancellation of the Company's $800,000
severance obligation; an assumption of the $486,750 ($518,000 less a $31,250
principal payment made in June 1997) bank loan; cancellation of Mr. Foley's put
right with respect to his Company stock; and the assumption by Mr. Foley of an
operating lease of Canadian facilities currently leased by the Company, which
has a remaining lease obligation of approximately $1,050,000 over 8 1/2 years.
Mr. Foley's employment contract also required the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award was reduced in the settlement transaction to a
payment of $150,000. The settlement also required the Company to continue Mr.
Foley's salary and benefits from the time of the termination advice through
December 15, 1997 (approximately $320,000).
As part of the negotiations to settle the obligations under Mr. Kirk
Foley's employment agreement and to avoid litigation regarding disputes as to
the amount of these obligations, certain related party receivables aggregating
$743,000 were forgiven and accordingly written off in the third and fourth
quarters of fiscal 1997. These receivables consisted of $292,200 advanced by the
Company in 1989 to three companies which were controlled by two directors of the
Company (Mr. Foley and Mr. Needler), $334,100 loaned by the Company in 1997 to
Amherst Tanti U.S. Inc., a corporation owned by an officer of the Company (Mr.
Foley), and $116,700 relating to other employee receivables.
The Company has also entered into consulting contracts with Fairway Inc.,
Mr. Abrahams, Mr. Winfield and Mr. Meany. For further details on such consulting
contracts, see "COMMITTEES AND COMPENSATION OF THE BOARD OF
DIRECTORS -- Consulting Agreements."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's officers, directors and owners of more than 10% of the Company's
common stock file reports of ownership and changes in ownership of the Company's
securities with the Commission and Nasdaq and to furnish the Company with a copy
of all such reports they file.
Based solely on a review of the copies of such forms the Company has
received, the Company believes that all of its executive officers and directors
complied with all filing requirements applicable to them with respect to
transactions during the fiscal year ended September 30, 1997, except for the
following. Mr. Foley, an executive officer and director, failed to file a Form 4
for January 1997 reporting the vesting of 24,390 shares of phantom stock and the
grant of an employee stock option to purchase 20,000 shares of common stock.
Michael Harper and Robert M. Benedict, Jr., each an executive officer of the
Company, were each late in filing Form 5 relating to the grant of employee stock
options to purchase 15,000 shares of common stock.
PROPOSALS OF STOCKHOLDERS
Proposals which stockholders intend to present at the 1999 annual meeting
of stockholders must be received by the Secretary of the Company at its
executive offices at 3631 Perkins Avenue, Cleveland, Ohio 44114 no later than
November 14, 1998.
OTHER MATTERS; SOLICITATION OF PROXIES
As of the time of this Proxy Statement, the Board knows of no matters other
than those described herein. However, if any other matter properly comes before
the meeting or any adjournment thereof, the person or persons voting the proxies
will vote them in accordance with their best judgment.
54
<PAGE> 60
Costs of solicitation will be borne by the Company. Solicitation will be by
mail, except for any incidental personal solicitation made by directors,
officers and regular employees of the Company.
By Order of the Board of Directors
/s/ JOHN S. MEANY, JR.
John S. Meany, Jr
Secretary
March 13, 1998
Cleveland, Ohio
55
<PAGE> 61
ANNEX A--
COMPOSITE CONFORMED COPY
================================================================================
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
HMI INDUSTRIES INC.
AND
RHONE CAPITAL LLC
------------------------------------
DATED
DECEMBER 17, 1997
================================================================================
* This Composite Conformed Copy reflects an amendment entered into as of
February 11, 1998.
<PAGE> 62
STOCK PURCHASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I PURCHASE AND SALE OF SHARES
1.1 Sale and Purchase of Shares................................. 1
1.2 Purchase Price.............................................. 1
1.3 Closing..................................................... 2
ARTICLE II POST-CLOSING ADJUSTMENTS
2.1 Adjustment of Purchase Price................................ 2
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER
3.1 Organization, Standing and Authority of Seller.............. 4
3.2 Authorization............................................... 4
3.3 No Violations, No Conflict.................................. 4
3.4 Consents.................................................... 4
3.5 Certificate of Incorporation, By-Laws and Regulations....... 5
3.6 Outstanding Shares.......................................... 5
3.7 Ownership of Shares......................................... 5
3.8 Authorized Shares........................................... 5
3.9 Financial Statements........................................ 5
3.10 Title to Assets............................................. 5
3.11 Intellectual Property....................................... 6
3.12 Real Property............................................... 6
3.13 Contracts................................................... 6
3.14 Accounts Receivable......................................... 7
3.15 Inventory................................................... 7
3.16 Litigation and Compliance with Laws......................... 7
3.17 Defaults and Permits........................................ 8
3.18 Insurance................................................... 8
3.19 Environmental Matters....................................... 8
3.20 Employee Benefit Plans...................................... 9
3.21 Employee Matters............................................ 10
3.22 Taxes and Returns........................................... 10
3.23 Absence of Material Changes................................. 10
3.24 Broker's Commission or Finder's Fees........................ 11
3.25 Vendors and Customers....................................... 11
3.26 Accounts Payable............................................ 11
3.27 Affiliate Transactions...................................... 11
3.28 Knowledge................................................... 12
3.29 Disclosure.................................................. 12
3.30 Information in Proxy Statement.............................. 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 Organization, Standing and Authority of Buyer............... 13
4.2 Authorization............................................... 13
4.3 No Conflict, No Violation................................... 13
4.4 Consents.................................................... 13
4.5 Litigation.................................................. 13
4.6 Investment Intent........................................... 14
4.7 Financing................................................... 14
4.8 No Dealing with Affiliates.................................. 14
</TABLE>
i
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
4.9 Broker's Commission or Finder's Fees........................ 14
4.10 Information in Proxy Statement.............................. 14
ARTICLE V ADDITIONAL AGREEMENTS OF THE PARTIES
5.1 Ordinary Course............................................. 14
5.2 Access and Confidentiality.................................. 15
5.3 Preservation of and Access to Records....................... 15
5.4 Regulatory and Other Authorizations......................... 16
5.5 Further Assurances.......................................... 16
5.6 Agreements with Respect to Insurance........................ 16
5.7 Employee and Employee Benefit Matters....................... 16
5.8 Accounts Receivable and Inventory........................... 17
5.9 Other Offers................................................ 17
5.10 Restrictive Covenants....................................... 18
5.11 Shareholder Approval; Proxy Statement....................... 18
5.12 Proposed Liquidation, Distribution, Etc. ................... 18
5.13 Payment to Profit Sharing Plan.............................. 18
5.14 Supplements to Schedules.................................... 18
ARTICLE VI CONDITIONS TO CLOSING
6.1 Seller's Conditions to Close................................ 18
6.2 Buyer's Conditions to Close................................. 19
ARTICLE VII THE CLOSING
7.1 Seller's Deliveries......................................... 20
7.2 Buyer's Deliveries.......................................... 20
ARTICLE VIII INDEMNIFICATION
8.1 Indemnification by Buyer.................................... 21
8.2 Indemnification by Seller................................... 21
8.3 Limitation on Indemnity..................................... 22
8.4 Indemnification Procedures.................................. 22
8.5 Environmental Matters....................................... 23
ARTICLE IX TAXES
9.1 Apportionment and Indemnification........................... 25
9.2 Filing of Tax Returns....................................... 25
9.3 Section 338(h)(10) Election................................. 26
ARTICLE X TERMINATION
10.1 Termination................................................. 26
10.2 Effect of Termination....................................... 26
ARTICLE XI MISCELLANEOUS
11.1 Expenses.................................................... 27
11.2 Public Disclosure........................................... 27
11.3 Survival.................................................... 27
11.4 Governing Law............................................... 27
11.5 Notices..................................................... 27
11.6 Assignment.................................................. 28
11.7 Section Headings............................................ 28
</TABLE>
ii
<PAGE> 64
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
11.8 Counterparts................................................ 28
11.9 Amendment................................................... 28
11.10 Waiver...................................................... 28
11.11 Miscellaneous............................................... 28
</TABLE>
SCHEDULES
EXHIBIT A -- Escrow Agreement
ANNEX A -- Form of Opinion of Counsel to Seller
ANNEX B -- Form of Opinion of Counsel to Buyer
iii
<PAGE> 65
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of December 17,
1997 and amended as of February 11, 1998, by and between HMI Industries Inc., a
Delaware corporation ("Seller"), and Rhone Capital LLC, a Delaware limited
liability company (and together with its assigns, collectively, "Buyer").
Seller owns all of the issued and outstanding shares of common stock (the
"Shares") of Bliss Manufacturing Company, an Ohio corporation (the "Company").
Subject to the terms and conditions stated herein, Seller wishes to sell and
Buyer wishes to purchase from Seller all of the Shares of the Company owned by
Seller which constitute 100% of the issued and outstanding shares of the capital
stock of the Company. The term "Business" shall mean the business and operations
conducted by the Company and Newton Falls Holding Company, a Delaware
corporation ("Sub").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 SALE AND PURCHASE OF SHARES. On the terms and subject to the
conditions herein expressed and based on the representations, warranties,
covenants and agreements contained herein, Seller agrees to sell, assign,
transfer and convey to Buyer, and Buyer agrees to purchase, acquire and accept
from Seller at the Closing, as that term is hereinafter defined, all of Seller's
right, title and interest in and to the Shares.
1.2 PURCHASE PRICE. (a) In consideration for the sale and transfer of the
Shares described in Section 1.1 above, at the Closing, Buyer shall deliver (i)
to Seller an amount equal to $30,250,000 by wire transfer of immediately
available funds to Seller's account at Star Bank, N.A. and (ii) to The Chase
Manhattan Bank or such other escrow agent reasonably agreeable to the parties
(the "Escrow Agent"), under an Escrow Agreement substantially in the form
attached hereto as Exhibit A (the "Escrow Agreement"), $1,000,000 (the "Escrow")
by wire transfer of immediately available funds to an interest bearing account
specified by the Escrow Agent (the amounts described in clauses (i) and (ii)
being referred to as the "Purchase Price"). Seller shall pay and distribute from
the portion of the Purchase Price that is delivered by Buyer to Seller at the
Closing the following closing payments: (x) $1,000,000 shall be paid to Liberty
Steel in accordance with the letter agreement between Seller and Liberty Steel
referred to in Schedule 5.1 and (y) $500,000 shall be paid to the Company to
fund future employee benefits (the "Closing Payments"). The Purchase Price shall
be subject to post-closing adjustments in accordance with the procedures set
forth in Article II hereof.
(b) If Buyer delivers to Seller the Acceptance Notice referred to in
Section 2.1(d) or fails to deliver an Objection Notice (as defined below) within
the forty-five (45) day period required by Section 2.1(d), then, as soon as
practicable (but not more than two (2) business days) after final determination
of the Final Net Current Assets (as defined below), (i) in the event the Final
Net Current Assets are less than the Reference Net Current Assets (as defined
below), Seller and Buyer shall provide joint written instructions to the Escrow
Agent directing the Escrow Agent to remit to Buyer, the amount by which the
Reference Net Current Assets exceeds the Final Net Current Assets (provided
that, to the extent that such amount would reduce the Escrow to less than
$500,000, only an amount that would reduce the Escrow to $500,000 shall be paid
to Buyer out of the Escrow and Seller shall remit to Buyer the balance of such
amount owed to Buyer pursuant to this clause (i)), or (ii) in the event the
Final Net Current Assets exceed the Reference Net Current Assets, Buyer shall
remit to Seller the amount by which the Final Net Current Assets is greater than
the Reference Net Current Assets. Alternatively, if Buyer delivers to Seller the
Objection Notice referred to in Section 2.1(d), within two (2) business days
after such delivery, (y) Seller and Buyer shall provide joint written
instructions to the Escrow Agent directing the Escrow Agent to remit to Buyer
the amount, if any, by which the undisputed portion of the Final Net
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<PAGE> 66
Current Assets is less than the Reference Net Current Assets (provided that, to
the extent that such amount would reduce the Escrow to less than $500,000, only
an amount that would reduce the Escrow to $500,000 shall be paid to Buyer out of
the Escrow and Seller shall remit to Buyer the balance of such amount owed to
Buyer pursuant to this clause (y)), or (z) Buyer shall remit to Seller the
amount, if any, by which the undisputed portion of the Final Net Current Assets
is greater than the Reference Net Current Assets. Within two (2) business days
after the resolution of any dispute by the parties or the Unrelated Accounting
Firm (as defined below) relating to the Objection Notice, Seller and Buyer shall
provide joint written instructions to the Escrow Agent directing the Escrow
Agent to remit to Buyer (provided that, to the extent that such amount would
reduce the Escrow to less than $500,000, only an amount that would reduce the
Escrow to $500,000 shall be paid to Buyer out of the Escrow and Seller shall
remit to Buyer the balance of such amount owed to Buyer), in the case where the
portion of the Final Net Current Assets is less than the Reference Net Current
Assets, or Buyer shall remit to Seller, in the case where the portion of the
Final Net Current Assets is more than the Reference Net Current Assets, the
amount of any further adjustment required.
(c) Any payment pursuant to Section 1.2(b) shall be made by certified or
bank cashier's check, or, at the recipient's option, by wire transfer of
immediately available funds.
1.3 CLOSING. The closing (the "Closing") of the transactions contemplated
hereby shall take place at the offices of Squire, Sanders & Dempsey L.L.P., 4900
Key Tower, 127 Public Square, Cleveland, Ohio 44114-1304 (or at such other place
as the parties may agree in writing), at 10:00 a.m. on March 15, 1998, or such
other date mutually designated by Seller and Buyer, but in no event later than
five (5) business days after the date when each of the conditions specified in
Article VI has been fulfilled (or waived by the party entitled to waive that
condition). The date on which the Closing is held is referred to in this
Agreement as the "Closing Date." At the Closing, the parties shall execute and
deliver the documents referred to in Article VII.
ARTICLE II
POST-CLOSING ADJUSTMENTS
2.1 ADJUSTMENT OF PURCHASE PRICE. (a) The Purchase Price shall be adjusted
as follows:
(i) For purposes hereof, "Final Net Current Assets" shall mean the
current assets of the Business less the current liabilities of the
Business, as reflected in the Final Balance Sheet (as defined in Section
2.1(b)). "Reference Net Current Assets" shall mean the current assets of
the Business less the current liabilities of the Business as reflected on
the Reference Balance Sheet (as defined in Section 3.9).
(ii) If the amount of the Final Net Current Assets determined in
accordance with this Section 2.1 is less than the Reference Net Current
Assets, the Purchase Price shall be decreased by an amount equal to the
difference between the Final Net Current Assets and the Reference Net
Current Assets.
(iii) If the amount of the Final Net Current Assets is greater than
the Reference Net Current Assets, the Purchase Price shall be increased by
an amount equal to the difference between the Final Net Current Assets and
the Reference Net Current Assets.
(b) The Final Net Current Assets shall be determined as of the close of
business on the day immediately preceding the day of the Closing (the
"Determination Time") on the basis of the balance sheet of the Business as of
the Determination Time (the "Final Balance Sheet"). The Final Balance Sheet
shall be prepared by Seller in accordance with generally accepted accounting
principles applied on a basis consistent with the principles used in the
preparation of the Reference Balance Sheet (the "Accounting Principles") and
shall be reported upon by Coopers & Lybrand LLP ("C&L"). For purposes of
calculating the Purchase Price adjustment, any current assets and current
liabilities relating to (i) the adoption of FAS 106, (ii) current or deferred
income tax and (iii) any liability in respect of any
A-2
<PAGE> 67
environmental matters, including, without limitation, costs of investigation,
attorneys and consultants, analysis, cleanup, containment or other environmental
remediation, shall be excluded from both the Reference Balance Sheet and the
Final Balance Sheet. Additionally, Seller and Buyer agree that the only amount
to be accrued for employee profit sharing and incentive compensation shall be at
the rate of $75,000 per month in the aggregate for each month commencing October
1, 1997 until the Final Balance Sheet date, provided that the accrual shall be
pro rata for any partial month. C&L shall hereinafter be referred to as the
"Auditor". Seller shall be responsible for the fees and expenses of the Auditor.
(c) Seller shall engage the Auditor to examine the Final Balance Sheet and
shall deliver to Buyer the Final Balance Sheet within sixty (60) days after the
Closing, together with a report of the Auditor thereon (i) setting forth the
amount of Final Net Current Assets reflected in the Final Balance Sheet, (ii)
stating that (y) the examination has been made in accordance with generally
accepted auditing standards as supplemented by the Accounting Principles, and
(z) the Final Balance Sheet has been prepared in conformity with the Accounting
Principles, and (iii) setting forth the amount of any required adjustment to the
Purchase Price pursuant to this Section 2.1. Buyer and Seller shall take such
actions as are necessary to cause the Auditor's audit of the Final Balance Sheet
to be performed expeditiously. During the period from the Closing Date until the
date of delivery of the Final Balance Sheet, Buyer shall give Seller, the
Auditor and other appropriate personnel such assistance and access to the assets
and books and records of the Company as Seller and the Auditor shall reasonably
request during normal business hours in order to enable them to prepare and
examine, respectively, the Final Balance Sheet. Price Waterhouse LLP or such
other independent accounting firm engaged by Buyer at Buyer's sole expense
(which shall not be the Unrelated Accounting Firm referred to below) ("Buyer's
Auditor") shall have the opportunity to observe the taking of the inventory of
the Business in connection with the preparation of the Final Balance Sheet, and
to examine the work papers, schedules and other documents prepared by Seller in
connection with its preparation of the Final Balance Sheet. Seller shall use its
reasonable efforts to cause the Auditor to permit Buyer and Buyer's Auditor to
examine the Auditor's work papers used in connection with its audit of the Final
Balance Sheet.
(d) Within forty-five (45) days following the delivery of the Final Balance
Sheet and the related report of the Auditor, Buyer shall deliver to Seller a
notice of objection (an "Objection Notice") or a notice of acceptance (an
"Acceptance Notice") with respect to the Final Balance Sheet and related
Auditor's report. Such Final Balance Sheet and related Auditor's report shall be
final and binding on the parties if an Acceptance Notice is delivered to Seller
or if no Objection Notice is delivered to Seller within such forty-five (45) day
period. Any Objection Notice shall specify in reasonable detail the items on the
Final Balance Sheet disputed and shall describe in reasonable detail the basis
for the objection and all information in the possession of the objecting party
which forms the basis thereof, as well as the amount in dispute. If an Objection
Notice is given, the parties shall consult with each other with respect to the
objection. If the parties are unable to reach agreement within fifteen (15) days
after an Objection Notice has been given, any unresolved disputed items shall be
promptly referred to Arthur Andersen LLP (the "Unrelated Accounting Firm"). The
Unrelated Accounting Firm shall be directed to render a written report on the
unresolved disputed issues with respect to the Final Balance Sheet as promptly
as practicable and to resolve only those issues of dispute set forth in the
Objection Notice. The resolution of the dispute by the Unrelated Accounting Firm
shall be final and binding on the parties. The fees and expenses of the
Unrelated Accounting Firm shall be borne equally by Seller and Buyer. Within two
(2) business days following the latest to occur of (i) the delivery by Buyer of
an Acceptance Notice, (ii) the expiration of the 45-day objection period or
(iii) the receipt of the written report rendered by the Unrelated Accounting
Firm, Buyer and Seller shall direct the Escrow Agent to release to Seller from
the Escrow, in immediately available funds to Seller's account as specified in
Section 1.2(a) or as otherwise directed by Seller, an amount that, after making
any payments from the Escrow to Buyer, would leave a remaining balance of
$500,000 in the Escrow Account.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer (which representations and
warranties shall survive the Closing to the extent provided in Section 11.3
hereof) that:
3.1 ORGANIZATION, STANDING AND AUTHORITY OF SELLER. Seller, the Company
and Sub are corporations duly organized, validly existing and in good standing
under the laws of the states indicated on Schedule 3.1, and Seller has full
corporate power and authority to enter into and perform this Agreement, the
Escrow Agreement and the Stockholder Voting Agreement dated the date hereof
among Seller, the shareholders of Seller named therein and Buyer (the "Voting
Agreement"). Each of the Company and Sub is duly qualified to do business and is
in good standing in each jurisdiction in which the properties owned or leased by
it or the conduct of the Business requires such qualification, except where the
failure to be so qualified or in good standing would not have a material adverse
effect on the operations of the Business taken as a whole.
3.2 AUTHORIZATION. The execution, delivery and performance of each of this
Agreement, the Escrow Agreement and the Voting Agreement by Seller have been
duly authorized by all necessary corporate action of Seller, and this Agreement
and the Voting Agreement constitute and, when executed and delivered, the Escrow
Agreement will constitute the valid and binding obligation of Seller enforceable
against it in accordance with its terms, except to the extent enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights in general and
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
3.3 NO VIOLATIONS, NO CONFLICT. Subject to receipt of the consents and
approvals listed in Schedule 3.3, the execution, delivery and performance of
this Agreement, the Voting Agreement and the Escrow Agreement and the
consummation of the transactions contemplated hereby and thereby by Seller will
not (i) violate or conflict with the certificates of incorporation or the
by-laws or regulations, as the case may be, of Seller, the Company or Sub, (ii)
conflict with, or result in the breach of, or termination of, or constitute a
default under (whether with notice or lapse of time or both), or accelerate or
permit the acceleration of the performance required by, any indenture, mortgage,
lien, lease, agreement, commitment or other instrument, or any order, judgment
or decree, to which Seller or the Company or Sub is a party or by which Seller
or the Company or Sub or any of their properties are bound, (iii) constitute a
violation of any law, regulation, order, writ, judgment, injunction or decree
applicable to Seller or the Company or Sub, or (iv) result in the creation of
any lien, charge or encumbrance upon the capital stock, properties or assets of
Seller or the Company or Sub, other than violations, conflicts, breaches,
terminations, accelerations and defaults specified in the foregoing clauses (ii)
and (iv) which could not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company or Sub or on Seller's
ability to perform its obligations under this Agreement, the Voting Agreement or
the Escrow Agreement.
3.4 CONSENTS. The only authorization, consent, approval or notice of any
federal, state, local or foreign regulatory body required to be obtained or
given or waiting period required to expire with respect to Seller in order that
this Agreement, the Voting Agreement or the Escrow Agreement and the
transactions contemplated hereby or thereby may be consummated by the Buyer and
Seller is (a) notification to the Federal Trade Commission and the Antitrust
Division of the Department of Justice pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the rules promulgated thereunder (the
"HSR Act", and such notification, an "HSR Filing") and the expiration of the
applicable waiting periods under the HSR Act and (b) filings with the Pension
Benefit Guaranty Corporation (the "PBGC"), the Internal Revenue Service (the
"IRS"), the Department of Labor (the "DOL") and any other similar governmental
entity with respect to the transfer of assets and liabilities of Plans (as
defined below). Except as disclosed in Schedule 3.3 or 3.4, no consent or
approval of any other party (other than any governmental entity referred to
above) is required to be obtained by Seller for the execution, delivery or
performance of this Agreement, the Voting Agreement or the Escrow Agreement or
the
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performance by Seller of the transactions contemplated hereby and thereby,
except where the failure to obtain any such consent or approval would not
prevent or delay the consummation of the transactions contemplated hereby, or
otherwise prevent Seller from performing its obligations under this Agreement,
the Voting Agreement or the Escrow Agreement or would not, individually or in
the aggregate, have a material adverse effect on Seller or the Company or Sub.
3.5 CERTIFICATE OF INCORPORATION, BY-LAWS AND REGULATIONS. Schedule 3.5
sets forth correct and complete copies of the certificates of incorporation, as
amended and restated from time to time, and the regulations and by-laws, as the
case may be, of the Company and Sub. Schedule 3.5 sets forth a list of the
directors and officers of each of the Company and Sub.
3.6 OUTSTANDING SHARES. The authorized capital stock of the Company and
Sub, the number of shares issued and outstanding and the shareholders of the
Company and Sub are set forth on Schedule 3.6.
3.7 OWNERSHIP OF SHARES. The Shares of the Company and the outstanding
capital stock of Sub are owned by Seller and the Company, respectively,
beneficially and of record, free and clear of all liens, encumbrances or claims.
At the Closing, Seller will transfer and deliver to Buyer valid title to all of
the Shares, free and clear of any liens, claims, charges, pledges, security
interests, options or other legal or equitable encumbrances of any kind
(collectively "Claims"). Except for Sub and except as disclosed in Schedule 3.7
hereto, the Company is neither the record nor beneficial holder of any capital
stock, membership interest in any limited liability company, partnership
interest or other similar interest or right to acquire any capital stock,
membership interest in any limited liability company, partnership interest or
other similar interest in any entity.
3.8 AUTHORIZED SHARES. All of the Shares of the Company and shares of
capital stock of Sub are duly authorized, validly issued, fully paid and
nonassessable. Except for this Agreement, there are no options or rights of any
kind to acquire any shares of any class of securities or any securities
convertible into or exchangeable for any capital stock of the Company or Sub.
3.9 FINANCIAL STATEMENTS. Schedule 3.9 sets forth financial statements
including the balance sheet as of September 30, 1997 (the "Reference Balance
Sheet"), and the income statements for the fiscal years ended September 30,
1995, 1996 and 1997 for the Company and Sub (together with the Reference Balance
Sheet, the "Financial Statements"). Schedule 3.9 sets forth certain items which
represent a combination of actual events and transactions that occurred in the
year ended September 30, 1997. The Financial Statements present fairly, in all
material respects, the financial condition and results of operations of the
Company and Sub as of the dates and for the periods indicated therein. Such
Financial Statements were used in the preparation of Seller's consolidated
financial statements and were prepared in accordance with generally accepted
accounting principles and the Financial Statements were prepared in accordance
with past accounting practices applied consistently except as noted in Schedule
3.9. Since September 30, 1997, there has been no adverse change to the business,
assets, operations, properties, financial condition, liabilities, or results of
operations of the Company or Sub which change is material to the Company and Sub
taken as a whole (a "Material Adverse Change"). Except as set forth in Schedule
3.9, there has been no Material Adverse Change since September 30, 1997
involving the relationship or agreements with any customers, suppliers or labor
force of the Company. Except as reflected in the Financial Statements or as set
forth in Schedule 3.9 or in any other Schedule to this Agreement, or as incurred
since September 30, 1997 in the ordinary course of business consistent with past
practice, there are no debts, obligations, guaranties of obligations of others
or liabilities (whether accrued, absolute, contingent or otherwise) that would
be required to be disclosed on a consolidated balance sheet of the Company
prepared under generally accepted accounting principles.
3.10 TITLE TO ASSETS. Each of the Company and Sub has good and marketable
title to all real and tangible personal property reflected on the Reference
Balance Sheet as currently owned and used in the operation of the Business
(excluding inventory and obsolete equipment that may have been sold in the
ordinary course of business consistent with past practice from September 30,
1997) and such property is
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free from all Claims, except for (i) liens for taxes not yet due and payable and
similar liens arising by operation of law in the ordinary course of business for
which adequate reserves have been made on the Company's balance sheets, (ii)
such liens, charges, options or encumbrances noted in the title report furnished
to Buyer that individually or in the aggregate do not materially affect the use
of such assets in the Business in accordance with the Company's past practice or
(iii) except as otherwise described in Schedule 3.10 to this Agreement.
The assets reflected on the Reference Balance Sheet constitute all assets
currently used or held for use in the Business, constitute all assets necessary
to continue to operate the Business consistent with current and historical
practice and, except as set forth in Schedule 3.10, are in good repair, working
order and operating condition (subject to normal wear and tear). The Company
owns all of the rights, properties and assets used in and which are necessary
for the conduct of the Business as presently conducted.
3.11 INTELLECTUAL PROPERTY. Except for the logo set forth in Schedule
3.11, neither the Company nor Sub owns or uses in the Business any patents,
patent applications, trade names, trademarks, service marks or other names,
logos or marks or any licenses, proprietary or other intellectual property
rights. The logo of the Company has not been registered. To Seller's knowledge,
such logo does not infringe on any rights owned or held by any other person.
3.12 REAL PROPERTY. Schedule 3.12 sets forth a list of all real property
owned by the Company or Sub on the date of this Agreement which is necessary to
the conduct of the Business as presently conducted. Neither the Company nor Sub
leases any real property. With respect to the real property owned by the Company
or Sub and the improvements thereon, (i) neither the Company nor Sub has
received any written notice of condemnation proceedings pending or threatened
against any portion thereof, (ii) such property is not in violation of any
zoning or building laws, except where such violations would not, individually or
in the aggregate, reasonably be expected to result in a Material Adverse Change,
(iii) such property does not violate any restrictive covenants or encroach on
any property owned by others, except where such violations or encroachments
would not, individually or in the aggregate, reasonably be expected to result in
a Material Adverse Change, and (iv) the improvements thereon have been
maintained in accordance in all material respects with all applicable laws,
ordinances, regulations and orders.
3.13 CONTRACTS. Except for this Agreement or any agreement contemplated
hereby, and agreements, contracts and commitments listed in Schedule 3.13 (which
Schedule includes contracts entered into with key management personnel),
complete and correct copies or descriptions of which have previously been made
available to Buyer or included in the Schedules to this Agreement, neither the
Company nor Sub is a party to any written or oral:
(a) contract for the sale of goods or the purchase of inventory,
materials, supplies, services, equipment or any capital item or items that
involve a payment of more than $25,000 in one year or that cannot be
cancelled by the Company without penalty in less than six months from the
date of this Agreement;
(b) agreement, indenture or other instrument relating to the borrowing
of more than $25,000 or the guaranty of any obligation for the borrowing of
more than $25,000;
(c) lease of personal property, including capital leases, involving a
consideration of more than $25,000 and which has a term, including renewal
options exercisable by any party thereto, ending more than six (6) months
after the date of this Agreement;
(d) distribution, agency, sales representative, compensation, labor or
employment contract which is not terminable by the Company without penalty
upon notice of sixty (60) days or less;
(e) lease or agreement with an affiliated company;
(f) agreement or understanding regarding the disposition of any stock
or assets of the Company or Sub;
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(g) noncompete agreements or other documents that will limit the
freedom of Buyer, the Company or Sub to compete in any line of business; or
(h) any other agreement, contract or commitment that is material to
the Company or Sub or not made in the ordinary course of business
consistent with past practice.
Neither the Company nor Sub is in breach or default in any material respect
under any of the agreements, contracts or commitments set forth in Schedule
3.13, except for such breaches or defaults as would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Change. All of the
agreements, contracts and commitments set forth in Schedule 3.13 are in full
force and effect and enforceable against the Company or Sub, as the case may be,
except for such agreements, contracts and commitments as would not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Change.
3.14 ACCOUNTS RECEIVABLE. All of the Company's accounts receivable that
are reflected in the Financial Statements have arisen in the ordinary course of
business consistent with past practice. The reserves for doubtful accounts
reflected on the Financial Statements were determined in accordance with
generally accepted accounting principles consistent with past practice and are
reasonable in light of the Company's past experience and expected future
collections. Net accounts receivable less allowances, as reflected in the
Financial Statements, will be collectible in the ordinary course of business
consistent with past practice within 90 days after the Closing Date.
3.15 INVENTORY. The inventory is of a quality and quantity usable and
saleable in the ordinary course of business of the Company consistent with past
practice, except for obsolete items or items below standard quality as to which
a provision determined in a manner consistent with the prior practice of the
Business has been made in the Financial Statements. The value of all inventory
items, including finished goods, work-in-process and raw materials, has been
recorded on the books of the Company as reflected in the Financial Statements at
the lower of cost (FIFO) (determined in accordance with generally accepted
accounting principles consistently applied and as set forth in the Reference
Balance Sheet, except as disclosed in Schedule 3.15) or fair market value. As
the Business is currently conducted by the Company, net inventory after reserves
will be usable and saleable, with respect to work-in-process and finished goods,
within 90 days, and, with respect to raw materials, within six (6) months from
the Closing Date, except as disclosed in Schedule 3.15.
3.16 LITIGATION AND COMPLIANCE WITH LAWS. (a) There are no judicial or
administrative actions, proceedings or investigations pending or, to Seller's
knowledge, threatened, that question the validity of this Agreement or any
action taken or to be taken by Seller or the Company in connection with this
Agreement. Except as set forth in Schedule 3.16, there is no, and in the
preceding three years there has been no, action, claim, litigation, proceeding
or governmental investigation pending or, to Seller's knowledge, threatened, or
any order, injunction or decree outstanding, against the Company involving more
than $25,000 individually or $100,000 in the aggregate and Seller knows of no
basis for any such action, claim, litigation, proceeding or investigation.
(b) The Business is not affected by any present or, to the knowledge of
Seller, threatened strike, walkout, slowdown or other labor disturbance except
as described in Schedule 3.16. All litigation required to be disclosed by Seller
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, for fiscal years 1993 and 1994 were properly disclosed
in Seller's periodic reports.
(c) Except as disclosed in Schedule 3.16, (i) each of the Company and Sub
has complied and is in compliance with all laws, regulations, rules and orders
applicable to the Business (other than Environmental Laws (as defined in Section
8.5)), including, without limitation, laws, rules, regulations, permits,
franchises, licenses, judgments and orders relating to occupational safety and
health ("OSHA Laws"), except where the failure to so be in compliance would not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Change and (ii) to Seller's knowledge, there is no present condition
relating to the Company or Sub or the real property described in Schedule 3.12
that would,
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individually or in the aggregate, reasonably be expected to result in a Material
Adverse Change for violation of any OSHA Laws or other federal, state or local
laws, rules, regulations, permits, franchises, licenses, judgments and orders
(other than Environmental Laws). Except as set forth on Schedule 3.16, neither
the Company nor Sub is subject to any order, writ, injunction or decree relating
to the operations of the Business or affecting its properties except where such
orders, writs, injunctions or decrees would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Change.
(d) Except as set forth in Schedule 3.16, to Seller's knowledge, (i)
neither the Company nor Sub has violated or is in violation of any requirements
of any Environmental Laws, (ii) there are no present or past conditions relating
to the Company or Sub or relating to the real property described in Schedule
3.12 or any other real property owned or operated by the Company or any of its
present or past affiliates, or any real property or surface or subsurface rivers
or streams crossing or adjoining any such real property, or any appurtenances to
or improvements on any such real property, that would, individually or in the
aggregate, reasonably be expected to lead to any material liability against, or
have a Material Adverse Change for violation of any Environmental Laws and (iii)
each of the Company and Sub has operated the real property described in Schedule
3.12 and all appurtenances thereto and improvements thereon and has received,
handled, used, stored, treated, shipped and disposed of all hazardous or toxic
materials, substances and wastes (whether or not on its properties or properties
owned or operated by others) in compliance with all applicable Environmental
Laws.
3.17 DEFAULTS AND PERMITS. Except as disclosed in Schedule 3.17, no event
of default has occurred under any agreement, contract or other instrument
relating to the Business to which the Company or Sub is a party, and, as of the
date hereof, there does not exist thereunder any event or condition that, with
or without the lapse of time or the giving of notice, or both, would have a
material effect on the Business. Except as set forth in Schedule 3.17, all
franchises, licenses, ordinances and permits material to and relating to the
Business are in full force and effect, no violations have been recorded in
respect thereof, and no proceeding (not including any application for renewal)
is pending or, to Seller's knowledge, threatened which would have the effect of
revoking or materially limiting any such franchises, licenses, ordinances or
permits. Except as set forth in Schedule 3.17, the Business has all franchises,
licenses, ordinances and permits necessary to the conduct of the Business as
currently conducted, and which if not present, or not in full force and effect,
would reasonably be expected to have, individually or in the aggregate, a
Material Adverse Change. Except as disclosed in Schedule 3.17, this Agreement
and the transactions contemplated by this Agreement will not result in the
denial of the application for renewal or the revocation, nonrenewal or
suspension of any franchise, license, ordinance or permit relating to the
Business or held by the Company or Sub and Seller knows of no basis for any such
denial, revocation, nonrenewal or suspension. A current list of such material
franchises, licenses, ordinances and permits is set forth on Schedule 3.17 to
this Agreement.
3.18 INSURANCE. Schedule 3.18 sets forth a list of all material policies
of insurance pursuant to which the Company or Sub is insured and sets forth the
types and amounts of coverage under such policies. Neither the Company nor Sub
has received any notice of cancellation with respect to any such policy, and,
except as set forth in Schedule 3.18, no claims are pending. Schedule 3.18 sets
out all claims made by or on behalf of the Company or Sub under any policy of
insurance during the past 12 months with respect to the Business. There are no
other claims asserted, and Seller knows of no basis for any such claims to be
asserted by the Company or Sub under any insurance policy. Insurance has been
maintained by or for the benefit of the Company and Sub without interruption
since July 1, 1990 of a type that is and has been not less than that generally
maintained by persons owning properties and engaging in operations similar to
those of the Company and Sub.
3.19 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.19, (a)(i)
neither the Company nor Sub has received since July 1, 1990, any claim, action,
cause of action, proceeding, investigation, request for information, notice or
citation (collectively, "Citation") from any governmental agency for
noncompliance with such agency's requirements with respect to air, water, ground
or environmental pollution pertaining to the Business and (ii) there are no
pending or unresolved Citations against the Company or Sub.
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(b) Neither the Company nor Sub has received any Citation that it is or may
be potentially responsible with respect to any investigation or clean-up of any
threatened or actual release of any hazardous substance (as that or any similar
term is presently defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. sec. 9601 et seq.
("CERCLA"), comparable state law or any other Environmental Law) or petroleum
products, regardless of whether such threatened or actual release took place at
any location owned, operated or leased by the Company or Sub (whether or not
prior to or during the Company's or Sub's ownership, operation or leasing
thereof) or elsewhere with respect to the Business.
3.20 EMPLOYEE BENEFIT PLANS. Schedule 3.20 sets forth (i) a list of the
employee pension benefit plans (as defined in section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) established and
maintained by the Company or with respect to which the Company is a
participating or contributing employer (the "Pension Plans"), (ii) a brief
description of the employee benefit plans and arrangements with employees for
profit-sharing, stock ownership, stock purchase, stock option, phantom stock,
stock appreciation right, disability, death benefit, life insurance, medical,
hospitalization, disability, workers' compensation, supplemental unemployment,
vacations, severance pay, retirement, insurance or other employee benefits
maintained by the Company not set forth in the foregoing clause (i), and (iii) a
list containing a description of any other employment, consulting or severance
contract, bonus program, incentive compensation arrangement, deferred
compensation arrangement, or employee or retiree benefits maintained by the
Company and not described in (i) or (ii) above (individually, a "Plan";
collectively, the "Plans"). No employee of the Business is a participant in any
employee benefit plan or arrangement other than a Plan. The Company has no
liability (including, without limitation, any potential or contingent liability
under Title IV of ERISA) with respect to any employee benefit plan, other than a
Plan. Seller has delivered to Buyer true and complete copies of (A) each Plan,
(B) the summary plan description for each Plan, (C) the latest annual report
which has been filed with the IRS for each Plan for which such filing was
required, (D) the most recent IRS determination letter for each Pension Plan,
(E) copies of any report for the three most recent Plan years showing compliance
with discrimination rules under Code Sections 401(a), 401(k), 401(m), 419, 419A,
505, 501(c)(9), 105(h), 125 or 129 applicable to such Plan, and (F) all
correspondence with any governmental agency concerning any audit, investigation,
or controversy concerning any Plan. With respect to Pension Plans: (a) no
liability has been incurred by the Company to the PBGC or the IRS or to the
participants or beneficiaries thereof, other than claims for Pension Plan
benefits and other immaterial benefits in the ordinary course which claims have
been satisfied in full and each Pension Plan has been operated in all material
respects in accordance with its terms and with applicable law; (b) no prohibited
transaction, within the meaning of section 406 or 408 of ERISA, has occurred
with respect to any Pension Plan; (c) all governmental filings and all
disclosures and communications to participants and beneficiaries required to be
made pursuant to ERISA with respect to the Pension Plans and related trusts have
been made in a timely manner; (d) each Pension Plan is qualified within the
meaning of section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and each related trust is exempt from taxation under section 501(a) of
the Code and no event has occurred and no circumstance exists that would
adversely affect such qualification or exemption; (e) a favorable determination
letter has been received from the IRS with respect to each Pension Plan; and (f)
no Pension Plan is a multiemployer plan (within the meaning of section 3(37) of
ERISA). No material liability, contingent or otherwise, exists with respect to
any Plan other than retiree welfare benefit liabilities disclosed in Schedule
5.7(a) which liabilities are accurately reflected on such Schedule. No Plan is
subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of
Title I of ERISA. There are no actions, claims, lawsuits or arbitrations (other
than routine claims for benefits) pending, or, to the knowledge of Seller,
threatened, with respect to any Plan or the assets of any Plan, and Seller has
no knowledge of any facts which could give rise to any such actions, claims,
lawsuits or arbitrations (other than routine claims for benefits). With respect
to each Plan, all contributions and insurance premiums paid by the Company are
tax deductible. The Company has paid all contributions (including employee
salary reduction contributions) and all insurance premiums that have become due
and any such expense accrued but not yet due has been properly reflected in the
financial information furnished pursuant to
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Section 3.9. Except as disclosed in Schedule 5.7(a), no Plan provides or is
required to provide, now or in the future, health, medical, dental, accident,
disability, death or survivor benefits to or in respect of any person beyond
termination of employment with the Company, except to the extent required under
the state insurance law or under Part 6 of Subtitle B of Title I of ERISA and
under Section 4980(B) of the Code. No Plan covers any individual other than with
respect to periods of employment with the Company, other than spouses and
dependents of employees of the Company under health and child care Plans
disclosed to Buyer. The consummation of the transactions contemplated by this
Agreement will not entitle any employee of the Company to severance pay or
termination benefits for which Buyer or any of its affiliates (including the
Company) may become liable, or accelerate the time of payment or vesting or
increase the amount of compensation due to any such employee or former employee
of the Company for which Buyer or any of its affiliates (including the Company)
may become liable.
3.21 EMPLOYEE MATTERS. Except for the Bliss Manufacturing Employees
Association (the "Employee Association"), no other employee association or union
represents members of the Company's work force. Set forth in Schedule 3.21 is a
list of the members of the Employee Association. No controversies or disputes
are pending or, to Seller's knowledge, threatened between the Company and any of
its employees other than controversies and disputes with individual employees
arising in the ordinary course of business that would not, individually or in
the aggregate, reasonably be expected to result in a Material Adverse Change.
3.22 TAXES AND RETURNS. All federal, state, county, local, foreign and
other income, franchise, gross receipts, sales and use, payroll, real and
personal property and other taxes and governmental charges, assessments and
contributions of the Company with respect to the Business or with respect to
which Buyer or the Company could have any liability, including interest and
penalties, as a result of being a member of a controlled, combined or affiliated
group of corporations ("Taxes") required to be paid, collected or withheld with
respect to all open years have been paid, collected or withheld and remitted to
the appropriate governmental agency except for (i) those Taxes which the Company
is contesting in good faith and (ii) accrued and unpaid Taxes as to which
appropriate reserves have been established by the Company ("Tax Reserves"). The
Company has filed all tax returns and reports required to be filed by it, or
requests for extensions to file such returns or reports have been timely filed
and granted and have not expired, and all tax returns and reports are complete
and accurate in all material respects. No requests for waivers of the time to
assess any Taxes against the Company have been granted or are pending, except
for requests with respect to such taxes as to which appropriate reserves have
been established by the Company. Schedule 3.22 sets forth the amount of Taxes
that the Company is contesting in good faith and the amount of Taxes not yet
paid which are accrued to the extent not specifically set forth in the Financial
Statements. All tax returns required to be filed by Seller with respect to Taxes
have been filed in a timely manner, and all Taxes reflected on such returns as
being due have been paid. No election under section 341(f) of the Code has been
made to treat the Company as a "consenting corporation." The Company has not
been a United States real property holding company within the meaning of section
897(c)(2) of the Code during the period specified in section 897(c)(1)(A)(ii) of
the Code. The Company is not a party to a tax sharing or tax indemnity agreement
or any other agreement of a similar nature that remains in effect. The Company
is not a party to any contract that would result, separately or in the
aggregate, in the requirement to pay any "excess parachute payments" within the
meaning of Section 280G of the Code. The Company has withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or other third
party.
3.23 ABSENCE OF MATERIAL CHANGES. Except as has previously been disclosed
to Buyer, or as otherwise disclosed in Section 3.9 or Schedule 3.23 hereof,
since September 30, 1997, there has not been:
(a) any material damage, destruction or other casualty loss to any
property material to the Business;
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(b) any disposition by the Company or Sub of any asset other than
sales of inventory in the ordinary course of business, consistent with past
practice;
(c) except as set forth on Schedule 3.23(c), any direct or indirect
redemption, purchase or other acquisition of, or any declaration, setting
aside or payment of any dividend or other distribution on or in respect of,
any Shares or any other securities of the Company or Sub;
(d) any obligation or liability (whether absolute, accrued, contingent
or otherwise, and whether due or to become due) incurred by the Company or
Sub, other than liabilities or obligations incurred in the ordinary course
of business, consistent with past practice;
(e) any change in the accounting methods or practices followed by the
Company or Sub or any change in depreciation or amortization policies or
rates theretofore adopted;
(f) any capital expenditure or commitment therefor in excess of
$25,000 for any single item or $50,000 in the aggregate for additions to
property, plant or equipment of the Company or Sub;
(g) any cancellation of any debts or claims owing to the Company or
Sub without the Company or Sub receiving consideration equal to the amount
of such debt or claim or any amendment, termination or waiver of any rights
of value to the business of the Company or Sub;
(h) any write-down of the value of any inventory or other asset of the
Company or Sub or any write-off as uncollectible of any accounts or notes
receivable or any portion thereof, other than in the ordinary course of
business and consistent with past practice;
(i) amend, extend, terminate or waive any provision under any
employment or labor agreement or other agreement, except as required by law
or in accordance with the terms of such agreement and in the ordinary
course of business, consistent with past practice; or
(j) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Company (whether absolute,
accrued, contingent or otherwise, and whether due or to become due), except
in the ordinary course of business and consistent with past practice.
3.24 BROKER'S COMMISSION OR FINDER'S FEES. Neither Seller nor its
affiliates have entered into any agreement with any other party and are not
responsible for claims by any other party for brokerage or other commissions
related to this Agreement or the transactions contemplated hereby, except that
Seller has retained McDonald & Company Securities, Inc. ("McDonald") as Seller's
financial advisor and Seller is responsible for, and shall indemnify Buyer
against, any obligations with respect to the fee of McDonald.
3.25 VENDORS AND CUSTOMERS. Schedule 3.25 contains a complete and correct
list of the largest 20 vendors to the Company by dollar volume for the year
ended September 30, 1997 and a complete and correct list of the largest 20
customers of the Company by dollar volume for each of the three years ended
September 30, 1997. As of the date hereof, neither Seller nor the Company is
aware of any fact, circumstance or other matter on which to form a reasonable
belief that any vendor or customer intends to terminate or materially and
adversely modify any relationship with the Company (whether prior to or
following the consummation of the transactions contemplated by the Agreement).
3.26 ACCOUNTS PAYABLE. Set forth in Schedule 3.26 is a complete and
correct list of all accounts payable of the Company as of November 30, 1997.
Such list sets forth with respect to each payable thereon the payee and the
invoice date. The accounts payable set forth in Schedule 3.26 were incurred in
the ordinary course of business, consistent with past practice.
3.27 AFFILIATE TRANSACTIONS. Except as set forth in Schedule 3.27, no
current or former director, officer, employee or shareholder of the Company or
any associate or affiliate (as defined in the rules promulgated under the
Securities Exchange Act of 1934, as amended) thereof, or any relative with a
relationship of not more remote than first cousin or spouse of any of the
foregoing, is presently, or during the 12-month period ending on the date hereof
has been (a) a party to any transaction with the Company or (b) the direct or
indirect owner of an interest in any corporation, firm, association or
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business organization which is a present (or potential) competitor, supplier or
customer of the Company, nor does any such person receive income from any source
other than the Company which relates to the business of, or should properly
accrue to, the Company.
3.28 KNOWLEDGE. As used in this Article III, "knowledge", "know" or any
derivation thereof means the actual knowledge of the Company's currently elected
officers and what such persons should have known after making due inquiry into
the subject matter thereof with the Company's or Sub's management responsible
for oversight of such matters, and with respect to Joseph Dubaj, Fred Chordas,
Terry Duvall, Andrew A. Welch, Michael Hildack, and Roger Wellman, the actual
knowledge of each of such individuals as to the matters addressed in this
Agreement, obtained in the normal course of their respective duties, but without
any further investigation or inquiry by any of such individuals.
3.29 DISCLOSURE. No representation or warranty of Seller contained in this
Agreement, and no statement contained in any certificate, schedule, annex, list
or other writing furnished to Buyer pursuant hereto, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein in light of the circumstances under
which they were made, not misleading.
3.30 INFORMATION IN PROXY STATEMENT. None of the information supplied by
Seller or the Company or Sub for inclusion or incorporation by reference in the
Proxy Statement prepared in connection with a special meeting of Seller's
shareholders to approve this Agreement and the consummation of the transactions
contemplated hereby (the "Proxy Statement") will, at the date mailed to Seller's
shareholders and at the time of Seller's special shareholder meeting convened to
vote on this Agreement and the transactions contemplated hereby, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller (which representations and
warranties shall survive the Closing to the extent provided in Section 11.3
hereof) as follows:
4.1 ORGANIZATION, STANDING AND AUTHORITY OF BUYER. Rhone is a limited
liability company duly formed, validly existing and in good standing under the
laws of the State of Delaware and has full liability company power and authority
to enter into and to perform this Agreement, the Escrow Agreement and the Voting
Agreement.
4.2 AUTHORIZATION. The execution, delivery and performance of each of this
Agreement, the Escrow Agreement and the Voting Agreement and the consummation of
the transactions contemplated hereby or thereby by Buyer have been duly
authorized by all necessary liability company action of Buyer, including by
Buyer's members, if required, and the Agreement and the Voting Agreement
constitute, and, when executed, the Escrow Agreement will constitute, the valid
and binding obligation of Buyer and will be enforceable against Buyer in
accordance with its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
4.3 NO CONFLICT, NO VIOLATION. The execution, delivery and performance of
this Agreement, the Voting Agreement and the Escrow Agreement by Buyer will not:
(i) violate or conflict with the certificate of formation, operating agreement
or other constitutive documents of Buyer; (ii) conflict with, or result in the
breach or termination of, or constitute a default under (whether with notice or
lapse of time or both), or accelerate or permit the acceleration of the
performance required by, any indenture, mortgage, lien, lease, agreement,
commitment or other instrument or any order, judgment or decree, to which Buyer
is a party or by which it or its properties are bound; (iii) constitute a
violation of any law, regulation, order, writ, judgment, injunction or decree
applicable to Buyer; or (iv) result in the creation of any lien, charge or
encumbrance upon the partnership interests, properties or assets of Buyer, other
than violations, conflicts, breaches, terminations, accelerations and defaults
specified in the foregoing clauses (ii) and (iv) which would not, individually
or in the aggregate, reasonably be expected to have a material adverse effect on
Buyer and on Buyer's ability to perform its obligations under this Agreement,
the Voting Agreement or the Escrow Agreement.
4.4 CONSENTS. The only authorization, consent, approval or notice of any
federal, state, local or foreign regulatory body required to be obtained or
given or waiting period required to expire with respect to Buyer in order that
this Agreement, the Voting Agreement or the Escrow Agreement and the
transactions contemplated hereby or thereby may be consummated by Buyer and
Seller is (a) an HSR Filing and the expiration of the applicable waiting periods
under the HSR Act and (b) filings with the PBGC, the IRS, the DOL and any other
similar governmental entity referred to above with respect to the transfer of
assets and liabilities of Plans. No consent or approval of any other party
(other than any governmental entity) is required to be obtained by Buyer for the
execution, delivery or performance of this Agreement, the Voting Agreement or
the Escrow Agreement or the performance by Buyer of the transactions
contemplated hereby or thereby, except where the failure to obtain any such
consent or approval would not prevent or delay the consummation of the
transactions contemplated hereby, or otherwise prevent Buyer from performing its
obligations under this Agreement, the Voting Agreement or the Escrow Agreement
or would not, individually or in the aggregate, materially impair or delay the
consummation of the transactions contemplated hereby.
4.5 LITIGATION. There are no judicial or administrative actions,
proceedings or investigations pending or, to the best of Buyer's knowledge,
threatened, that question the validity of this Agreement or any action taken or
to be taken by Buyer in connection with this Agreement. There is no, and has
been no, action, claim, litigation, proceeding or governmental investigation
pending or, to the best of Buyer's knowledge, threatened, or any order,
injunction or decree outstanding, against Buyer that, if adversely
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determined, would have a material adverse effect upon Buyer's ability to perform
its obligations under this Agreement.
4.6 INVESTMENT INTENT. Buyer is acquiring the Shares solely for the
purpose of investment and not with a view to, or for sale in connection with,
any distribution thereof. Buyer acknowledges that the Shares are not registered
under the Securities Act of 1933, as amended, and that such Shares may not be
transferred or sold except pursuant to the registration provisions of such Act
or pursuant to an applicable exemption therefrom and pursuant to state
securities laws and regulations as applicable.
4.7 FINANCING. Buyer has sufficient funds or has secured a firm commitment
from a third party or parties to provide sufficient funds to pay the Purchase
Price and related fees and expenses.
4.8 NO DEALING WITH AFFILIATES. Except as set forth on Schedule 4.8, Buyer
has no agreement, commitment, understanding or arrangement, express or implied,
with any subsidiary or other affiliate of Seller, or with any person employed
thereby, other than such agreements as may be expressly contemplated by this
Agreement.
4.9 BROKER'S COMMISSION OR FINDER'S FEES. Buyer has not entered into any
agreement with any other party and is not responsible for any claims by any
other party for brokerage or other commissions related to this Agreement or the
transactions contemplated hereby, and shall indemnify Seller against, any
obligations with respect to any such fee.
4.10 INFORMATION IN PROXY STATEMENT. None of the information supplied by
Buyer for inclusion or incorporation by reference in the Proxy Statement will,
at the date mailed to Seller's shareholders and at the time of Seller's special
shareholder meeting convened to vote on this Agreement and the transactions
contemplated hereby, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
ARTICLE V
ADDITIONAL AGREEMENTS OF THE PARTIES
5.1 ORDINARY COURSE. From the date hereof until the Closing, except as
Buyer may, in its sole discretion, otherwise agree in writing, or except as set
forth in Schedule 5.1, Seller shall cause the Company and Sub to conduct their
business in the ordinary course consistent with past practice, and neither the
Company nor Sub shall:
(a) borrow any sums or enter into any financial guarantees or
otherwise incur any indebtedness, including for the payment of trade
payables, other than in the ordinary course of business consistent with
past practice; provided that, neither the Company nor Sub shall have any
obligation with respect to indebtedness for borrowed money or guarantees
with respect thereto; or
(b) make or authorize any compensation increase for any employee of
the Company or Sub whether such increase relates to base compensation,
commissions, bonuses, or benefits, or otherwise unless such increase is
consistent with the Company's prior practices with regard to such increases
and Buyer consents to such increases, except that, as set forth in Schedule
5.1(b), the Company shall, immediately prior to the Closing, pay (i)
certain employees discretionary bonuses for fiscal 1997 in accordance with
past practice the aggregate amount of which bonuses shall not exceed
$300,000, (ii) amounts that shall become due and payable at the time of the
Closing under those contracts set forth in Schedule 3.13 hereto; and (iii)
up to $250,000 for a one-time cash bonus for employees eligible for the
Company's profit sharing plan, provided, that any payments made pursuant to
this clause (iii) shall reduce the amount to be paid pursuant to Section
5.13; or
(c) except for the sale by the Company of inventory or work-in-process
and in the ordinary course of business consistent with past practice, sell,
assign, transfer, lease, mortgage, pledge or make or cause to become
subject to any Claim, any of the assets of the Company or Sub; or
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(d) enter into any agreement with respect to the Business pursuant to
which the aggregate obligation of the Company and Sub subsequent to the
date hereof may exceed $50,000 individually or in the aggregate, and which
is not terminable by the Company without penalty upon 90 days' notice or
less; or
(e) manage inventories and other supplies and parts other than in the
ordinary course of business consistent with past practice; or
(f) issue or sell any shares of its capital stock of any class, or
issue or sell any securities convertible into, or options with respect to,
or warrants to purchase or rights to subscribe to, any shares of its
capital stock of any class, nor make any commitment to issue or sell any
such shares or securities; or
(g) except as may be disclosed on Schedule 3.9, declare, pay or set
aside for payment any dividend, distribution or return of capital in
respect of its capital stock nor, directly or indirectly, redeem, purchase
or otherwise acquire any shares of its capital stock; or
(h) settle or compromise any Tax liability; or
(i) without limiting the generality of the foregoing, take any action
or omit to take any action, which act or omission would result in a breach
of any of the representations or warranties set forth in clauses (a)
through (j) of Section 3.23; or
(j) otherwise enter into any transaction not in the ordinary course of
business.
5.2 ACCESS AND CONFIDENTIALITY. (a) Upon reasonable notice, Seller shall
afford Buyer and its representatives (including, without limitation, its
independent public accountants and counsel) reasonable access during regular
business hours from the date hereof until the Closing to any and all of the
premises, properties, contracts, books, records and data of or relating to the
Business and the Company and Sub, and Seller shall, and shall cause the Company
and Sub to furnish to Buyer during that period all documents and copies of
documents and information concerning the Business as Buyer reasonably may
request.
(b) From and after the Closing Date: (i) Seller shall permit Buyer, the
Company and their respective affiliates and representatives reasonable access,
during reasonable business hours and at Buyer's expense, to the relevant books
and records (including all relevant tax returns and related work papers) of
Seller in existence at the Closing Date relating to the Business or the Company
or Sub; (ii) Seller shall provide such information to Buyer or the Company as it
may reasonably request in connection with the Business prior to the Closing
Date; and (iii) Seller shall use its reasonable efforts to cause its independent
accountants to consult with Buyer and the Company, and an independent auditor of
Buyer or the Company, and to permit Buyer and the Company, and an independent
auditor of Buyer or the Company, to examine work papers of such accountant of
Seller relating to the Business or the Company or Sub; provided that Seller
shall not be required to maintain any records relating to the Business for a
period of more than five (5) years from the Closing.
(c) Buyer shall hold, and shall cause its representatives to hold, all such
information and documents and all other information and documents delivered
pursuant to this Agreement confidential and, if the transactions contemplated by
this Agreement are not consummated for any reason, shall return to Seller all
such information and documents and any copies as soon as practicable and not
disclose any such information (that has not previously been disclosed by a party
other than Buyer, its affiliates or representatives) to any third party unless
required to do so pursuant to a request or order under applicable laws and
regulations or pursuant to a subpoena or other legal process. Buyer's
obligations under this Section shall survive the termination of this Agreement.
5.3 PRESERVATION OF AND ACCESS TO RECORDS. Buyer agrees that it shall
preserve and keep the records of the Company delivered to it hereunder for
period of five (5) years from the Closing, or for any longer period as may be
required by any governmental agency or ongoing litigation, and shall make such
records available to Seller and its affiliates as may be reasonably required by
Seller and its affiliates in
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connection with any legal proceedings against or governmental investigations of
Seller or its affiliates or in connection with any tax examination of Seller or
its affiliates. In the event Buyer wishes to destroy such records after that
time, it shall first give 90 days' prior written notice to Seller and Seller
shall have the right at its option, upon prior written notice given to Buyer
within said 90-day period, to take possession of said records within 180 days
after the date of Seller's notice to Buyer hereunder.
5.4 REGULATORY AND OTHER AUTHORIZATIONS. The parties hereto shall use
their reasonable efforts to file within twenty (20) business days after the
receipt of the Phase II Study (as defined in Section 8.5(a)), HSR Filings and
documentary material that comply with the provisions of the HSR Act, and will
promptly file any additional information requested as soon as practicable after
receipt of the request. The parties hereto will not take any action that is
designed to have the effect of delaying, impairing or impeding the receipt of
any required approvals, including the consents referred to in Sections 3.3 and
3.4, and will use their reasonable efforts to secure such approvals as promptly
as possible.
5.5 FURTHER ASSURANCES. At any time and from time to time after the
Closing, the parties agree to cooperate with each other, to execute and deliver
such other documents, instruments of transfer or assignment, files, books and
records and do all such further acts and things as may be reasonably required to
carry out the transactions contemplated hereunder.
5.6 AGREEMENTS WITH RESPECT TO INSURANCE.
(a) Seller and Buyer acknowledge that the policies of insurance applicable
to the Business are not necessarily exclusive to the Business whereby certain
coverages and limits may be impaired by claims arising from other companies
currently or previously owned by Seller, by whom Seller is owned or with whom
Seller is otherwise affiliated. Except as otherwise disclosed in Section 3.18
hereof, Seller makes no representations or warranties in respect of any policy
of insurance and shall not be responsible for any allocations, determinations as
to coverage or lack thereof or any decision or interpretation made by insurers
or their agents with respect thereto.
(b) If, on or prior to the Closing Date, any property owned or leased by
the Company or Sub suffers any material damage, destruction or loss, Seller
shall surrender to Buyer (i) all insurance proceeds received by Seller or the
Company with respect to such damage or loss and (ii) all rights of Seller or the
Company with respect to any causes of action, whether or not litigation has
commenced on the Closing, in connection with such damage or loss.
5.7 EMPLOYEE AND EMPLOYEE BENEFIT MATTERS.
(a) Employee Benefit Obligations and Plans. On and after the Closing,
Seller shall have no liability whatever, except as provided for in Article VIII
hereof, for providing or causing the Company to provide employee welfare
benefits for the employees of the Company or fulfilling collective bargaining
agreement obligations or negotiations. Buyer agrees to cause the Company to
fulfill the collective bargaining obligations of the Company in accordance with
the Basic Labor Agreement effective as of September 1, 1995, between the Company
and the Employee Association (the "Collective Bargaining Agreement") during the
term thereof, and to cause the Company to maintain for no less than 12 months
after the Closing Date, employee welfare benefits, arrangements and commitments
to employees of the Company substantially comparable in the aggregate to those
currently in effect for such employees, provided, however, that this sentence
shall under no circumstances confer upon any person not a party to this
Agreement the rights of a third party beneficiary of this Agreement.
Specifically, and not by way of limitation, Buyer shall cause the Company to
recognize employees' vacation time and sick leave accrued prior to the Closing
and to fulfill the Company's obligations existing at the date of the Closing
under the employee and retiree plans described in Schedule 5.7(a).
(b) Continued Plans. (i) Subject to Section 3.20 and Article VIII hereof,
as of the Closing, Buyer shall cause the Company to be fully responsible for the
maintenance and administration of the Plans and for all expenses, liabilities,
and obligations with respect thereto arising on or after the Closing.
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(ii) Subject to Section 3.20 and Article VIII hereof, Buyer shall cause the
Company to be fully responsible and to indemnify and hold Seller harmless for
any and all liabilities, obligations, expenses, losses or taxes arising on or
after the Closing with respect to: (v) any and all benefits and claims for
benefits under any Plan; (w) compliance with the reporting and disclosure
requirements of the Code and ERISA for plan years occurring on and after the
Closing with respect to each Plan; (x) the minimum funding obligations under the
Code and ERISA with respect to any Plan for plan years ending after the Closing;
(y) the termination of any Plan that occurs after the Closing; and (z) any act
or omission of Buyer that adversely affects the qualification of any Plan under
section 401(a) of the Code for any year.
(c) Employer Plan. With respect to the Pension Plans, Seller agrees to
cause the Company to make to such Pension Plans all contributions required to be
made with respect to the time period prior to the Closing in accordance with the
terms of the Collective Bargaining Agreement. Buyer agrees to cause to be made
to such Pension Plans all contributions required to be made with respect to the
time period beginning on the Closing in accordance with the terms of the
Collective Bargaining Agreement as long as such agreement remains in force.
Subject to Article VIII hereof, Buyer shall cause the Company to indemnify
Seller against all contributions required and liabilities assessed under such
Pension Plans after the Closing.
5.8 ACCOUNTS RECEIVABLE AND INVENTORY. Seller and Buyer agree that, with
respect to Sections 3.14 and 3.15 hereof, in the event that (i) (x) 90% of the
accounts receivable of the Company reflected on the Final Balance Sheet are not
collected within ninety (90) days after the Closing Date, at Buyer's option,
Buyer shall assign to Seller, and Seller shall purchase from Buyer, the
uncollected accounts receivable reflected on the Final Balance Sheet so that the
Company shall have received cash for 90% of the accounts receivable reflected on
the Final Balance Sheet and (y) the remaining 10% of the accounts receivable of
the Company reflected on the Final Balance Sheet are not collected within 180
days after the Closing Date, at Buyer's option, the Company shall assign to
Seller, and Seller shall purchase from Buyer, the uncollected accounts
receivable reflected on the Final Balance Sheet so that the Company shall have
received cash for such remaining 10% of the accounts receivable reflected on the
Final Balance Sheet; and (ii) the inventory of the Company reflected on the
Final Balance Sheet is not useable and saleable within, with respect to matters
disclosed on Schedule 3.15, twelve months, with respect to all other
work-in-process and finished goods, 90 days, and, with respect to all other raw
materials, six (6) months, after the Closing Date, at Buyer's option, the
Company shall sell to Seller, and Seller shall purchase from the Company such
unuseable and unsaleable inventory. The purchase price for any such uncollected
accounts receivable or unuseable and unsaleable inventory, as the case may be,
shall be an amount equal to the amount reflected on the Final Balance Sheet for
such items, less applicable prorated reserves.
5.9 OTHER OFFERS. Until the termination of this Agreement, neither Seller,
the Company nor any of their respective affiliates will, nor will they authorize
the officers, directors, employees, representatives or other agents of Seller,
the Company or any of such affiliates to, directly or indirectly, (a) take any
action to solicit or initiate any Acquisition Proposal (as defined below) or (b)
engage in negotiations with, or disclose any nonpublic information relating to
the Company or Sub or afford access to the properties, books or records of the
Company or Sub to, any person that has advised the Company or Seller or
otherwise made known the fact that such person may be considering making, or
that has made, an Acquisition Proposal. The Company will promptly notify Buyer
orally and in writing after receipt of any Acquisition Proposal or any notice
that any person is considering making an Acquisition Proposal or any request for
nonpublic information relating to the Company or Sub or for access to the
properties, books or records of the Company or its Sub by any person that has
advised the Company or Seller or otherwise made known the fact that such person
may be considering making, or that has made, an Acquisition Proposal and will
promptly disclose to Buyer the status and details of any such Acquisition
Proposal, indication or request. Seller shall (i) immediately cease and cause to
be terminated as of the date of this Agreement any ongoing discussions or
negotiations with any third parties concerning an Acquisition Proposal and
direct such third parties to return to Seller all information received by them
from the Company or Seller or their respective representatives and (ii) direct
and cause all of its
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representatives to cease engaging in the foregoing. For purposes of this
Agreement, "Acquisition Proposal" means any offer or proposal for, or any
written indication of interest in, a merger or other business combination
involving the Company or Sub or the acquisition of any significant equity
interest in, or a significant portion of the assets of, the Company or its
subsidiary, other than the transactions with Buyer contemplated by this
Agreement.
5.10 RESTRICTIVE COVENANTS.
(a) For a period of three (3) years commencing on the Closing, Seller shall
not, directly or indirectly, solicit the employment of any employee of the
Company or Sub or induce any such employee to leave the employment of the
Company or Sub.
(b) To the extent permitted by law, for a period of five years from and
after the Closing Date, Seller shall not, and shall not permit any of its
subsidiaries or other affiliates to, directly or indirectly, conduct any
business competitive with the Company or Sub or assist others in engaging in any
such business.
5.11 SHAREHOLDER APPROVAL; PROXY STATEMENT. Seller will duly call, give
notice of, convene and hold a meeting of its shareholders for the purpose of
approving this Agreement and the transactions contemplated hereby. Seller will,
through its Board of Directors, recommend to its shareholders approval of this
Agreement and the transactions contemplated hereby. As promptly as practicable,
Seller shall prepare and file with the Securities Exchange Commission ("SEC")
the Proxy Statement. Seller shall use its reasonable efforts to cause the Proxy
Statement to be mailed to Seller's shareholders as promptly as practicable after
the date of this Agreement.
5.12 PROPOSED LIQUIDATION, DISTRIBUTION, ETC. Seller shall give Buyer
written notice, at least 30 days in advance, of the proposed liquidation,
distribution, sale, assignment, exchange or other transfer, in one transaction
or in a series of related transactions, of all or substantially all of the
property or assets of Seller or the dissolution of Seller.
5.13 PAYMENT TO PROFIT SHARING PLAN. Subject to Section 5.1(b), Seller
shall make a contribution on or about the Closing to the Company's profit
sharing plan in an amount of up to $1,000,000 out of the portion of the Purchase
Price that is received by Seller from Buyer at the Closing pursuant to Section
1.2(a) hereof, provided that any amount in excess of the liabilities reflected
in the Financial Statements shall not have any impact on the Purchase Price
adjustments described in Article II.
5.14 SUPPLEMENTS TO SCHEDULES. From time to time prior to the Closing
Date, Seller may amend or supplement the Schedules with respect to any matter
that, if existing or occurring at or prior to the Closing Date, would be
required to be set forth or described in any Schedule or that would be necessary
to complete or correct any information in any representation or warranty
contained in Article III, other than any matter that, to Seller's knowledge on
the date hereof, was required to be set forth or described in such Schedule or
otherwise necessary to render such representation or warranty true and correct
in all material respects on the date hereof. Each such amendment or supplement
shall be given effect for all purposes under or in connection with this
Agreement and the transactions contemplated hereby, other than for purposes of
determining the fulfillment of the conditions precedent set forth in Section
6.2(a) and Section 6.2(b); provided that Buyer's consummation of the Closing
shall constitute, without any further action on the part of Buyer, a waiver by
Buyer of its right to require satisfaction of the conditions precedent in
Section 6.2(a) and Section 6.2(b); provided further, that nothing set forth in
this Section 5.14 shall affect or limit in any way Seller's liability to Buyer
under this Agreement for a breach by Seller of any of Seller's covenants or
agreements set forth in this Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 SELLER'S CONDITIONS TO CLOSE. The obligations of Seller under this
Agreement are subject to the satisfaction at or prior to the Closing of each of
the following conditions, but compliance with any or all of such conditions may
be waived by Seller:
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(a) The representations and warranties of Buyer contained in Article
IV shall be true and correct in all respects;
(b) Buyer shall have performed and complied with all of the covenants
and agreements in all material respects, including the delivery of the
documents specified in Section 7.2, and satisfied all the conditions
applicable to Buyer required by this Agreement, the Escrow Agreement and
the Voting Agreement to be performed or complied with or satisfied by Buyer
at or prior to the Closing;
(c) The applicable waiting periods under the HSR Act shall have
expired, and there shall be in effect no preliminary or permanent
injunction or other order of a court or governmental or regulatory agency
of competent jurisdiction directing that the transactions contemplated
herein, or any of them, not be consummated;
(d) Buyer shall have provided Seller evidence satisfactory to Seller
that Buyer shall have obtained the consents and approvals listed in Section
4.4;
(e) The Escrow Agreement shall have been duly executed and delivered
by Buyer and the Escrow Agent; and
(f) This Agreement and the transactions contemplated herein shall have
been adopted and approved by the holders of more than 50% of the shares of
common stock of Seller in accordance with applicable law and the provisions
of Seller's certificate of incorporation and by-laws.
6.2 BUYER'S CONDITIONS TO CLOSE. The obligations of Buyer under this
Agreement are subject to the satisfaction at or prior to the Closing of each of
the following conditions, but compliance with any or all of any such conditions
may be waived by Buyer:
(a) The representations and warranties of Seller contained in Article
III shall be true and correct in all respects;
(b) Seller shall have performed and complied with all the covenants
and agreements in all material respects, including the delivery of the
documents specified in Section 7.1, and satisfied all the conditions
applicable to Seller required by this Agreement, the Escrow Agreement and
the Voting Agreement to be performed or complied with or satisfied by it at
or prior to the Closing;
(c) The applicable waiting periods under the HSR Act shall have
expired, and there shall be in effect no preliminary or permanent
injunction or other order of a court or governmental or regulatory agency
of competent jurisdiction directing that the transactions contemplated
herein, or any of them, not be consummated;
(d) Since the date of this Agreement, there shall not have occurred
any Material Adverse Change or a material adverse change with respect to
Seller;
(e) The Phase II Study (as defined in Section 8.5(a)) shall have been
completed, Buyer shall have received a true and complete copy of the
written report prepared by the consultants regarding the Phase II Study and
Buyer shall be satisfied that the reasonably likely aggregate Environmental
Damages (as defined in Section 8.5 hereof) shall not exceed $2 million;
provided, however, that this condition shall expire ten (10) business days
after receipt by Buyer of any such report on the Phase II Study;
(f) Seller shall have provided Buyer evidence satisfactory to Buyer
that Seller and the Company shall have obtained the consents and approvals
listed in Schedules 3.3 and 3.4;
(g) The Escrow Agreement shall have been duly executed by Seller and
the Escrow Agent;
(h) Seller shall have entered into a transitional services agreement
with the Company, in form and substance reasonably satisfactory to Buyer,
to provide to the Company and Sub administrative services of the same
nature and scope as presently provided, at no cost to the Company or Sub,
for a period of six (6) months from and after the Closing Date; and
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(i) This Agreement and the transactions contemplated herein shall have
been adopted and approved by the holders of more than 50% of the shares of
common stock of Seller in accordance with applicable law and the provisions
of Seller's certificate of incorporation and by-laws.
ARTICLE VII
THE CLOSING
7.1 SELLER'S DELIVERIES. At the Closing, Buyer shall receive from Seller
the following documents:
(a) Copies of duly adopted resolutions of Seller's board of directors
and Seller's shareholders approving the execution, delivery and performance
of this Agreement and the transactions contemplated hereby, as required,
certified by Seller's Secretary;
(b) A certificate of good standing as to the corporate status of the
Company from the Secretary of State of the State of Ohio and of Sub from
the Secretary of State of the State of Delaware;
(c) A complete and correct copy of the certificate of incorporation of
each of Seller, Company and Sub certified by the Secretary of State of the
State of Ohio or Delaware, as the case may be;
(d) A complete and correct copy of the by-laws or regulations of
Seller, the Company and Sub, each certified by the Secretary of Seller, the
Company or Sub, as the case may be;
(e) A certificate, dated the Closing Date, from Seller's and the
Company's Secretary to Buyer stating that Seller's, the Company's and Sub's
certificate of incorporation and regulations or by-laws, as the case may
be, have not been amended since the date hereof;
(f) A certificate, dated the Closing Date, of an appropriate officer
or agent of Seller with respect to the matters described in Sections 6.2(a)
and (b);
(g) A certificate or certificates representing the Shares with valid
stock powers attached, together with the stock ledger of the Company and
Sub;
(h) A Certification of Non-Foreign Status under and in accordance with
Section 897 and Section 1445 of the Code;
(i) The resignations of all of the directors of the Company and Sub;
(j) The resignations of all of the officers of the Company and Sub;
(k) An opinion of Squire, Sanders & Dempsey L.L.P., counsel to Seller,
with respect to the matters described on Annex A hereto;
(l) Seller shall have paid the Closing Payments specified in Section
1.2; and
(m) Such other documents and certificates as Buyer may reasonably
request in connection with the consummation of the transactions
contemplated by this Agreement.
7.2 BUYER'S DELIVERIES. At the Closing, Seller shall have received from
Buyer the following documents:
(a) Copies of duly adopted resolutions of Buyer's member, if required,
approving the execution, delivery and performance of this Agreement and the
transactions contemplated hereby, as required, certified by an appropriate
officer of Buyer;
(b) A certificate of good standing as to the limited liability company
status of Buyer from the Secretary of State of the State of Delaware;
(c) A complete and correct copy of the certificate of formation of
Buyer certified by the Secretary of State of the State of Delaware;
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(d) A complete and correct copy of the operating agreement or similar
governing agreement of Buyer certified by an appropriate officer of Buyer;
(e) A certificate, dated the Closing Date, of a principal officer of
Buyer with respect to the matters described in Sections 6.1(a) and (b);
(f) Evidence satisfactory to Seller of the wire transfer by Buyer to
Seller of $30,250,000 and of the wire transfer by Buyer to the Escrow Agent
of $1,000,000, each in accordance with Section 1.2 hereof;
(g) An opinion of Howard, Darby & Levin, counsel to Buyer, with
respect to matters described on Annex B hereto; and
(h) Such other documents and certificates as Seller may reasonably
request in connection with the consummation of the transactions
contemplated by this Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY BUYER. From and after the Closing, Buyer shall,
without any further responsibility or liability of or recourse to Seller or its
affiliates or any of Seller's or its affiliates' directors, shareholders,
beneficiaries, officers, employees, agents, consultants, representatives,
successors or assigns (collectively, the "Seller Indemnified Parties"),
absolutely and irrevocably indemnify, defend and hold harmless the Seller
Indemnified Parties from and against any and all losses, liabilities,
obligations, damages (whether actual or punitive), deficiencies, costs or
expenses (including interest, penalties and reasonable attorneys' fees and
disbursements) (individually, a "Loss"; collectively, "Losses") of any of the
foregoing persons, after netting any related tax benefit realized or to be
realized by such persons, arising from, asserted against or associated with:
(a) a breach of any representation or warranty made by Buyer in this
Agreement, the Escrow Agreement or the Voting Agreement;
(b) the failure to perform any covenant, obligation or agreement of
Buyer made herein, the Escrow Agreement or the Voting Agreement; or
(c) any and all actions, suits, proceedings, demands, judgments, costs
and legal and other expenses incident to any of the matters referred to in
clauses (a) through (b) of this Section 8.1.
8.2 INDEMNIFICATION BY SELLER. From and after the Closing, Seller shall,
without any further responsibility or liability of or recourse to Buyer or its
affiliates or any of Buyer's or its affiliates' directors, shareholders,
partners, members, beneficiaries, officers, employees, agents, consultants,
representatives, successors or assigns (collectively, the "Buyer Indemnified
Parties"), absolutely and irrevocably indemnify, defend and hold harmless the
Buyer Indemnified Parties from and against any and all Losses of any of the
foregoing persons after netting any related tax benefit realized or to be
realized by such persons, arising from, asserted against or associated with:
(a) a breach of any representation or warranty made by Seller in this
Agreement, the Escrow Agreement or the Voting Agreement; or
(b) failure to perform any covenant, obligation or agreement of Seller
made herein, the Escrow Agreement or the Voting Agreement; or
(c) the business formerly conducted by the Company regarding the
manufacture of metal vacuum cleaner tubular components and the sale of such
business, including (without limitation) any and all obligations under the
Asset Purchase Agreement and the Supply Transition Agreement, each dated as
of August 27, 1997, between the Company and H-P Products, Inc.; or
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(d) any product sold by the Company or Sub or any product processed or
manufactured by the Company or Sub but not yet sold by the Company or Sub
prior to the Closing; or
(e) in connection with the Company's classification of the different
inventory valuation method adopted by the Company, as described in
Schedules 3.9, 3.15 and 3.23, as a change in method rather than a change in
principle; or
(f) any and all actions, suits, proceedings, demands, judgments, costs
and legal and other expenses incident to any of the matters referred to in
clauses (a) through (e) of this Section 8.2.
8.3 LIMITATION ON INDEMNITY. Except with respect to the representations
and warranties contained in Sections 3.1, 3.6, 3.7 and 3.8 hereof or claims
arising out of fraud (collectively, "Excluded Claims"), liability for which
shall be unlimited, Seller's, on the one hand, and Buyer's, on the other hand,
maximum aggregate liability under Section 8.1 or 8.2, as the case may be, shall
in no event exceed Five Million Dollars ($5,000,000). No claim for
indemnification under Section 8.1 or Section 8.2 may be made more than two years
after the Closing; provided, however, that (i) claims regarding Excluded Claims
may be made at any time after the Closing and (ii) if prior to two years after
the Closing, any claim for indemnity hereunder shall have been made and such
claim shall not have been finally resolved or disposed of at such date, such
claim shall in no way be prejudiced or impaired by the passage of time and any
representation or warranty that is the basis for such claim shall continue to
survive as to such claim and shall remain a basis for indemnity until such claim
is finally resolved or disposed of.
8.4 INDEMNIFICATION PROCEDURES. The obligation to indemnify under Sections
8.1, 8.2 and 8.5 is conditioned upon receiving from the party seeking
indemnification (the "Indemnified Party") written notice of the assertion or
institution of a claim arising from or related to any Loss ("Claim") after the
Indemnified Party has actual knowledge of such a Claim, provided that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its indemnification obligation under this
Agreement except to the extent that such failure results in a lack of notice to
the Indemnifying Party and the Indemnifying Party is materially prejudiced as a
result of such failure to give notice. Upon written unqualified acknowledgement
of its indemnification obligations with respect to a third-party Claim, the
party from whom indemnification is sought (the "Indemnifying Party") shall have
the absolute right, in its sole discretion and expense, to elect to defend,
contest, settle or otherwise protect against any such Claim with legal counsel
reasonably acceptable to the Indemnified Party; provided that the relief sought
in any such Claim is for money damages only and the Indemnified Party reasonably
determines that the Indemnifying Party has the financial resources to pay such
damages; and provided further that the Indemnifying Party shall not settle or
compromise any Claim without the consent of the Indemnified Party, which consent
to settlement or compromise shall not be unreasonably withheld. If the
Indemnifying Party conducts such defense, the Indemnified Party shall have the
right, but not the obligation, to participate, at its own expense, in the
defense thereof through counsel of its own choice and shall have the right, but
not the obligation, to assert any and all cross-claims or counterclaims it may
have. The Indemnified Party shall, and shall cause its affiliates to, at the
cost of the Indemnifying Party, at all times cooperate in all reasonable ways
with, make their relevant files and records available for inspection and copying
by, and make their employees available or otherwise render reasonable assistance
to the Indemnifying Party in its defense of any action being indemnified
hereunder. In the event the Indemnified Party, without the prior consent of the
Indemnifying Party (which consent shall not be unreasonably withheld), makes any
settlement with respect to any Claim, the Indemnifying Party shall not be bound
to such settlement. In the event the Indemnifying Party fails timely to defend,
contest or otherwise protect against any suit, action, investigation, claim or
proceeding related to a Claim, the Indemnified Party shall have the right, but
not the obligation, to defend, contest, assert cross-claims, or counterclaims or
otherwise protect against the same and may make any compromise or settlement
thereof and recover and be indemnified for the entire cost thereof from the
Indemnifying Party including, without limitation, legal expenses, disbursements
and all amounts paid as a result of such suit, action, investigation, claim,
proceeding, cross-claim or counterclaim or compromise or settlement thereof, and
provided, further, if the Indemnified Party should incur any such expense, the
Indemnifying Party shall pay the Indemnified Party's interest incurred on all
such amounts,
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from the date incurred by the Indemnified Party through the date of payment by
the Indemnifying Party, at a rate per annum equal to the publicly announced base
interest rate of Citibank, N.A., in New York City, in effect from time to time,
which rate shall change as and when such base interest rate shall change.
8.5 ENVIRONMENTAL MATTERS.
(a) Upon the signing of this Agreement, (i) Seller shall cause the Company
to conduct Phase II environmental testing (the "Phase II Study"), including soil
and ground water sampling, on the premises owned or leased by the Company and
such adjacent areas with respect to which the Company or Sub might reasonably be
expected to have liability, and Seller shall make, or shall cause the Company to
make, available to Buyer all data collected and reports prepared in connection
with the Phase II Study, or (ii), at Buyer's option, Seller shall perform an
analysis, which may be based on existing data (to the extent existing data is
sufficient for such purpose), to determine if any contaminants which might
reasonably be expected to be found would not present unreasonable risks to
health or the environment under continued industrial use of the property. The
Phase II Study shall be conducted by environmental consultants reasonably
acceptable to Buyer, and the scope of work in the Phase II Study shall be
reasonably acceptable to Buyer. Buyer and its representatives shall have the
right to observe the Company's environmental consultants during the course of
their on-site examination of the relevant properties, review the findings of
such consultants and discuss with the Company, Seller and their respective
representatives, including such environmental consultants, the nature of the
study and the findings therefrom. Seller shall cause the Company to use its
reasonable efforts to make such environmental consultants available to the Buyer
for such purpose. Seller shall be solely responsible for providing any required
notifications under any federal, state or local law, regulation, standard,
order, decree, rule, ordinance, permit, franchise, license or judgment now
existing or hereafter developing, relating to protection of health, safety or
the environment, including without limitation CERCLA and the Solid Waste
Disposal Act, 42 U.S.C. sec. 6901 et seq. (such laws, regulations, standards,
orders, decrees, rule, ordinance, permit, franchise, license or judgment,
collectively, "Environmental Laws").
(b)(i) Subject to Section 8.5(d)(vii), this Section 8.5(b) governs the
allocation between the Seller Indemnified Parties, on the one hand, and the
Buyer Indemnified Parties and the Company and Sub (collectively, the "Buyer
Environmental Indemnitees"), on the other hand, of Environmental Damages to any
Buyer Indemnified Party, the Company or Sub arising from or in connection with
(A) the operations of the Business or of any predecessor-in-interest of the
Company or Sub on or prior to the Closing, (B) any environmental condition
existing as of the Closing (including any future spreading of contamination
existing at such time) on any real property owned or leased by the Company or
Sub and on any property adjacent to such owned or leased real property,
provided, that the Environmental Damages do not result from acts or omissions of
Buyer after the Closing (whether or not caused by the Company or Sub), (C) in
response to a claim, demand, investigation or inquiry made against any Buyer
Environmental Indemnitee by any third party, including any governmental
authority or agency, or (D) to correct or remediate any environmental condition
as required by authority or any Environmental Law or a governmental authority or
agency, to achieve compliance with any Environmental Law. For the purpose of
this Agreement, "Environmental Damages" shall mean any and all Losses,
including, without limitation, costs of investigation, attorneys and
consultants, analysis, cleanup, containment or other environmental remediation,
actually incurred by any Buyer Environmental Indemnitee in connection with any
matter described in any of clauses (A) through (D) above.
(ii) With respect to any Environmental Damages pursuant to which a claim is
made by any Buyer Environmental Indemnitee against Seller: (a) before or on the
second anniversary of the Closing, Seller shall indemnify and hold Buyer
harmless to the extent of 90% of such Environmental Damages and Buyer shall pay
for 10% of such Environmental Damages; (b) after the second anniversary but
before or on the third anniversary of the Closing, Seller shall indemnify and
hold Buyer harmless to the extent of 80% of such Environmental Damages, and
Buyer shall pay for 20% of such Environmental Damages; (c) after the third
anniversary but before or on the fourth anniversary of the Closing, Seller shall
indemnify and hold Buyer harmless to the extent of 70% of such Environmental
Damages, and Buyer
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shall pay for 30% of such Environmental Damages; (d) after the fourth
anniversary but before or on the fifth anniversary of the Closing, Seller shall
indemnify and hold Buyer harmless to the extent of 60% of such Environmental
Damages, and Buyer shall pay for 40% of such Environmental Damages; or (e) after
the fifth anniversary but before or on the seventh anniversary of the Closing,
Seller shall indemnify and hold Buyer harmless to the extent of 50% of such
Environmental Damages, and Buyer shall pay for 50% of such Environmental
Damages.
(c) No claim for indemnification made pursuant to this Section 8.5 may be
made more than seven years after the Closing; provided that if prior to seven
years after the Closing, any claim for indemnity under this Section 8.5 shall
have been made and such claim shall not have been finally resolved or disposed
of at such date, such claim shall in no way be prejudiced or impaired by the
passage of time and the obligations of Seller under this Section 8.5 with
respect to such claim shall continue to survive as to such claim and shall
remain a basis for indemnity until such claim is finally resolved or disposed
of.
(d) It is further agreed as follows:
(i) The parties hereto agree to act in good faith in undertaking work
to address environmental matters that give rise to a claim for
indemnification hereunder with a view toward avoiding unnecessary costs.
(ii) Environmental Damages shall be limited to damages directly
related to rectifying the environmental matter to the minimum extent (A)
satisfactory to the governmental authority or agency with responsibility
for such matter or (B) that a prudent business owner would, in its
reasonable business judgment, consider reasonably necessary, in light of
prior use of the properties and facilities of the Company and demonstrated
unreasonable risks associated with the environmental conditions. Each party
agrees that, except as required by Environmental Law or a governmental
authority or agency or in accordance with the preceding sentence, it shall
not by voluntary or discretionary action, accelerate the timing, or
increase the cost, of any obligations of the party under this Section 8.5.
(iii) At Buyer's election, Buyer shall have the right to control and
manage all discussions with third parties and all proceedings and
activities regarding the satisfaction and discharge of any Environmental
Damages, and planning or performing any work at such property, provided
that Seller shall have the right, at its expense, to participate in all
such discussions and all proceedings and activities.
(iv) If Seller is required to investigate, clean up or otherwise
address Environmental Damages, Buyer shall give Seller and its authorized
representatives and agents reasonable access to the Company's property, all
natural materials (including without limitation, water, dirt, clay and
related materials) on such property and all equipment, facilities and
utilities on such property, all subject to this Section 8.5. Seller shall
make commercially reasonable efforts to avoid interfering with operations
of the Business.
(v) Buyer will take all reasonable measures to reduce the cost of any
required remediation, including, without any limitation, permitting Seller
to file on or prior to Closing a deed permanently restricting use of the
Company's property for commercial or industrial purposes, provided that
Buyer will take such reasonable measures commensurate with existing zoning
with respect to adjacent property.
(vi) The party performing the remedial or other work relating to
Environmental Damages shall keep the other party regularly advised of any
studies, reports, correspondence or other significant documents relating to
the project, and shall, to the extent practicable, provide the other party
with reasonable advance notice of any planned activities.
(vii) If Environmental Damages are attributed to transactions or
occurrences that take place before and after the Closing Date and to which
both Seller and a Buyer Environmental Indemnitee
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have contributed, Seller's liability hereunder shall be further apportioned
on a reasonable basis, taking into account, in addition to other relevant
factors, the degree of contribution on the part of Seller and such Buyer
Environmental Indemnitee before and after the Closing Date.
ARTICLE IX
TAXES
9.1 APPORTIONMENT AND INDEMNIFICATION. (a) Seller and Buyer agree that the
Company will be included in the consolidated federal income Tax return and the
combined Tax return for Ohio and any other state, where permitted, in which Tax
returns are filed by the Company or its parent for the period from September 30,
1997 through the Closing. Prior to the Closing, the Company shall not increase
the Tax Reserves other than in the ordinary course of business.
(b) Seller shall indemnify and hold Buyer harmless against any and all
Taxes of Seller and its affiliates and the Company for any taxable year or
period ending on or before the Closing, and the portion of any such Taxes for
any taxable year or period beginning before and ending after the Closing that is
attributable to the portion of such year or period prior to the Closing, in
either case, however, only to the extent such Taxes exceed the Tax Reserves, and
Seller shall be entitled to all refunds of such Taxes. In determining the Taxes
attributable to any year or period prior to the Closing, the books and records
of the Company will be closed as of the Closing, in accordance with Seller's
past practices, and the taxable income of the Company attributable to the
portion of the year or period prior to the Closing will be determined from such
closed books and records.
(c) Buyer shall indemnify and hold Seller harmless against any and all
Taxes relating to the Company, or any affiliated group of which the Company
becomes a member, after the Closing for any taxable year or period beginning on
or after the Closing, and the portion of any such Taxes for any taxable year or
period beginning before and ending after the Closing that is attributable to the
portion of such year or period beginning after the Closing Date (determined in
the manner parallel to that described in Section 9.1(b) above), and Buyer shall
be entitled to all refunds of such Taxes.
(d) Any payment by Seller or Buyer under this Section 9.1 will be treated
for Tax purposes as an adjustment to the Purchase Price.
(e) Whenever it is necessary for purposes of this Article IX to determine
the Tax liability of a taxable entity for a taxable year or period that begins
before and ends after a prescribed date, the determination shall be made by
apportioning the total Tax liability in the manner described in Section 9.1(b)
and (c) above, except that exemptions, allowances or deductions that are
calculated on an annual basis, such as the deduction for depreciation, shall be
apportioned on a time basis.
9.2 FILING OF TAX RETURNS.
(a) Seller shall file or cause to be filed when due all returns in respect
of Taxes of the Company for taxable years or periods ending before or on the
Closing. Seller shall be responsible for the audits of such returns.
(b) Buyer shall file or cause to be filed when due all returns in respect
of Taxes of the Company for taxable years or periods ending after the Closing.
Buyer shall be responsible for the audits of such returns and shall be entitled
to receive from Seller reimbursement for any payment that it makes in connection
with the settlement or other disposition of such proceeding, to the extent such
Taxes exceed the Tax Reserves.
(c) Buyer and Seller agree to furnish or cause to be furnished to each
other, upon request, as promptly as practicable, such information (including
access to books and records) and assistance relating to the Company and the
Business as is reasonably necessary for preparation of and filing of any return,
for the preparation for any audit, and for the prosecution or defense of any
claim, suit or proceeding relating to any proposed adjustment. Buyer and Seller
shall cooperate with each other in the
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conduct of any audit or other proceedings involving the Company or any other
entity with which they may be consolidated or combined for any Tax purposes and
Buyer and Seller shall each execute and deliver such powers of attorney and
other documents as are necessary to carry out the intent of this Section 9.2;
provided, that Buyer shall have the right to control the resolution of such
audit or settlement of proceedings for which Buyer is to bear the cost of any
resulting Tax, interest or penalties; and, provided, further, that Seller shall
have the right to control the resolution of such audit or settlement of
proceedings for which Seller is to bear the cost of any resulting Tax, interest
or penalties.
9.3 SECTION 338(h)(10) ELECTION.
(a) Buyer shall be responsible for and prepare, and Buyer and Seller shall
sign and deliver, timely and irrevocable elections under section 338(h)(10) of
the Code and, if permissible, similar elections under any applicable state and
local income tax laws. Each of Seller and Buyer shall report the transaction
consistent with such elections under section 338(h)(10) of the Code or any
similar state or local tax provision (the "Elections") and shall take no
position contrary thereto unless and to the extent required to do so pursuant to
a determination (as defined in section 1313(a) of the Code or any similar state
or local tax provision). Seller shall pay, and indemnify the Company and Buyer
for, any and all Taxes that result from any of the Elections that is properly
prepared and filed; provided, however, that Seller shall not pay nor indemnify
the Company or the Buyer for any Taxes resulting from, or otherwise be
responsible for any consequences of, an invalid, ineffective, or untimely
Election.
(b) Each of Seller and Buyer shall execute at Closing any and all forms
necessary to effectuate the Elections (including, without limitation, IRS Form
8023-A and any similar forms under applicable state and local income tax laws
(the "Section 338 Forms")). Each of Seller and Buyer shall cause the Section 338
Forms to be duly executed by an authorized person and shall duly and timely file
the Section 338 Forms in accordance with applicable Tax laws and the terms of
this Agreement.
(c) Each of Seller and Buyer agrees to allocate the Aggregate Deemed Sale
Price (as defined under applicable Treasury Regulations) of the assets of the
Company as set forth in Schedule 9.3. Each of Seller and Buyer will reflect such
allocation in all applicable tax returns filed by any of them, including but not
limited to the Section 338 Forms. Each of Seller and Buyer shall not take a
position before any taxing authority or otherwise (including in any tax return)
inconsistent with such allocation unless and to the extent required to do so
pursuant to a determination (as defined in Section 1313(a) of the Code or any
similar state or local law).
ARTICLE X
TERMINATION
10.1 TERMINATION. Notwithstanding anything in this Agreement to the
contrary, this Agreement may be terminated only (a) by the mutual written
consent of the parties to this Agreement, (b) by Buyer or Seller if, for any
reason, the Closing has not occurred prior to April 30, 1998 or (c) by Buyer in
the event that the condition set forth in Section 6.2(e) with respect to
Environmental Damages would not be satisfied as of the Closing; provided that if
the failure to close by such date is due to Buyer's or Seller's breach of this
Agreement, such party shall not be entitled to terminate this Agreement.
10.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, other
than with respect to the Buyer's obligations under Section 4.9, Seller's
obligations under Section 3.24 and Buyer's and Seller's obligations under
Section 11.1, this Agreement shall thereafter become void and have no effect,
and without any liability on the part of any party or its shareholders,
directors or officers in respect thereof, except that nothing herein will
relieve any party from liability for any breach of this Agreement.
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ARTICLE XI
MISCELLANEOUS
11.1 EXPENSES. Unless otherwise indicated, the parties shall bear their
own respective expenses (including, but not limited to, all compensation and
expenses of counsel, financial advisors, consultants, actuaries and independent
accountants) incurred in connection with the preparation and execution of this
Agreement and consummation of the transactions contemplated hereby.
11.2 PUBLIC DISCLOSURE. Each of the parties hereto hereby agrees that,
except as and to the extent required to comply with the requirements of
applicable law, no press releases or similar public announcement or
communication will be made or caused to be made concerning the execution, terms
or performance of this Agreement unless specifically approved in advance by all
parties. The parties shall consult with one another prior to making any press
release or announcement required to be disclosed by law and shall use their
reasonable efforts to reach agreement on any such press release or announcement.
11.3 SURVIVAL. Subject to the provisions of Sections 5.2, 5.3 and 5.10 and
Article VIII hereof, the representations, warranties, covenants and agreements
made by the parties pursuant to this Agreement shall survive the Closing for a
period of two (2) years.
11.4 GOVERNING LAW. This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with the law of, the State of Ohio without giving effect to the provisions
thereof relating to conflicts of law.
11.5 NOTICES. All notices, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given upon (a) delivery
in person, (b) confirmation of receipt of telex or telecopier transmission, (c)
confirmed delivery by a standard overnight carrier or (d) when mailed by
registered or certified service, postage prepaid, return receipt requested, on
the expiration of the fifth business day thereafter, addressed to the respective
parties at the following addresses (or such other address as shall be specified
by like notice):
(a) If to Seller:
HMI Industries Inc.
3631 Perkins Avenue
Cleveland, Ohio 44114
Telecopier No. (216) 432-0329
Attention: Carl H. Young, General Counsel
with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
Telecopier No. (216) 479-8793
Attention: Carolyn J. Buller, Esq.
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<PAGE> 92
(b) If to Buyer:
Rhone Capital LLC
1330 Avenue of the Americas
New York, NY 10019
Telecopier No. (212) 757-1718
Attention: David R. Ramsay
Ferdinand P. Groos
M. Brett Herman
Nancy Cooper
with a copy to:
Howard, Darby & Levin
1330 Avenue of the Americas
New York, NY 10019
Telecopier No. (212) 841-1010
Attention: Kelly Vance, Esq.
11.6 ASSIGNMENT. This Agreement may not be assigned, by operation of or
otherwise, except that Buyer may assign its rights under this Agreement in whole
or in part, as collateral security to parties providing financing to Buyer or
the Company in connection with the transactions contemplated hereby and to one
or more affiliates of Buyer which will take title to the Shares and will assume
all obligations of Buyer hereunder; provided, however, that in such event, Buyer
will remain fully liable for the fulfillment of all such obligations, and except
that this Agreement shall be binding upon any assignee, transferee or successor
to all or substantially all of the business of Seller.
11.7 SECTION HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.9 AMENDMENT. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
11.10 WAIVER. At any time prior to the Closing, the parties hereto may (a)
extend the time for the performance of any of the obligations or other acts of
the others parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements of conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
11.11 MISCELLANEOUS. This Agreement (including the Schedules, Exhibit A,
Annexes A and B and the Voting Agreement and the other documents and instruments
referred to herein): (a) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties,
with respect to the subject matter hereof, including, without limitation, any
transaction between or among the parties hereto, and Seller and Buyer hereby
release each other from any claims which Seller and Buyer may now or hereafter
have under any Environmental Law; provided, however, that this Section 11.11
shall not release Buyer and Seller from their respective obligations under
Article VIII of this Agreement; (b) is not intended to confer upon any other
persons, including, but not limited to, employees of Seller or the Company, any
rights or remedies hereunder except as specifically provided in Section 5.2(b)
or 5.10 or Article VIII; and (c) in case any provision in this Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby. Seller agrees to use its best efforts to cause
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stockholders of Seller that together own or control a majority of Seller's
outstanding common stock to execute, within two business days after the date
hereof, the Stockholder Voting Agreement in the form of Exhibit B attached to
this Agreement (the "Stockholder Voting Agreement"). Notwithstanding anything to
the contrary set forth in this Agreement, in the event Seller fails to cause all
of such stockholders to execute the Stockholder Voting Agreement within such two
business day period, by notice to Seller within two business days thereafter,
Buyer may terminate this Agreement and have no further obligation to Seller
hereunder.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed as of the date first above written.
RHONE CAPITAL LLC
By: /s/ David R. Ramsay
----------------------------------
Name: David R. Ramsay
Title: Managing Director
HMI INDUSTRIES INC.
By: /s/ Mark A. Kirk
----------------------------------
Name: Mark A. Kirk
Title: President
A-29
<PAGE> 94
EXHIBIT A
TO STOCK PURCHASE AGREEMENT
FORM OF ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of [INSERT CLOSING DATE] (the "Agreement"), among
[insert name and jurisdiction of Rhone affiliate(s) acquiring common stock of
the Company] (the "Buyer"), HMI Industries Inc., a Delaware corporation (the
"Seller"), and The Chase Manhattan Bank, as escrow agent (the "Escrow Agent").
INTRODUCTION
The Buyer and the Seller are parties to a Stock Purchase Agreement, dated
as of December 17, 1997 (the "Stock Purchase Agreement"), pursuant to which the
Buyer has agreed to purchase, and the Seller has agreed to sell, the Shares.
Capitalized terms used and not otherwise defined herein have the meaning set
forth in the Stock Purchase Agreement.
The Stock Purchase Agreement requires as a condition to the sale of the
Shares that the Buyer, the Seller and the Escrow Agent enter into this
Agreement, and that the Buyer deposit the Escrow Amount (as defined below) with
the Escrow Agent to provide a fund from which may be made purchase price
adjustments in accordance with the provisions of Article II of the Stock
Purchase Agreement and indemnity payments that the Seller may become obligated
to make to the Buyer Indemnified Parties or Buyer Environmental Indemnities
(collectively, the "Indemnified Parties") as provided in Article VIII of the
Stock Purchase Agreement.
The parties hereto hereby agree as follows:
1. APPOINTMENT OF THE ESCROW AGENT; DEPOSIT OF ESCROW AMOUNT. The Seller
and the Buyer hereby appoint the Escrow Agent as, and the Escrow Agent agrees to
assume and perform the duties of, the escrow agent pursuant to terms and
provisions of this Agreement and agrees to accept, hold, deal with and dispose
of any property comprising the Escrow Account in accordance with this Agreement.
The Escrow Agent acknowledges receipt by wire transfer from the Buyer of the
amount of $1,000,000 in immediately available funds (the "Escrow Amount") from
the Buyer which amount is to be held in escrow pursuant to this Agreement.
2. THE ESCROW FUND. The Escrow Amount, as may be reduced from time to time
in accordance with the terms and provisions of this Agreement, and all earnings
on the Escrow Amount (such Escrow Amount and such earnings being referred to in
this Agreement as the "Escrow Fund") shall be held by the Escrow Agent in a
separate account maintained for the purpose, on the terms and subject to the
conditions, of this Agreement. The Escrow Fund shall not be subject to lien or
attachment by any creditor of any party to this Agreement and shall be used
solely for the purpose set forth in this Agreement. Amounts held in the Escrow
Fund shall not be available to, and shall not be used by, the Escrow Agent to
set off any obligations of either the Buyer or the Seller owing to the Escrow
Agent in any capacity.
3. INVESTMENT OF THE ESCROW FUND; INCOME; TAXES.
(a) Permitted Investments. Subject to Section 3(b), the Escrow Agent
shall invest and reinvest the Escrow Fund in such Permitted Investments as the
Seller shall from time to time direct by written notice to the Escrow Agent and
the Buyer. A "Permitted Investment" is an investment in (i) direct obligations
of the United States or any agency thereof, or obligations guaranteed fully as
to payment of interest, principal and premium (if any) by the United States or
any agency thereof, that, in each case, mature within one year from the date of
its acquisition by the Escrow Fund, (ii) direct obligations of any one of the
United States or any agency thereof, or obligations guaranteed fully as to
payment of interest, principal and premium (if any) by such state or agency,
that, in each case, mature within one year from the date of its acquisition by
the Escrow Fund, (iii) demand or time deposits with
<PAGE> 95
or certificates of deposit or bankers' acceptances issued by any office located
in the United States of any bank or trust company which is organized under the
laws of the United States or any state thereof, is a member of the Federal
Reserve System and has capital, surplus and undivided profits aggregating at
least $5,000,000,000, that, in each case, mature within one year from the date
of its acquisition by the Escrow Fund, (iv) repurchase agreements with respect
to securities described in clause (i) above entered into with an office of a
bank or trust company meeting the criteria specified in clause (iii) above, and
(v) commercial paper rated at least A-1 by Standard & Poor's Corporation and P-1
by Moody's Investors Service, Inc., that, in each case, matures within one year
from the date of its acquisition by the Escrow Fund. The Escrow Agent shall have
no responsibility for the review of proposed investments or otherwise to confirm
whether any proposed investments meet the criteria for Permitted Investments
prescribed in the preceding sentence and may rely conclusively upon a written
investment instruction of the Seller as authorized in accordance with such
criteria. The Escrow Fund shall initially be invested in the Permitted
Investments specified in the written instructions delivered on or prior to the
date hereof to the Escrow Agent by the Seller in accordance with this Agreement.
If no written investment instructions are provided by 12:00 noon (New York City
time) on the maturity date of any investment held in the Escrow Fund, the Escrow
Agent shall reinvest the proceeds of the same and uninvested cash in the Escrow
Fund (if any) in the investments described in clause (iii) of this subsection.
(b) Liquidation of Investments. The Escrow Agent, in its absolute
discretion, may sell investments within the Escrow Fund without regard to
capital losses or depreciation in value as it deems necessary to make or reserve
against distributions to be made pursuant to Section 4 or Section 5.
(c) Taxes; Withholding. All taxes and withholding obligations in respect
of earnings on the Escrow Fund shall be the obligation of and shall be paid when
due by the Seller, which shall indemnify and hold the Buyer and the Escrow Agent
harmless from and against all such taxes and withholding obligations.
4. CLAIMS AGAINST THE ESCROW FUND.
(a) Subject to the provisions of this Agreement, the Buyer and/or the
Seller shall be entitled to payment from the Escrow Fund to the extent they are
entitled to such payment under (i) Sections 1.2 and 2.1 of the Stock Purchase
Agreement for the adjustment of Purchase Price and (ii) Article VIII of the
Stock Purchase Agreement for indemnification for losses.
(b) Purchase Price Adjustment. (i) If the Buyer delivers to Seller the
Acceptance Notice referred to in Section 2.1(d) of the Stock Purchase Agreement
or fails to deliver an Objection Notice within the 45-day period required by
Section 2.1(d) of the Stock Purchase Agreement, then, as soon as practicable
(but not more than two (2) business days) after final determination of the Final
Net Current Assets, in the event the Final Net Current Assets are less than the
Reference Net Current Assets, Seller and Buyer shall provide joint written
instructions to the Escrow Agent to remit to Buyer, an amount equal to the
lesser of (x) the amount by which the Reference Net Current Assets exceeds the
Final Net Current Assets and (y) $500,000. (ii) Alternatively, if Buyer delivers
to Seller the Objection Notice, within (2) business days after such delivery,
Seller and Buyer shall provide joint written instructions to the Escrow Agent
directing the Escrow Agent to remit to Buyer an amount equal to the lesser of
(x) the amount, if any, by which the undisputed portion of the Final Net Current
Assets is less than the Reference Net Current Assets and (y) $500,000. (iii)
Within two business days after the resolution of any dispute by the parties or
the Unrelated Accounting Firm relating to the Objection Notice, Seller and Buyer
shall provide joint written instructions to the Escrow Agent directing the
Escrow Agent to remit to Buyer an amount equal to the lesser of (x) the amount,
if any, of any further adjustment required and (y) $500,000. Within two business
days of its receipt of instructions pursuant to the foregoing (i), (ii) or
(iii), the Escrow Agent shall pay over and distribute, from the Escrow Fund, (x)
to the Buyer the amount set forth in the joint instructions delivered by the
Buyer and the Seller pursuant to the foregoing (i), (ii) or (iii) and (y) to the
Seller an amount (if any) equal to (1) the remaining amount of the Escrow Fund,
after giving effect to the payment referred to in clause (x), minus (2)
$500,000. Such payments shall be by wire transfer of immediately available funds
to a bank account designated in writing to the
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<PAGE> 96
Escrow Agent by the Buyer, in the case of amounts payable to the Buyer, and by
the Seller, in the case of amounts payable to the Seller.
(c) Indemnification Claims. If an Indemnified Party makes a claim for
indemnification from the Seller under relevant provisions of the Stock Purchase
Agreement, the Buyer will concurrently deliver to the Escrow Agent a certificate
in substantially the form of Annex I attached to this Agreement (a "Certificate
of Instruction") and shall give written notice to the Seller of its delivery of
a Certificate of Instruction, together with a copy of such Certificate of
Instruction. No Certificate of Instruction may be delivered by the Buyer after
the close of business on the business day immediately preceding the Termination
Date (as defined in Section 5).
(d) Payment of Owed Amount. If the Escrow Agent (i) shall not, within 20
business days following its receipt of a Certificate of Instruction (the
"Objection Period"), have received from the Seller a certificate in
substantially the form of Annex II attached to this Agreement (an "Objection
Certificate") disputing the Seller's obligation to pay the Owed Amount referred
to in such Certificate of Instruction, or (ii) shall have received such an
Objection Certificate within the Objection Period and shall thereafter have
received either (x) a certificate from the Buyer and the Seller substantially in
the form of Annex III attached to this Agreement (a "Resolution Certificate")
stating that the Buyer and the Seller have agreed that the Owed Amount referred
to in such Certificate of Instruction (or a specified portion of the Owed
Amount) is payable to one or more of the Indemnified Parties or (y) a copy of a
final, nonappealable order, judgment, decree, or award of a court of competent
jurisdiction (accompanied by a certificate of the presenting party substantially
in the form of Annex IV attached to this Agreement (a "Litigation
Certificate")), in either case, directing delivery of the Owed Amount referred
to in such Certificate of Instruction (or a specified portion of the Owed
Amount) is payable to one or more of the Indemnified Parties by the Seller, then
the Escrow Agent shall, on the second business day next following (A) the
expiration of the Objection Period or (B) the Escrow Agent's receipt of a
Resolution Certificate or a Litigation Certificate, as the case may be, pay to
the Buyer from the Escrow Fund, by wire transfer of immediately available funds
to a bank account designated by the Buyer in the Certificate of Instruction, the
amount set forth in said Certificate of Instruction or, if such Resolution
Certificate or Litigation Certificate specifies that a lesser amount than such
Owed Amount is payable, such lesser amount.
(e) Notification of Dispute. The Escrow Agent shall give written notice
to the Buyer of its receipt of an Objection Certificate within two business days
of its receipt thereof, together with a copy of such Objection Certificate. The
Buyer shall give written notice to the Seller of its delivery of a Litigation
Certificate to the Escrow Agent, together with a copy of such Litigation
Certificate.
(f) Cancellation by Payment. Upon the payment by the Escrow Agent of the
Owed Amount referred to in a Certificate of Instruction, such Certificate of
Instruction shall be deemed canceled. Upon the receipt by the Escrow Agent of a
Resolution Certificate or a Litigation Certificate and the payment by the Escrow
Agent of the Owed Amount referred to in either such Certificate, the related
Certificate of Instruction shall be deemed canceled.
(g) Cancellation by Buyer. Upon the Buyer's determination that it has no
claim or has released its claim with respect to an Owed Amount referred to in a
Certificate of Instruction (or a specified portion of the Owed Amount), the
Buyer will deliver to the Escrow Agent a certificate substantially in the form
of Annex V attached to this Agreement (a "Buyer Cancellation Certificate")
canceling such Certificate of Instruction (or such specified portion of the Owed
Amount, as the case may be), and such Certificate of Instruction (or portion
thereof) shall thereupon be deemed canceled. The Buyer shall give written notice
to the Seller of its delivery to the Escrow Agent of a Buyer Cancellation
Certificate within two business days, together with a copy of such Buyer
Cancellation Certificate.
(h) Cancellation by Seller. Upon receipt of a final, nonappealable
order, decree or judgment of a court of competent jurisdiction, to the effect
that none of the Owed Amount referred to in a Certificate of Instruction as to
which the Seller delivered an Objection Certificate within the Objection Period
is
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<PAGE> 97
payable by the Seller, the Seller may, provided no Resolution Certificate or
Litigation Certificate with respect to such matter shall have previously been
received by the Escrow Agent, deliver a copy of such final, nonappealable court
order, decree or judgment (accompanied by a certificate of the Seller
substantially in the form of Annex VI attached to this Agreement (a "Seller
Cancellation Certificate")) canceling such Certificate of Instruction, and such
Certificate of Instruction shall thereupon be deemed canceled. The Escrow Agent
shall give written notice to the Buyer of its receipt of a Seller Cancellation
Certificate within two business days, together with a copy of such Seller
Cancellation Certificate.
(i) No Duty to Verify. The Escrow Agent shall have no obligation to
verify that the order attached to a Litigation Certificate or Seller
Cancellation Certificate constitutes a final, nonappealable order of a court of
competent jurisdiction, and shall be entitled to rely upon the Buyer's or the
Seller's statement to that effect.
5. TERMINATION.
(a) Termination Date. On the first anniversary of the Closing Date (as
defined in the Stock Purchase Agreement) (the "Termination Date"), the Escrow
Agent shall pay over and distribute to the Seller from the Escrow Fund, by wire
transfer of immediately available funds to a bank account designated in writing
by the Seller, an amount (if any) equal to (x) all amounts that remain in the
Escrow Fund as of such date minus (y) the Outstanding Claims Reserve as of such
date. "Outstanding Claims Reserve" means, as of any date, the sum of all of the
Owed Amounts referred to in Certificates of Instruction received by the Escrow
Agent that have not been canceled as of such date in accordance with Section
4(e), (f) or (g). If at any time after the Termination Date the amount remaining
in the Escrow Fund exceeds the Outstanding Claims Reserve, the Escrow Agent
shall promptly pay over to the Seller from the Escrow Fund, by wire transfer of
immediately available funds to a bank account designated in writing by the
Seller, the amount of such excess.
(b) Outstanding Certificates of Instruction. At such time on or
following the Termination Date as all Certificates of Instruction received by
the Escrow Agent prior to the Termination Date have been canceled in accordance
with Section 4(f), (g) or (h), the Escrow Agent shall promptly pay over to the
Seller the balance, if any, in the Escrow Fund, by wire transfer of immediately
available funds to a bank account designated in writing by the Seller, and this
Agreement (other than Sections 6, 7 and 8) shall automatically terminate.
6. DUTIES AND OBLIGATIONS OF THE ESCROW AGENT.
(a) The duties and obligations of the Escrow Agent shall be limited to
and determined solely by the provisions of this Agreement and the certificates
delivered in accordance with this Agreement, and the Escrow Agent is not charged
with knowledge of, or any duties or responsibilities in respect of, any other
agreement or document. In furtherance, and not in limitation, of the foregoing:
(i) The Escrow Agent shall not be liable for any loss sustained as a
result of investments made under this Agreement in accordance with the
terms of this Agreement, including losses sustained as a result of any
liquidation of any investment of the Escrow Fund prior to its maturity
effected in order to make a payment required by the terms of this
Agreement.
(ii) The Escrow Agent shall not be liable for loss of interest or
earnings incident to delays in the investment or reinvestment of cash held
in the Escrow Fund in accordance with the terms of this Agreement,
provided, that such delays did not result from the Escrow Agent's gross
negligence or willful misconduct.
(iii) The Escrow Agent shall be fully protected in relying in good
faith upon any written certification, notice, direction, request, waiver,
consent, receipt or other document that the Escrow Agent reasonably
believes to be genuine and duly authorized, executed and delivered.
(iv) The Escrow Agent shall not be liable for any error of judgment,
or for any act done or omitted by it, or for any mistake in fact or law, or
for anything that it may do or refrain from doing
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in connection with this Agreement; provided, however, that notwithstanding
any other provision in this Agreement, the Escrow Agent shall be liable for
its willful misconduct or gross negligence.
(v) The Escrow Agent may seek the advice of legal counsel selected
with reasonable care in the event of any dispute or question as to the
construction of any of the provisions of this Agreement or its duties under
this Agreement, and it shall incur no liability and shall be fully
protected in respect of any action taken, omitted or suffered by it in good
faith in accordance with the opinion of such counsel.
(vi) In the event that the Escrow Agent shall in any instance, after
seeking the advice of legal counsel pursuant to the immediately preceding
clause, in good faith be uncertain as to its duties or rights under this
Agreement, it shall be entitled to refrain from taking any action in that
instance and its sole obligation, in addition to those of its duties under
this Agreement as to which there is no such uncertainty, shall be to keep
safely all property held in the Escrow Fund until it shall be directed
otherwise in writing by each of the parties to this Agreement or by a
final, nonappealable order of a court of competent jurisdiction; provided,
that in the event that the Escrow Agent has not received such written
direction or court order within 180 calendar days after requesting the
same, it shall have the right to interplead the Buyer and Seller in any
court of competent jurisdiction and request that such court determine its
rights and duties under this Agreement.
(vii) The Escrow Agent may execute any of its powers or
responsibilities under this Agreement and exercise any rights under this
Agreement either directly or by or through agents or attorneys selected
with reasonable care.
(b) Nothing in this Agreement shall be deemed to impose upon the Escrow
Agent any duty to qualify to do business or to act as fiduciary or otherwise in
any jurisdiction other than the State of New York and the Escrow Agent shall not
be responsible for and shall not be under a duty to examine into or pass upon
the validity, binding effect, execution or sufficiency of this Agreement or the
Stock Purchase Agreement or of any agreement amendatory or supplemental to this
Agreement.
7. COOPERATION. The Buyer and the Seller shall provide to the Escrow Agent
all instruments and documents within their respective powers to provide that are
necessary for the Escrow Agent to perform its duties and responsibilities under
this Agreement. Each of the Buyer and the Seller has provided the Escrow Agent
with a certificate setting forth the names of persons authorized to deliver
instructions under this Agreement and a sample of the genuine signatures of such
persons and the Escrow Agent shall be entitled to rely upon such certificates
until a substitute certificate is delivered.
8. FEES AND EXPENSES; INDEMNITY.
(a) Fees and Expenses. All customary and ordinary course fees and
expenses of the Escrow Agent for its services under this Agreement shall be
shared equally between the Seller and the Buyer and paid as and when so billed
to such parties by the Escrow Agent.
(b) Indemnification of Escrow Agent. The Buyer and the Seller shall,
severally and not jointly, reimburse and indemnify the Escrow Agent and its
employees, officers, directors, and agents for, and hold it harmless against,
any loss, liability, damage, cost or expense, including but not limited to
reasonable attorneys' fees, reasonably incurred by the Escrow Agent in
connection with the Escrow Agent's performance of its duties and obligations
under this Agreement, as well as the reasonable costs and expenses of defending
against any claim or liability relating to this Agreement, provided, that
neither the Buyer nor the Seller shall be required to reimburse or indemnify the
Escrow Agent for, or hold it harmless against, any such loss, liability, damage,
cost or expense arising as a result of the Escrow Agent's willful misconduct or
gross negligence.
9. RESIGNATION AND REMOVAL OF THE ESCROW AGENT.
(a) Resignation and Removal. The Escrow Agent may resign as such 30
calendar days after notifying the Buyer and the Seller in writing of its intent
to resign. In addition, the Escrow Agent may be removed and replaced on a date
designated in a written instrument signed by the Seller and the Buyer
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and delivered to the Escrow Agent. Notwithstanding the foregoing, no such
resignation or removal shall be effective until a successor escrow agent has
acknowledged its appointment as such as provided in Section 9(c). In either
event, upon the effective date of such resignation or removal, the Escrow Agent
shall deliver the property comprising the Escrow Fund to the successor jointly
designated by the Seller and the Buyer or designated by the withdrawing Escrow
Agent as provided in Section 9(b), as applicable, together with such records
maintained by the Escrow Agent in connection with its duties under this
Agreement and other information with respect to the Escrow Fund as such
successor may reasonably request.
(b) Selection of Successor by Escrow Agent. If a successor escrow agent
shall not have acknowledged its appointment as such as provided in Section 9(c),
in the case of a resignation, prior to the expiration of 30 calendar days
following the date of a notice of resignation or, in the case of a removal, on
the date designated for the Escrow Agent's removal, as the case may be, because
the Seller and the Buyer are unable to agree on a successor escrow agent, or for
any other reason, the Escrow Agent may select a successor escrow agent and any
such resulting appointment shall be binding upon all of the parties to this
Agreement.
(c) Release of Withdrawing Escrow Agent. Upon written acknowledgment by
a successor escrow agent appointed in accordance with the foregoing provisions
of this Section 9 of its agreement to serve as escrow agent under this Agreement
and the receipt of the property then comprising the Escrow Fund, the Escrow
Agent shall be fully released and relieved of all duties, responsibilities and
obligations under this Agreement (except to the extent the withdrawing Escrow
Agent's actions or omissions to act with respect to such duties,
responsibilities and obligations constituted gross negligence or willful
misconduct) and the successor escrow agent shall for all purposes of this
Agreement be the Escrow Agent. Any Escrow Agent acting under this Agreement
shall be entitled to rely on the survival of Section 8 following the withdrawal
and replacement of such Escrow Agent.
10. NOTICES. All notices, requests and other communications under this
Agreement shall be in writing and sufficient if delivered personally or sent by
facsimile (with confirmation of receipt) or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Buyer, to:
Rhone Capital LLC
1330 Avenue of the Americas
New York, New York 10019
Facsimile: (212) 757-1718
Attention: David R. Ramsay
Ferdinand P. Groos
M. Brett Herman
Nancy Cooper
with a copy to:
Howard, Darby & Levin
1330 Avenue of the Americas
New York, New York 10019
Facsimile: (212) 841-1010
Attention: Kelly Vance
If to the Seller, to:
HMI Industries, Inc.
3631 Perkins Avenue
Cleveland, Ohio 44114
Facsimile: (216) 432-0329
Attention: Carl H. Young, General Counsel
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with a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
Facsimile: (216) 479-8793
Attention: Carolyn J. Buller
or to such other address or facsimile number as the party to whom notice is to
be given may have furnished to the other parties in writing in accordance with
this Section 10. Each such notice, request or communication shall be effective
when received or, if given by mail, when delivered at the address specified in
this Section or on the fifth business day following the date on which such
communication is posted, whichever occurs first.
11. AMENDMENTS AND WAIVERS. No modification, amendment or waiver of any
provision of, or consent required by, this Agreement, nor any consent to any
departure from the terms of this Agreement, shall be effective unless it is in
writing and signed by the parties to this Agreement. Such modification, waiver
or consent shall be effective only in the specific instance and for the purposes
for which it is given.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
13. ASSIGNMENT. This Agreement and the rights and obligations of the
parties to this Agreement shall not be assignable or transferable by any party
to this Agreement (other than the Escrow Agent) without the prior written
consent of the other parties, except that (a) the Buyer may assign this
Agreement and all of its rights and obligations under this Agreement to one or
more affiliates of the Buyer, provided, that no such assignment by the Buyer
shall release it from any of its liabilities or obligations hereunder and (b)
this Agreement shall be binding upon any assignee, transferee or successor to
all or substantially all of the business of the Seller. Any instrument
purporting to make an assignment in violation of this Section 13 shall be void.
14. MISCELLANEOUS. This Agreement is binding upon and will inure to the
benefit of the parties to this Agreement and, in accordance with Section 13
hereof, their respective successors and permitted assigns. This Agreement will
not constitute a valid and binding agreement, enforceable in accordance with its
terms, until executed and delivered by all of the parties hereto. For all
purposes of this Agreement, the term "business day" shall mean a day other than
Saturday, Sunday or any other day on which banks located in the State of New
York or Ohio are authorized or obligated to close. The headings used in this
Agreement have been inserted for convenience of reference only and do not define
or limit the provisions of this Agreement. 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. As between the
parties hereto other than the Escrow Agent, the terms of the Stock Purchase
Agreement shall control and govern over the terms of this Agreement in the event
of any conflict or inconsistency between this Agreement and the Stock Purchase
Agreement.
7
<PAGE> 101
The parties to this Agreement have executed or caused this Agreement to be
executed by duly authorized representatives as of the date first above written.
<TABLE>
<S> <C>
BUYER: [insert Buyer's name]
By: ----------------------------------------------------
SELLER: HMI INDUSTRIES INC.
By: ----------------------------------------------------
ESCROW AGENT: The Chase Manhattan Bank, as Escrow Agent
By: ----------------------------------------------------
Name:
Title:
</TABLE>
8
<PAGE> 102
ANNEX I
CERTIFICATE OF INSTRUCTION
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Certificate of Instruction.
Pursuant to Section 4(c) of the Escrow Agreement, the Buyer:
(a) certifies that (i) the Buyer has notified the Seller of the
existence of a claim for Losses or Environmental Damages (as such terms are
defined in the Stock Purchase Agreement) that are indemnifiable by the
Seller under Article VIII of the Stock Purchase Agreement, a copy of which
notice is attached hereto, and (ii) the amount of $[ ] (the "Owed
Amount") is payable to the Buyer or to another specified Indemnified Party
by the Seller pursuant to Article VIII of the Stock Purchase Agreement by
reason of the matter described in such notice;
(b) instructs you to pay to the Buyer from the Escrow Fund the Owed
Amount, by wire transfer of immediately available funds to the Buyer's
account at [name of bank], [ABA number], [title of account], [account
number], (i) if you do not receive an Objection Certificate from the Seller
prior to the expiration of the Objection Period, within two business days
following the expiration of the Objection Period, or (ii) if you receive an
Objection Certificate within the Objection Period, within two business days
following your receipt of a Resolution Certificate or a Litigation
Certificate; and
(c) certifies that a copy of this certificate has been or is
concurrently being delivered to the Seller.
[BUYER]
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 103
ANNEX II
OBJECTION CERTIFICATE
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Objection Certificate.
Pursuant to Section 4(d) of the Escrow Agreement, the Seller:
(a) disputes that the Owed Amount referred to in the Certificate of
Instruction dated , is payable to the Indemnified Parties
by the Seller pursuant to Article VIII of the Stock Purchase Agreement;
(b) certifies that the undersigned has sent to the Buyer a written
statement dated , , a copy of which is attached hereto,
disputing the liability of the Seller to the Indemnified Parties for the
Owed Amount; and
(c) objects to your making payment to the Buyer as provided in such
Certificate of Instruction.
HMI INDUSTRIES INC.
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 104
ANNEX III
RESOLUTION CERTIFICATE
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Resolution Certificate.
Pursuant to Section 4(d) of the Escrow Agreement, the Buyer and the Seller:
(a) certify that (i) the Buyer and the Seller have resolved their
dispute as to the matter described in the Certificate of Instruction dated
[ , ] and the related Objection Certificate dated
[ , ] and (ii) the final Owed Amount with respect to the
matter described in such Certificates is $[ ];
(b) instruct you to pay to the Buyer from the Escrow Fund the Owed
Amount referred to in clause (ii) of paragraph (a) above, by wire transfer
of immediately available funds to the Buyer's account at [name of bank],
[ABA number], [title of account], [account number], within two business
days following your receipt of this Certificate; and
(c) agree that the Owed Amount designated in such Certificate of
Instruction, to the extent, if any, it exceeds the Owed Amount referred to
in clause (ii) of paragraph (a) above, shall be deemed not payable to the
Indemnified Parties and such Certificate of Instruction is hereby canceled.
[BUYER]
By:
------------------------------------
Name:
Title:
HMI INDUSTRIES INC.
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 105
ANNEX IV
LITIGATION CERTIFICATE
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Litigation Certificate.
Pursuant to Section 4(d) of the Escrow Agreement, the Buyer:
(a) certifies that (i) attached hereto is a final, nonappealable
order, judgment, decree or award of a court of competent jurisdiction
resolving the dispute between the Buyer and the Seller as to the matter
described in the Certificate of Instruction dated [ , ] and
the related Objection Certificate dated [ , ] and (ii) the
final Owed Amount with respect to the matter described in such
Certificates, as provided in the attached order, is $[ ];
(b) instructs you to pay to the Buyer from the Escrow Fund the Owed
Amount referred to in clause (ii) of paragraph (a) above, by wire transfer
of immediately available funds to the Buyer's account at [name of bank],
[ABA number], [title of account], [account number], within two business
days following your receipt of this Certificate; and
(c) agrees that the Owed Amount designated in such Certificate of
Instruction, to the extent, if any, it exceeds the Owed Amount referred to
in clause (ii) of paragraph (a) above, shall be deemed not payable to the
Indemnified Parties and such Certificate of Instruction is hereby canceled.
[BUYER]
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 106
ANNEX V
BUYER CANCELLATION CERTIFICATE
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Buyer Cancellation
Certificate.
Pursuant to Section 4(g) of the Escrow Agreement, the Buyer:
(a) certifies that (i) it hereby releases its claim against the Seller
with respect to [all] [specify portion] of the Owed Amount designated in
the Certificate of Instruction dated [ , ] and (ii) as a
result the Owed Amount with respect to such Certificate of Instruction is
$[ ]; and
(b) agrees that such Certificate of Instruction is, to the extent
released as provided in clause (i) of paragraph (a) above, canceled.
[BUYER]
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 107
ANNEX VI
SELLER CANCELLATION CERTIFICATE
TO
THE CHASE MANHATTAN BANK,
AS ESCROW AGENT
[ ] (the "Buyer"), HMI Industries Inc. (the "Seller") and The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), are parties to an
Escrow Agreement, dated as of [ ], 1998. Terms defined in the Escrow
Agreement have the same meanings when used in this Seller Cancellation
Certificate.
Pursuant to Section 4(h) of the Escrow Agreement, the Seller certifies that
(i) attached hereto is a final, nonappealable order, judgment, decree or award
of a court of competent jurisdiction resolving the dispute between the Buyer and
the Seller as to the matter described in the Certificate of Instruction dated
[ , ] and the related Objection Certificate dated [ ,
] and (ii) as provided in the attached order, there is no Owed Amount with
respect to the matter described in such Certificates.
HMI INDUSTRIES, INC.
By:
------------------------------------
Name:
Title:
Dated: ____________________, ____
<PAGE> 108
ANNEX A
TO STOCK PURCHASE AGREEMENT
MATTERS FOR OPINION OF
SQUIRE, SANDERS & DEMPSEY L.L.P.
1. The Company, Bliss and Sub are corporations duly organized, validly
existing and in good standing under the laws of their respective states of
incorporation and have the corporate power and authority to own and use their
respective assets and to conduct their business as and where now owned and
conducted.
2. The execution and delivery of the Purchase Agreement, Voting Agreement
and Escrow Agreement by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not violate or contravene (a)
any provision of the Certificate of Information or Bylaws or Regulations, as the
case may be, of the Company, Bliss or Sub or (b) any law or regulation
applicable to the Company, Bliss or Sub.
3. Each of the Purchase Agreement, Voting Agreement and Escrow Agreement
has been duly executed and delivered by the Company and constitutes the valid
and binding obligation of the Company, and, with respect only to the Purchase
Agreement, is enforceable against the Company in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles.
4. The authorized capital stock of each of Bliss and Sub is as set forth in
the Purchase Agreement. The shares of Bliss to be acquired by Buyer as
contemplated by the Purchase Agreement are duly authorized, validly issued,
fully paid and nonassessable and free of any preemptive or similar rights.
A-1
<PAGE> 109
ANNEX B
TO STOCK PURCHASE AGREEMENT
MATTERS FOR OPINION OF
HOWARD, DARBY & LEVIN
1. Buyer is a limited liability company duly formed, validly existing and
in good standing under the laws of the State of Delaware and has the full
limited liability company power and authority to enter into and perform the
Purchase Agreement, the Voting Agreement and the Escrow Agreement.
2. Each of the Purchase Agreement, the Voting Agreement and the Escrow
Agreement has been duly authorized, executed and delivered by Buyer and
constitutes the valid and binding obligation of Buyer, and, with respect only to
each of the Escrow Agreement and the Voting Agreement, is enforceable against
Buyer in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles.
3. The execution and delivery of the Purchase Agreement, the Voting
Agreement and the Escrow Agreement by Buyer and the consummation by Buyer of the
transactions contemplated thereby do not and will not violate or contravene (a)
any provision of the certificate of formation or operating agreement of Buyer or
(b) any law or regulation applicable to Buyer.
B-1
<PAGE> 110
ANNEX B --
COMPOSITE CONFORMED COPY
STOCKHOLDER VOTING AGREEMENT
This STOCKHOLDER VOTING AGREEMENT (this "Agreement") is made and entered
into as of December 17, 1997, by and among Rhone Capital, LLC, a Delaware
limited liability company ("Rhone", together with its assigns, the "Buyer"), HMI
Industries Inc., a Delaware corporation ("HMI"), and each of the undersigned
persons or entities (each a "Stockholder").
WHEREAS, each Stockholder desires that the Buyer and HMI enter into a Stock
Purchase Agreement dated the date hereof (as the same may be amended or
supplemented, the "Purchase Agreement") with respect to the purchase (the "Stock
Purchase") by Buyer of the common stock of Bliss Manufacturing Company, an Ohio
corporation (the "Company" or "Bliss"); and
WHEREAS, the Stockholders and HMI are executing this Agreement as an
inducement to the Buyer to enter into and to consummate, subject to the terms
and conditions thereof, the Purchase Agreement;
NOW, THEREFORE, in consideration of the execution and delivery by the Buyer
and HMI of the Purchase Agreement and the respective representations,
warranties, covenants, conditions and agreements contained herein and therein,
the parties agree as follows:
1. Representations and Warranties of Stockholders. Each Stockholder,
severally and not jointly, represents and warrants to the Buyer as follows:
(a) Such Stockholder is the record or beneficial owner of the
number of shares of common stock, $1.00 par value, of HMI ("HMI Stock") and
has rights by option or otherwise to acquire the number of additional
shares of HMI Stock as set forth below such Stockholder's name on the
signature pages hereof (such Stockholder's "Shares"). Except for such
Stockholder's Shares, such Stockholder is not the record or beneficial
owner of any shares of HMI Stock. This Agreement has been duly executed and
delivered by, and constitutes a valid and binding agreement of, such
Stockholder, enforceable against such Stockholder in accordance with its
terms.
(b) Neither the execution and delivery of this Agreement nor the
consummation by such Stockholder of the transactions contemplated hereby
will result in a violation of, or a default under, or conflict with, any
contract, trust, commitment, agreement, understanding, arrangement or
restriction of any kind to which such Stockholder is a party or bound or to
which such Stockholder's Shares are subject. If such Stockholder is married
and such Stockholder's Shares constitute community property, this Agreement
has been executed and delivered by, and constitutes a valid and binding
agreement of, such Stockholder's spouse, enforceable against such person in
accordance with its terms. Consummation by the Stockholder of the
transactions contemplated hereby will not violate, or require any consent,
approval, or notice under, any provision of any judgment, order, decree,
statute, law, rule or regulation applicable to the Stockholder or such
Stockholder's Shares.
(c) Such Stockholder's Shares and the certificates representing
such Shares are now, and at all times during the term hereof will be, held
by such Stockholder, or by a nominee or custodian for the benefit of such
Stockholder, except as indicated on the signature page hereof, free and
clear of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances, proxies or agreements arising
hereunder, and if such Stockholder's Shares are the subject of a bona fide
pledge to a bank, financial institution or other entity, no default exists
under such pledge as of the date hereof.
(d) Such Stockholder understands and acknowledges that the Buyer
is entering into the Purchase Agreement in reliance upon such Stockholder's
execution and delivery of this Agreement. Such Stockholder acknowledges
that the irrevocable proxy set forth in Section 5 is granted in
consideration for the execution and delivery of the Purchase Agreement by
the Buyer.
<PAGE> 111
2. Representations and Warranties of Buyer. The Buyer represents and
warrants to each Stockholder as follows:
(a) The Buyer is a limited liability company duly formed, validly
existing and in good standing under the laws of the State of Delaware.
(b) Buyer has the requisite limited liability company power and
authority to execute, deliver and perform this Agreement and to consummate
the transaction contemplated hereby.
(c) The execution, delivery and performance of this Agreement by
Buyer and the consummation by the Buyer of the transactions contemplated
hereby have been duly authorized by all necessary company action of the
Buyer.
(d) This Agreement has been duly executed and delivered by the
Buyer and, assuming due authorization, execution and delivery of this
Agreement by each Stockholder, is a valid and binding obligation of the
Buyer enforceable against the Buyer in accordance with its terms.
(e) Neither the execution, delivery and performance of this
Agreement by the Buyer nor the consummation by the Buyer of the
transactions contemplated hereby will (i) violate any provision of the
certificate of formation or operating agreement of the Buyer, (ii) conflict
with, result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right
of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee or other evidence of indebtedness, license, lease, contract,
agreement, plan or other instrument or obligation to which the Buyer is a
party or by which it or any of its assets may be bound or (iii) conflict
with or violate any laws applicable to the Buyer of any of its properties
or assets; except in the case of clauses (ii) and (iii) for conflicts,
violations, breaches or defaults which would not individually or in the
aggregate be reasonably expected to prevent or materially impair or delay
the consummation by the Buyer of the transactions contemplated hereby.
3. Voting Agreements. Each Stockholder agrees with, and covenants to, the
Buyer as follows:
(a) At any meeting of stockholders of HMI called to vote upon the
Purchase Agreement, the Stock Purchase or the consummation of the
transactions contemplated by the Purchase Agreement, or at any adjournment
or postponement thereof, or in any other circumstances upon which a vote,
consent or other approval with respect to the Purchase Agreement, the Stock
Purchase or the consummation of the transactions contemplated by the
Purchase Agreement is sought (the "Stockholders' Meeting"), such
Stockholder shall vote (or cause to be voted) such Stockholder's Shares
(other than such Stockholder's Shares with respect to which a valid proxy
has been granted pursuant to Section 5 hereof) in favor of the execution
and delivery by HMI of the Purchase Agreement, the Stock Purchase and the
approval of the terms of the Purchase Agreement and each of the other
transactions contemplated thereby.
(b) At any meeting of stockholders of HMI or at any adjournment
thereof or in any other circumstances upon which their vote, consent or
other approval is sought, such Stockholder shall vote (or cause to be
voted) such Stockholder's Shares (other than such Stockholder's Shares with
respect to which a valid proxy has been granted pursuant to Section 5
hereof) against (i) any stock purchase or merger agreement or acquisition
(other than the Purchase Agreement and the Stock Purchase), consolidation,
combination, sale of substantial assets, reorganization, recapitalization,
dissolution, liquidation or winding up of or involving Bliss or (ii) any
amendment of the Company's or HMI's Certificate of Incorporation, By-laws
or Regulations or other proposal or transaction involving the Company or
its subsidiary which amendment or other proposal or transaction would in
any manner impede, frustrate, prevent or nullify the Stock Purchase, the
Purchase Agreement or any of the other transactions contemplated by the
Purchase Agreement (each of the foregoing in clause (i) or (ii) above, a
"Competing Transaction").
B-2
<PAGE> 112
4. Covenants of Stockholders. Each Stockholder agrees with, and covenants
to, the Buyer that, except as otherwise provided herein, such Stockholder shall
not (i) transfer (which term shall include, without limitation, for the purposes
of this Agreement, any sale, gift, pledge (other than Permitted Liens (as
defined below)) or other disposition), or consent to any transfer of, any or all
of such Stockholder's Shares or any interest therein, (ii) enter into any
contract, option or other agreement or understanding with respect to any
transfer of any or all of such Shares or any interest therein, (iii) grant any
proxy, power of attorney or other similar authorization in or with respect to
such Shares, except for this Agreement, or (iv) deposit such Shares into a
voting trust or enter into a voting agreement or arrangement with respect to
such Shares, except for this Agreement; provided, that such Stockholder may
transfer (as defined above) any of such Stockholder's Shares to any other person
who is on the date hereof, or to any family member of a person or charitable
institution which prior to the Stockholders' Meeting and prior to such transfer
becomes, a party to this Agreement bound by all the obligations of a
"Stockholder" hereunder. Exercise of rights or remedies pursuant to bona fide
pledges of shares of HMI Stock to banks or other financial institutions, which
pledges were made prior to the date hereof ("Permitted Liens"), are not
restricted by this Agreement.
5. Grant of Irrevocable Proxy; Appointment of Proxy.
(a) Each Stockholder, by this Agreement with respect to such
Stockholder's Shares that such Stockholder owns of record, hereby
irrevocably grants to, and appoints, David R. Ramsay and Ferdinand P.
Groos, in their capacities as representatives of the Buyer, and each of
them individually, such Stockholder's proxy and attorney-in-fact (with full
power of substitution), for and in the name, place and stead of such
Stockholder, to vote such Stockholder's Shares, or grant a consent or
approval in respect of such Shares (i) in favor of the Stock Purchase, the
execution and delivery of the Purchase Agreement and approval of the terms
thereof and each of the other transactions contemplated by the Purchase
Agreement and (ii) against any Competing Transaction.
(b) Each Stockholder represents, severally and not jointly, that
any proxies heretofore given in respect of such Stockholder's Shares are
not irrevocable, and that any such proxies are hereby revoked.
(c) Each Stockholder hereby affirms that the irrevocable proxy
set forth in this Section 5 is given in connection with the execution of
the Purchase Agreement, and that such irrevocable proxy is given to secure
the performance of the duties of such Stockholder under this Agreement.
Each Stockholder hereby further affirms that the irrevocable proxy is
coupled with an interest and may under no circumstances be revoked. Each
Stockholder hereby ratifies and confirms all that such irrevocable proxy
may lawfully do or cause to be done by virtue hereof. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212 of the Delaware General Corporation Law.
6. Certain Events. Each Stockholder agrees that this Agreement and the
obligations hereunder shall attach to such Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of such
Shares shall pass, whether by operation of law or otherwise, including without
limitation such Stockholder's successors or assigns. In the event of any stock
split, stock dividend, merger, reorganization, recapitalization or other change
in the capital structure of HMI affecting the HMI Stock, or the acquisition of
additional shares of HMI Stock or other voting securities of HMI by any
Stockholder, the number of Shares subject to the terms of this Agreement shall
be adjusted appropriately and this Agreement and the obligations hereunder shall
attach to any additional shares of HMI Stock or other voting securities of HMI
issued to or acquired by such Stockholder.
7. Legends. HMI agrees with, and covenants to, the Buyer that HMI shall not
register the transfer of any certificate representing any of the shares of HMI
Stock owned of record or beneficially by any Stockholder, unless such transfer
is made in compliance with this Agreement.
8. New Issuances. HMI agrees with and covenants to Buyer that, except
pursuant to the exercise of options to acquire HMI Stock outstanding on the date
hereof, HMI shall not issue any shares of HMI
B-3
<PAGE> 113
Stock or any securities convertible into or exchangeable for HMI Stock on or
after the date hereof to and including the earlier of (a) the completion by
Buyer of the transactions contemplated by the Stock Purchase and (b) the
termination of the Purchase Agreement in accordance with its terms.
9. Further Assurances. Each Stockholder and HMI shall, upon request of the
Buyer, execute and deliver any additional documents and take such further
actions as may reasonably be deemed by the Buyer to be necessary or desirable to
carry out the provisions hereof and to vest the power to vote such Stockholder's
Shares as contemplated by Section 5 in the representatives of Buyer and the
other irrevocable proxies described therein.
10. Termination. This Agreement, and all rights and obligations of the
parties hereunder, shall terminate upon the first to occur of (x) the
consummation by Buyer of the transactions contemplated by the Stock Purchase or
(y) the date upon which the Purchase Agreement is terminated in accordance with
its terms.
11. Miscellaneous.
(a) Capitalized terms used and not otherwise defined in this
Agreement shall have the respective meanings assigned to them in the
Purchase Agreement.
(b) All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof
of delivery) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice): (i) if to the
Buyer or HMI, to the address provided in the Purchase Agreement; and (ii)
if to a Stockholder, to its address shown below its signature on the
signature pages hereof.
(c) The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
(d) This Agreement may be executed in two or more counterparts,
all of which shall be considered one and the same instrument.
(e) This Agreement (including the documents and instruments
referred to herein) constitutes the entire agreement, and supersedes all
prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
(f) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware regardless of the laws
that might otherwise govern under applicable principles of conflicts of
laws thereof.
(g) Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior
written consent of the other parties, except as expressly contemplated by
Section 4; provided that Rhone Capital LLC may assign its rights hereunder
to any assignee of its rights under the Purchase Agreement. Any assignment
in violation of the foregoing shall be void.
(h) Each Stockholder and HMI agrees that irreparable damage would
occur and that the Buyer would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Buyer shall be entitled to an injunction or
injunctions to prevent breaches by such Stockholder or HMI of this
Agreement and to enforce specifically the terms and provisions of this
Agreement. Each of the parties hereto hereby submits to the jurisdiction of
the United States District Court for the District of Delaware and of any
Delaware state court sitting in Delaware for purposes of all legal
proceedings arising out of or relating to this Agreement or the
transactions contemplated hereby. Each of the parties hereto irrevocably
waives, to the fullest extent permitted by law, any objection which it may
now or hereafter have to the laying of
B-4
<PAGE> 114
the venue of any proceeding brought in such a court and any claim that any
such proceeding brought in such a court has been brought in an inconvenient
forum.
(i) If any term, provision, covenant or restriction herein, or
the application thereof to any circumstance, shall, to any extent, be held
by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions herein
and the application thereof to any other circumstances, shall remain in
full force and effect, shall not in any way be affected, impaired or
invalidated, and shall be enforced to the fullest extent permitted by law.
(j) No amendment, modification or waiver in respect of this
Agreement shall be effective against any party unless it shall be in
writing and signed by such party.
(k) Each of the parties to this Stockholder Voting Agreement
acknowledges and agrees that the obligations of the Stockholders and HMI
are several and not joint.
IN WITNESS WHEREOF, the undersigned parties have executed and delivered
this Stockholder Voting Agreement as of the day and year first above written.
<TABLE>
<S> <C> <C>
RHONE CAPITAL LLC
By /s/ DAVID R. RAMSAY
--------------------------------------------
HMI INDUSTRIES INC.
By /s/ CARL H. YOUNG, III
--------------------------------------------
Vice President
STOCKHOLDERS:
/s/ JAMES R. MALONE
------------------------------------------------
Name: James R. Malone
Address:
Number of Shares
Beneficially Owned: 12,500
------------------------------------------------
Number of Shares
Owned of Record: 12,500
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
</TABLE>
B-5
<PAGE> 115
<TABLE>
<S> <C> <C>
/s/ CARL H. YOUNG, III
------------------------------------------------
Name: Carl H. Young, III
Address:
Number of Shares
Beneficially Owned: 32,500
------------------------------------------------
Number of Shares
Owned of Record: 32,500
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
/s/ MARK A. KIRK
------------------------------------------------
Name: Mark A. Kirk
Address:
Number of Shares
Beneficially Owned: 32,500
------------------------------------------------
Number of Shares
Owned of Record: 32,500
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
/s/ JOHN S. MEANY, JR.
------------------------------------------------
Name: John S. Meany, Jr.
Address:
Number of Shares
Beneficially Owned: 347,104
------------------------------------------------
Number of Shares
Owned of Record: 347,104
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
/s/ ANNE M. BAKER
------------------------------------------------
Name: Anne M. Baker
Address:
Number of Shares
Beneficially Owned: 136,136
------------------------------------------------
Number of Shares
Owned of Record: 136,136
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
</TABLE>
B-6
<PAGE> 116
<TABLE>
<S> <C> <C>
/s/ DONALD L. BAKER
------------------------------------------------
Name: Donald L. Baker
Address:
Number of Shares
Beneficially Owned: 2,700
------------------------------------------------
Number of Shares
Owned of Record: 2,700
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
/s/ DONALD L. BAKER & ANNE M. BAKER
------------------------------------------------
Name: Donald L. Baker & Anne M. Baker
Address:
Number of Shares
Beneficially Owned: 2,700
------------------------------------------------
Number of Shares
Owned of Record: 2,700
------------------------------------------------
Number of Shares
Subject to Pledge: 0
/s/ Barry Needler, President
------------------------------------------------
Name: STEEPLECHASE CORP.
Address: P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Number of Shares
Beneficially Owned:
------------------------------------------------
Number of Shares
Owned of Record: 1,704,750
------------------------------------------------
Number of Shares
Subject to Pledge:
------------------------------------------------
/s/ Barry Needler, President
------------------------------------------------
Name: FAIRWAY, INC.
Address: P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Number of Shares
Beneficially Owned:
------------------------------------------------
Number of Shares
Owned of Record: 150,750
------------------------------------------------
Number of Shares
Subject to Pledge:
------------------------------------------------
</TABLE>
B-7
<PAGE> 117
<TABLE>
<S> <C> <C>
/s/ Barry Needler, President
------------------------------------------------
Name: RELDEEN LTD.
Address: P.O. Box 2463, Station B
Richmond Hill, Ontario L431A5
Number of Shares
Beneficially Owned: 4,500
------------------------------------------------
Number of Shares
Owned of Record:
------------------------------------------------
Number of Shares
Subject to Pledge: 0
------------------------------------------------
By /s/ M. Walker, President
------------------------------------------------
Name: ISETAN MANAGEMENT LTD.
Address: 4 Hunter Glen Road
Aurora, Ontario L4G 6W4
Number of Shares
Beneficially Owned: 233,973
------------------------------------------------
Number of Shares
Owned of Record:
------------------------------------------------
Number of Shares
Subject to Pledge:
------------------------------------------------
</TABLE>
B-8
<PAGE> 118
ANNEX C
LOGO
March 13, 1998
PERSONAL AND CONFIDENTIAL
- -----------------------------------------
Board of Directors
HMI Industries Inc.
3631 Perkins Avenue
Cleveland, Ohio 44114
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of HMI Industries Inc. (the "Company") of the
consideration to be paid by Rhone Capital LLC ("Rhone") in connection with the
proposed sale of Bliss Manufacturing Company, a wholly owned subsidiary of the
Company ("BMC"), to Rhone pursuant to a Stock Purchase Agreement dated as of
December 17, 1997 by and between the Company and Rhone, as amended (the
"Agreement").
Pursuant to the Agreement, Rhone will purchase from the Company all of the
issued and outstanding shares of common stock, no par value, of BMC for an
aggregate purchase price of $31,250,000, to be paid in cash (the
"Consideration"). The Consideration is subject to adjustment in accordance with
the provisions contained in the Agreement.
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. McDonald is familiar with the Company, having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the Agreement.
In connection with rendering this opinion, we have reviewed and analyzed,
among other things, the following: (i) the Agreement, including the exhibits and
schedules thereto; (ii) the Company's Proxy Statement on Schedule 14A prepared
for its 1998 Annual Meeting of Shareholders; (iii) certain publicly available
information concerning the Company and BMC, including the Annual Reports on Form
10-K of the Company and Annual Reports to Stockholders for each of the years in
the three year period ended September 30, 1997, and the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1997; (iv) certain other
internal information, primarily financial in nature, including projections,
concerning the business and operations of BMC and the Company furnished to us by
the Company for purposes of our analysis; (v) certain publicly available
financial and stock market information concerning the pricing and trading of,
and the trading market for, the Company's common stock; (vi) certain publicly
available financial and stock market information with respect to certain other
companies that we believe to be comparable to BMC and the pricing and trading
markets for certain of such other companies' securities; and (vii) certain
publicly available information concerning the nature and terms of certain other
comparable transactions that we consider relevant to our inquiry. We have also
met with certain officers and employees of the Company and BMC to discuss the
business, financial condition and future prospects of the Company and BMC, as
well as other matters we believe relevant
C-1
<PAGE> 119
Board of Directors
HMI Industries Inc.
March 13, 1998
Page 2
to our inquiry. In addition, we have performed such other studies and analyses
as we consider appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have assumed and relied upon
the representations and warranties of the Company and Rhone contained in the
Agreement. We have not been engaged to, and have not independently attempted to,
verify any of such information. We have also relied upon the management of the
Company as to the reasonableness and achievability of the financial and
operating projections (and the assumptions and bases therefor) provided to us
and, with your consent, we have assumed that such projections reflect the best
currently available estimates and judgments of the Company's management and that
such projections and forecasts will be realized in the amounts and in the time
periods currently estimated by management. We have not been engaged to assess
the achievability of such projections or the assumptions on which they were
based and express no view as to such projections or assumptions. In addition, we
have not conducted an independent evaluation or appraisal of any of the assets,
properties or facilities of BMC nor have we been furnished with any such
evaluation or appraisal, except for the appraisal report of the Company, dated
February 28, 1997, prepared by IPC/Levy. We have also assumed that the
conditions to the transaction as set forth in the Agreement would be satisfied
and that the sale of BMC would be consummated on a timely basis in the manner
contemplated by the Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, of the Consideration to be received
by the Company pursuant to the Agreement and does not address the Company's
underlying business decision to effect the sale of BMC or any other terms of the
transaction.
We have acted as financial advisor to the Company in connection with the
transactions contemplated by the Agreement and will receive from the Company a
fee for our services, all of which is contingent upon the consummation of the
sale of BMC. The Company has also agreed to indemnify us under certain
circumstances pursuant to an engagement letter dated October 3, 1997, with the
Company.
In the ordinary course of our business, we may actively trade securities of
the Company for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this opinion is directed to the Board of Directors
and senior management of the Company and may not be disclosed, summarized,
excerpted from or otherwise publicly referred to without our prior written
consent. Our opinion does not constitute a recommendation to any stockholder of
the Company as to how such stockholder should vote at the stockholders' annual
meeting held to consider, among other matters, the sale of BMC contemplated by
the Agreement.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that as of the date hereof, the
Consideration to be received by the Company pursuant to the Agreement is fair,
from a financial point of view, to the stockholders of the Company.
Very truly yours,
/s/ McDonald & Company Securities,
Inc.
McDONALD & COMPANY SECURITIES, INC.
C-2
<PAGE> 120
ANNEX D
FORM 10-K
D-1
<PAGE> 121
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A3
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997 Commission File Number 2-30905
HMI INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1202810
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3631 Perkins Avenue, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 432-1990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
Common Stock, $1 par value per share
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 and (2) has been subject to such filing requirements for the
past ninety (90) days. Yes X 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 amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of Registrant,
computed by reference to the closing price on the NASDAQ Stock Exchange on
March 6, 1998 was approximately $9,465,990.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 6, 1998
-------------------------------------- --------------------------------------
Common stock, $1 par value per share 5,033,996
Documents Incorporated by Reference
The following documents are incorporated by reference in this Form 10-K.
None
Index to Exhibits is found on page 60. This report consists of 61 pages.
================================================================================
1
<PAGE> 122
TABLE OF CONTENTS
- -----------------
<TABLE>
<CAPTION>
PART I. Page
- ------- ---------
<S> <C> <C>
Item 1. Business
(a) General Development of Business ......................................... 3
(b) Financial Information About Industry Segments ........................... 4
(c) Narrative Description of Business ....................................... 4
Consumer Goods ........................................................ 4
Manufactured Products ................................................. 5
Metal Stamping and Metal Formed Tubing .............................. 6
Tools, Dies and Specialty Machinery ................................. 6
Employees ............................................................. 6
Environmental Policies and Controls ................................... 7
Methods of Production and Raw Materials ............................... 7
(d) Financial Information About Foreign and Domestic
Operations and Export Sales ........................................... 7
Executive Officers of the Registrant .................................... 7
Item 2. Properties ................................................................ 9
Item 3. Legal Proceedings ......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ....................... 10
PART II.
- --------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matter ...................................................... 10
Item 6. Selected Financial Data ................................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 12
Item 8. Financial Statements and Supplementary Data ............................... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................................... 17
PART III.
- ---------
Item 10. Directors and Executive Officers of Registrant ............................ 17
Item 11. Executive Compensation .................................................... 20
Item 12. Security ownership of Certain Beneficial Owners and
Management .............................................................. 27
Item 13. Certain Relationships and Related Transactions ............................ 29
PART IV.
- --------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................................ 30
SIGNATURES ................................................................ 31
INDEX TO FINANCIAL STATEMENTS ............................................. 32
INDEX TO EXHIBITS ......................................................... 60
</TABLE>
2
<PAGE> 123
PART I.
- -------
Item 1. Business
- -----------------
(a) General Development of Business
-------------------------------
HMI Industries Inc. (the "Company" or "registrant") was known as Health-Mor Inc.
until January 1995. The Company was reorganized in 1968 as a Delaware
corporation, succeeding an Illinois corporation originally formed in 1928. In
1997, the business of the Company was carried out through two primary divisions.
The Consumer Goods Division manufactures and sells floor care and air filtration
products, primarily portable bagless vacuum cleaners sold under the trade names
"Filter Queen", "Princess", "Majestic" and "Empress", central vacuum cleaning
systems sold under the trade names "Vacu-Queen" and "Majestic II". Portable room
air cleaners are sold under the trade name "Defender" and carpet cleaning
systems under the trade name "Easy Way" are both sold and leased. This division
also sells needle-free insulin injectors under the "AdvantaJet" name. The
operations of the Consumer Goods Division are carried on through the operations
at the Perkins Avenue facility in Cleveland, Ohio, and the following
wholly-owned subsidiaries: HMI Incorporated (incorporated in Ontario, Canada);
Home Impressions Inc. (incorporated in Delaware);; Health-Mor International,
Inc., which meets the qualifications under the Internal Revenue Code as a
foreign sales corporation (incorporated in the U.S. Virgin Islands); Health-Mor
Acceptance Corporation (incorporated in Delaware); HMI Acceptance Corporation
(incorporated in Ontario, Canada); and Health-Mor Acceptance PTY Ltd.
(incorporated in Sydney, Australia). Health-Mor Personal Care Corp.
(incorporated in Delaware) is 85% owned by the registrant.
The Manufactured Products Division engages in the fabrication and sale of
commercial and industrial stamped components, metal formed tubular products and
machined components, and the manufacture of needle-free insulin injectors. The
operations of this division are carried out by Bliss Manufacturing Company
(incorporated in Ohio) and Tube-Fab Ltd. (incorporated in Ontario, Canada), both
wholly-owned subsidiaries of the Company.
In 1997, the Company made a decision to sell its Manufactured Products Division
businesses and any poor performing product lines in the Consumer Goods Division.
As a result of this decision, Bliss Tubular Products, which engaged in the
bending of aluminum, steel and copper tubing, was sold in fiscal 1997 and the
Company is negotiating the sale of Tube-Fab Ltd.
In September 1997, the Company decided to sell Bliss Manufacturing Company and
this subsidiary was offered for sale. On December 18, 1997, the Company signed a
definitive agreement to sell the stock of its Bliss Manufacturing Company to an
investor group led by Mervin Dunn and Rhone Capital, LLC. The purchase price is
$31,500,000, subject to certain adjustments, including a $1,500,000 distribution
for certain payments to vendors and employee obligations. The sale is expected
to close in March 1998, subject to regulatory and shareholder approval.
In the Consumer Goods Division, the Company has offered for sale two businesses,
Health-Mor Personal Care Corporation and Household Rental Systems ("HRS"). A
letter of intent to sell HRS was signed in December, 1997. In addition, the
Company discontinued selling the "Optima" portable canister vacuum and the
"Princess 2000" upright vacuum cleaner in 1997. In December 1997, the Company
announced it
3
<PAGE> 124
was discontinuing the "Electrapure" portable canister vacuum product. Sale of
the "SuperNaturals" brand of cleaning products was suspended in 1997. Most of
the Home Impressions product lines were discontinued in 1997, except for the
"Vacu-Queen" central vacuum cleaning system. The Company also discontinued
rental of the "Easy Way" carpet cleaning systems to Filter Queen direct
distributors in 1997.
(b) Financial Information About Industry Segments
---------------------------------------------
As of September 30, 1997, the Company's continuing operations consist of a
single operating segment: the Consumer Goods Division. See Note 12 (Business
Segments) of the Notes to the Consolidated Financial Statements found on page 55
for further information.
(c) Narrative Description of Business
---------------------------------
Consumer Goods
- --------------
The principal products of the Consumer Goods Division of the Company are floor
care and air filtration products, primarily portable vacuum cleaners and central
vacuum cleaning systems. Portable bagless vacuum cleaners are sold under the
trade names "Filter Queen", "Princess", "Majestic" and "Empress". The central
vacuum cleaning systems are sold under the trade names "Vacu-Queen" and
"Majestic II". The bagless portable and portable canister vacuums consist of a
canister type suction cleaner, motorized vacuum cleaning head with a revolving
brush ("Pow-R-Nozzle"), hose, wand, brushes and other cleaning tools. The
Company also offers accessories for use with its bagless and canister vacuum
cleaners, most of which are attached to the exhaust outlet and may be used as
room deodorizers, air circulators, and for other blowing operations such as the
spraying of liquids. The central vacuum cleaning systems use the motorized
vacuum cleaning head with a revolving brush, as well as the hose, wand, brushes
and other cleaning tools. The Company also manufactures straight suction
attachments, which do not have a motorized vacuum cleaning head.
The Filter Queen cleaning system has been registered by Underwriters
Laboratories and Canadian Standards Authority as an Air Filtration Device.
The floor care products of the Consumer Goods Division are marketed in the
United States, Canada, and over forty other countries. The Company markets the
Filter Queen Majestic and the Empress through independent distributors who sell
in the home directly through their own independent representatives and who also
sell indirectly through the representatives of smaller independent local
distributors.
Central vacuum cleaning systems are marketed worldwide under the trade name
"Vacu-Queen" through retail distributors and under the trade name "Majestic II"
through direct distributors. The Company also markets the Vacu-Queen to building
contractors and developers for installation in newly constructed homes and
apartments.
Household Rental Systems ("HRS") provides carpet cleaning systems for rent to
consumers through independent retail vacuum cleaner stores under the name "Easy
Way" in the United States and Canada. The Canadian HRS business has been
reported as discontinued operations and a letter of intent to sell HRS was
signed in December 1997.
4
<PAGE> 125
Health-Mor Personal Care Corp. markets the AdvantaJet needle-free insulin
injector and other health care products. Customer service is crucial to this
product line. This business has been classified as a discontinued operation and
the Company is seeking a buyer for this business.
The Company meets strong competition in the sale of its vacuum cleaners and
central vacuum systems. In the case of sales through in-home solicitation, this
competition is primarily with vacuum cleaner equipment in use in the home at the
time of the sales presentation. There are many significant vacuum cleaner
manufacturers, plus many regional and private label manufacturers, who make
numerous brand name vacuum cleaners in the United States. Most of these are sold
through department stores, discount houses, appliance shops and by catalog,
generally at substantially lower prices than the Filter Queen. There are more
than five companies which compete significantly with the Company in the United
States and Canada in distribution of vacuum cleaners by in-home solicitation.
Many of its competitors in the sale of vacuum cleaners are substantially larger
and have greater resources than the Company. The Company believes that its
vacuum cleaners are competitive with other vacuum cleaners because of their
performance and warranty. It is the practice of the Company, along with other
companies in the vacuum cleaner industry, to maintain sufficient amounts of
inventory to meet the rapid delivery requirements of customers. The Consumer
Goods Division of the Company operates with a minimal backlog.
The Company is expanding its parts and service business by utilizing its
extensive customer data base to market accessories and new products and
services. The purpose is to enhance the annuity value of each customer to the
Company and to distributors by encouraging add-on sales and generating referrals
by utilizing these same data bases and the Distributor network. The parts and
service business continues to expand in markets outside of North America.
The Company's financing program, through its subsidiaries Health-Mor Acceptance
Corporation and HMI Acceptance Corporation continues to serve its distributors
and consumers by offering financing to marginally credit worthy consumers. The
Company has sold a portion of its U.S. portfolio to a first line finance
company, and continues to explore ways to serve its distributors and consumers
while at the same time reducing its overhead through alliances with first line
finance companies. Health-Mor Acceptance PTY Ltd. was incorporated in Sydney,
Australia, to offer consumer financing of the Company's products in that
country. This portfolio is currently being liquidated.
The Company holds trademark or trade name registration on the principal
trademarks and trade names used by the Consumer Goods Division. These trademarks
have been registered in the United States, Canada and other countries in which
the Company has distributors which sell a significant number of units. The
Company owns a number of patents in the United States, Canada and other
countries on various features of the Filter Queen, Vacu-Queen and related
products. The Company does not believe that its business is materially dependent
on any patent or group of patents.
Manufactured Products
- ---------------------
The Manufactured Products Division of the Company consists of commercial and
industrial stamped components, metal formed tubular products, machined
components, tools, dies and specialty products and production of needle-free
insulin injection systems. All businesses related to the Manufactured Products
Division have been reclassified to discontinued operations and are held for sale
at September 30, 1997.
5
<PAGE> 126
Metal Stamping and Metal Formed Tubing
- --------------------------------------
Bliss Manufacturing Company ("Bliss"), a wholly-owned subsidiary of the Company,
engages in the manufacture of various types of sheet metal stamping and
sub-assemblies, and painting and welding in conjunction therewith, for customers
in the automotive and truck manufacturing, materials handling equipment,
military, and plumbing industries. The products manufactured by Bliss are sold
primarily to original equipment manufacturers, mostly in the Midwest.
The customers of Bliss issue releases for parts depending upon their own
requirements. Therefore, Bliss operates with a minimal backlog.
The business of Bliss is significantly dependent upon several automotive and
truck manufacturers. In the event that a significant portion of the automotive
and truck business were to cease immediately, and the revenues were not replaced
with sales to other customers, whether existing or new, the loss could have a
material adverse effect on the registrant and its subsidiaries, taken as a
whole. However, the registrant believes that its relationship with these
customers is good and, although it anticipates the loss of business for
particular parts from time to time as the products in which those parts are
incorporated are discontinued or substantially changed, the registrant believes
that it can, at least in part, make up for such losses through existing or new
customers. The Company has signed a definitive agreement to sell Bliss
Manufacturing (See Item 1a).
Tube-Fab Ltd. ("Tube-Fab"), a wholly-owned subsidiary of the Company, is engaged
in the manufacture of high quality tubular products for the aircraft, military,
communications and specialty architectural industries. The Company intends to
sell Tube-Fab in 1998 (See Note 14 "Related Party Transactions" of the Notes to
the Consolidated Financial Statements).
Tools, Dies and Specialty Machinery
- -----------------------------------
Machined Products Division ("MPD"), a division of Tube-Fab, engages in the
manufacture and sale of precision machined components for aircraft engines for
the aerospace industry. The work performed is primarily subcontract work for
engine manufacturers. In addition, MPD continues its work with Spar Aerospace,
manufacturing components for the Special Purpose Dextrous Manipulator for the
International Space Station. MPD has numerous competitors in the machining
field, none of whom has any sizable market share.
Sales backlog for MPD as of September 30, 1997 and 1996 was approximately
$540,903 and $420,000, respectively. It is expected that this backlog will be
filled during the current fiscal year.
Employees
- ---------
The Company and its subsidiaries employed 836 persons at September 30, 1997
throughout the world. Approximately 70% are part of businesses that have been
classified as discontinued.
6
<PAGE> 127
Environmental Policies and Controls
- -----------------------------------
To the best of the Company's knowledge, it is in compliance with all applicable
Federal, State and local laws relating to the protection of the environment. It
does not anticipate that any laws or regulations relating to the protection of
the environment will have any material effect on its earnings, capital
expenditures, or competitive position. The Company does not anticipate making
any material capital expenditures for environmental control facilities during
the current and succeeding fiscal years.
Methods of Production and Raw Materials
- ---------------------------------------
The Consumer Goods Division of the Company assembles finished parts purchased
from various suppliers. Tube-Fab purchases metal tubing from various suppliers
and engages in finishing operations, such as bending, beading and flaring. MPD
manufactures needle-free insulin injectors and precision machined parts for the
aerospace industry. Bliss purchases steel (both coil and blank) from various
suppliers and stamps metal parts for its customers. Bliss also engages in
welding and painting of certain parts, including the painting of parts for other
companies.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
----------------------------------------------------------------------------
Financial information relating to foreign and domestic operations for the years
ended September 30, 1997, 1996 and 1995 are set forth in Note 12 (Business
Segments) of the Notes to Consolidated Financial Statements found on page 55.
Executive Officers of the Registrant
- ------------------------------------
<TABLE>
<CAPTION>
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---- --- ----------------------------------------
<S> <C> <C>
James R. Malone 55 Chairman and Chief Executive Officer (1)
Mark A. Kirk 40 President, Chief Operating Officer and Chief Financial
Officer (2)
Carl H.Young III 56 Executive Vice President, General Counsel and Assistant Secretary (3)
Sherwin Ellens 60 Vice President - Sales and Marketing (4)
Robert M. Benedict 54 Vice President and Treasurer (5)
Kevin Dow 41 Vice President - Corporate Services and Assistant Treasurer (6)
Michael Harper 41 Vice President, Corporate Controller and Chief Accounting
Officer and Assistant Secretary (7)
</TABLE>
7
<PAGE> 128
(1) Mr. Malone was elected Chairman of the Board of Directors on December 5,
1996 and Chief Executive Officer on May 14, 1997. From 1993 to 1997, Mr.
Malone was Chairman, President, and Chief Executive Officer of Anchor Glass
Container Corporation, a manufacturer of glass containers. From 1990 to
1993 he was Chairman and Chief Executive Officer of Grimes Aerospace
Company, an aircraft component manufacturer.
(2) On May 14,1997, Mr. Kirk was elected President and Chief Operating
Officer. He is also Chief Financial Officer, and was elected to that
position in February 1997. From 1993 to 1997 he served as Senior Vice
President and Chief Financial Officer of Anchor Glass Container
Corporation. From 1990 to 1993 he was Senior Vice President and Chief
Financial Officer at Grimes Aerospace Company.
(3) Carl Young was elected Executive Vice President, General Counsel, and
Assistant Secretary on May 28, 1997. He had previously served as Vice
President and General Counsel from February 14, 1997 to May 28, 1997. From
1993 to 1997 Mr. Young served as Senior Vice President and General Counsel
of Anchor Glass Container Corporation. From 1990 to 1993, Mr. Young was
Senior Vice President and General Counsel for Grimes Aerospace Company.
(4) Mr. Ellens has served as Vice President - Sales and Marketing since May
28, 1997. From 1996 to May 14,1997 he was Vice President of Direct Sales.
From 1992 to 1995, he served as Director of Direct Sales for North
America.
(5) Mr. Benedict was elected Vice President and Treasurer on May 28, 1997.
From 1995 to 1997 he was Assistant Treasurer of Sealy Inc., a mattress
manufacturer. From 1992 to 1995 he was Vice President of Benedict, Kuhit &
Associates, a consulting firm.
(6) Mr. Dow was named Vice President - Corporate Services and Assistant
Treasurer on May 28, 1997. From March 1996 to May 1997 he served as Vice
President-Administration and Treasury. He has also served as Treasurer or
Assistant Treasurer at various times since 1995. He served as Vice
President - Finance and Administration from 1989 to 1996.
(7) Mr. Harper was elected Vice President, Chief Accounting Officer and
Assistant Secretary on May 28, 1997. He has also served as Corporate
Controller since December 1996. He served as Vice President, Finance for
Bliss Manufacturing Company from January 1996 to December 1996. For over
sixteen years prior to that time he served in various financial management
positions with The Sherwin-Williams Company, most recently as the
Controller of the Transportation Services Division. Sherwin-Williams
Company is a paint manufacturer.
Kevin Dow, Vice President-Corporate Services and Assistant Treasurer, is the
first cousin of Barry L. Needler, Vice Chairman and a director.
8
<PAGE> 129
Item 2. Properties
- ------------------
The following table sets forth by industry segment, the location, character and
size (in square feet) of the real estate used in the operations of the Company
and its subsidiaries at September 30, 1997:
<TABLE>
<CAPTION>
SQUARE FEET
--------------------------------
LOCATION CHARACTER OWNED LEASED
- --------------------------------------------------- ------------------------ ------------ --------------
<S> <C> <C> <C>
CONSUMER GOODS DIVISION
United States of America
------------------------
Cleveland, Ohio Office, Plant & 210,000
Warehouse
Bradley, Illinois (1) Office & Warehouse 7,516
Canada
Mississauga, Ontario Office & Warehouses 46,772
Dorval, Quebec Office & Warehouse 4,762
Calgary, Alberta Office & Warehouse 4,500
Surrey, British Columbia Office & Warehouse 4,100
Edmonton, Alberta Office & Warehouse 2,049
Vancouver, British Columbia Office & Store 2,292
Burlington, Ontario Office & Store 1,100
MANUFACTURED PRODUCTS DIVISION
Tools, Dies & Specialty Machinery (1)
- -------------------------------------
Charlottetown, Prince Edward Island Office, Plant & 19,000
Warehouse
Metal Stamping and Metal Formed Tubing (1)
- ------------------------------------------
Newton Falls, Ohio Office, Plant & 400,000
Warehouse
Youngstown, Ohio Office, Plant & 150,000
Warehouse
(1) Included in Assets Held for Sale
</TABLE>
Item 3. Legal Proceedings
- ------- -----------------
The Receiver of the Health Mor B.V. bankruptcy estate commenced litigation
against HMI Industries Inc and one of Health Mor B.V.'s Managing Directors,
Kevin Dow, on or about December 3, 1997, in bankruptcy case asserting that HMI
Industries Inc and Dow are liable, under the law of the Netherlands, for a
616,000 NLG ($308,000) deficit in the Health Mor B.V. estate and approximately
85,000 NLG ($42,500) in costs of administration. HMI Industries Inc believes the
Receiver's claims against HMI are without merit and will vigorously oppose the
Receiver.
Claims arising in the ordinary course of business are pending against the
Company. Although these are in various stages of the litigation process,
management believes that none of these matters will have a material adverse
effect on the consolidated financial position, results of operations or
liquidity of the Company.
9
<PAGE> 130
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable
PART II
- -------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The common stock of the Company is listed and traded on the NASDAQ Stock Market
under the symbol HMII. As of September 30, 1997, there were approximately 253
stockholders of record.
A summary of the dividends declared and the quarterly high and low sales price
of the Company's common stock on the Nasdaq Stock Exchange for the years ended
September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997
High Low Dividend
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
1st Quarter 6 3/4 4 3/4 $ .0000
2nd Quarter 8 1/8 5 1/8 $ .0000
3rd Quarter 7 5/8 4 7/8 $ .0000
4th Quarter 6 1/4 3 7/8 $ .0000
1996
High Low Dividend
---------------------- ---------------------- ----------------------
1st Quarter 15 11 1/4 $ .0875
2nd Quarter 12 1/4 7 3/4 $ .0875
3rd Quarter 8 3/4 7 $ .0875
4th Quarter 8 1/4 4 3/4 $ .0000
</TABLE>
The declaration and payment of quarterly dividends is at the discretion of the
Board of Directors, which may raise, lower or omit the dividend in any quarter.
Due to losses in the first three quarters of 1996, the Company did not declare a
dividend in the fourth quarter of fiscal 1996. No dividends were declared in
1997 due to continued losses. The Credit Agreement with the Company's lender
will not permit the payment of dividends and this restriction remains in effect
until the credit facility is paid in full in 1998. It is not expected that the
Company will declare a dividend until the Company returns to profitability.
10
<PAGE> 131
Item 6. Selected Financial Data
- -------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue From Continuing Operations $ 50,490,250 $ 59,548,908 $ 62,785,302 $ 52,759,037 $ 44,224,939
Operating Costs and Expenses $ 68,603,306 $ 63,882,184 $ 60,509,044 $ 50,539,058 $ 41,416,946
Other Income (Expense), net $ (2,650,313) $ (4,272,428) $ (1,282,491) $ (1,080,894) $ (1,080,413)
Income (loss) Before Discontinued
Operations Before Taxes $ (20,763,369) $ (8,605,704) $ 993,767 $ 1,139,085 $ 1,727,580
Income (loss) Margin Before Discontinued
Operations Before Taxes (41.1%) (14.5%) 1.6% 2.2% 3.9%
Income Taxes (benefits) $ (7,285,949) $ (2,838,259) $ (614,791) $ (69,510) $ 145,512
Income Tax Rate 35.1% 33.0% 69.1% 6.1% 8.4%
Income (loss) before Discontinued
Operations $ (13,477,420) $ (5,767,445) $ 1,608,558 $ 1,208,595 $ 1,582,068
Income (loss) Margin Before Discontinued
Operations (26.7%) (9.7%) 2.6% 2.3% 3.6%
Income (loss) From Discontinued
Operations $ 2,347,039 $ (1,965,815) $ 3,833,317 $ 3,422,894 $ 3,287,695
Loss on Disposal $ (5,519,684) $ (2,280,844) $ --- $ --- $ ---
Cumulative Effect-
Change of Accounting for Income
Taxes $ --- $ --- $ --- $ 719,016 $ ---
Net Income (loss) $ (16,650,065) $ (10,014,104) $ 5,441,875 $ 5,350,505 $ 4,869,763
Net Income (loss) Margin (33.0%) (16.8%) 8.7% 10.1% 11.0%
Per Share Data:
Income (loss) Before Discontinued
Operations $ (2.72) $ (1.18) $ .33 $ .25 $ .33
Income (loss) From Discontinued
Operations $ .47 $ (.40) $ .79 $ .70 $ .68
Net Income (loss) $ (3.36) $ (2.04) $ 1.12 $ 1.09 $ 1.01
Cash Dividends $ .000 $ .263 $ .346 $ .324 $ .301
Weighted Average Number of Common
Shares Outstanding 4,956,276 4,912,135 4,876,599 4,888,395 4,851,192
Total Assets $ 55,390,133 $ 92,511,124 $ 85,191,635 $ 78,642,212 $ 65,102,797
Long-Term Debt $ 762,777 $ 22,334,613 $ 14,050,715 $ 13,176,973 $ 8,800,956
Stockholders' Equity $ 14,551,505 $ 30,882,960 $ 40,350,913 $ 37,901,982 $ 34,442,194
Book Value Per Share $ 2.94 $ 6.29 $ 8.27 $ 7.75 $ 7.10
Working Capital $ 3,793,541 $ 24,981,647 $ 23,771,993 $ 22,941,184 $ 18,189,328
Ratio of Current Assets to Current 1.10 1.77 1.91 1.99 1.90
Liabilities
Percent of Earnings on Average
Stockholders' Equity (73.3%) (28.1%) 13.9% 14.8% 14.8%
Percent of All Dividends to Net Income --- (12.9%) 31.0% 29.7% 30.0%
Stock High 8 1/8 15 17 19 1/8 13 3/4
Stock Low 3 7/8 4 3/4 13 1/4 11 1/4 5 5/8
Average Annual Price to Earnings Ratio (1.8) (4.8) 13.5 13.9 9.6
Average Annual Dividend Yield --- 2.7% 2.3% 2.1% 3.1%
</TABLE>
11
<PAGE> 132
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
NET PRODUCT SALES- Net product sales for the year ended September 30, 1997
decreased by $8,942,000 or 15.2% as compared to fiscal 1996. The decrease in
sales is due primarily to declines in North America and Asia. Weak sales in
North America were attributable to a correction of high inventory levels in the
distribution network, lower sales to end consumers and a reduction in the
distributor base. Additionally, excess credit granted in prior years to the
Company's distributors resulted in an overall deterioration of liquidity in the
distribution network. Discussions with the HMI North American distributors
revealed that inventories were high at their level due to over ordering spurred
by generous credit terms from the Company. This had eroded liquidity in the
Distribution Network and created a need for an inventory correction. The Company
has adopted a cash only credit policy for North American distributors, which may
depress sales in the near term, but over time, should strengthen the health of
the distribution network. Sales in Asia were adversely affected by economic
conditions in that region and the devaluation of certain currencies. Sales gains
in a strong European market continued their favorable trend.
FINANCING REVENUE AND OTHER INCOME- Financing revenues represent the interest
and fees generated on the contracts financed by the Company's Australian,
Canadian, and United States Subsidiaries. The decline in these revenues is
consistent with the sales decrease experienced mainly in North America.
GROSS PROFIT- Gross Profit, exclusive of financing revenues, for fiscal 1997 was
$13,869,000 or 27.8% as compared to 1996 gross profit of $20,574,000 or 35.0%.
Gross profit was adversely affected by lower volume, quality problems, and
operational inefficiencies. Additionally, non-recurring charges of $1,084,000
were taken to write-off unused barter credits and tooling related to a
discontinued product line. Initiatives were begun in the fourth quarter of 1997
to strengthen business processes, reduce costs, and improve quality.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative costs
increased by $6,958,000 from fiscal 1996 to fiscal 1997. An additional bad debt
expense taken of $4,659,000 was a major factor in the increased SG&A costs. As
previously discussed, deteriorating liquidity in the North American distribution
network and extended credit terms created a customer base with the inability to
pay outstanding debt. This has caused the Company to enter into agreements with
certain distributors that will result in collected balances of substantially
less than 100%. On January 1, 1998, the Company implemented a cash basis policy
for North American distributors that may depress sales temporarily, but over
time, should improve the Company's liquidity and strengthen the fiscal health of
the North American Distribution Network. The Company believes that accounts
receivable, after the reserve for uncollectable accounts, are reflected at their
net realizable value.
12
<PAGE> 133
Severance charges related to the termination of Kirk W. Foley (See Note 14 to
the Consolidated Financial Statements) of approximately $2,000,000 also led to
the increase in SG&A in addition to expenses incurred in March 1997 for the
settlement of multiple lawsuits in Alabama for $294,000. These lawsuits were
based upon a variety of tort claims covered by a confidentiality agreement.
Adjusted for these charges, selling, general and administrative expenses would
have decreased by approximately $1,200,000.
The Company has initiated cost reduction measures in 1997 that should continue
to reduce selling, general and administrative costs in 1998. These include
implementation of a cash basis policy for North American distributors effective
January 1, 1998. The subsequent reduction in credit resulting from this policy
should significantly reduce bad debt expense in 1998.
INTEREST EXPENSE - Interest expense increased $532,000 in fiscal 1997 from 1996
as a result of additional borrowings and increases in interest rates in 1997.
INCOME TAXES - The effective tax rate for fiscal 1997 is 35.1 % compared to
33.0% in 1996.
YEAR 2000 - Customary computer programming changes, developed prior to the
upcoming change in the century becoming a concern, have used two digits rather
than four to identify the year in a date field. If not corrected, many computer
applications may fail to treat year dates intended to represent years in the
twenty-first century as such but instead treat them as still in the twentieth
century, potentially resulting in system failure or miscalculations disruptive
of business operations, including, among other things, an inability to initiate,
receive, process, invoice or otherwise complete normal business activities.
These Year 2000 issues affect virtually all companies and organizations.
The Company has performed a detailed review and assessment of the impact of the
Year 2000 issue on its continuing operations. In connection with this review,
the Company has determined that the remaining costs to be incurred to address
the Year 2000 issue subsequent to September 30, 1997 will not have a material
impact on the Company's future operating results, financial condition, or cash
flows. During fiscal 1997 and 1996, the Company implemented new information
systems throughout its continuing operations which are Year 2000 compliant. The
Company's remaining Year 2000 issue activities consist of replacing a minimal
amount of older personal computer equipment and investigating the status of Year
2000 compliance for its major suppliers. While the Company is beginning to
consider that inquiries might be appropriate to make of such other parties
(principally of its suppliers and other providers) in these regards, there can
be no assurance that the Year 2000 issues confronting such other parties and any
failure on their part to timely address them will not have a material adverse
effect on the Company.
DISCONTINUED OPERATIONS - As of June 30, 1997, the Company reported Bliss
Tubular and Tube-Fab Ltd., its tubular and aerospace businesses, as well as
Health-Mor Personal Care Corp., its personal care business, as discontinued
operations. The Company recorded a pretax estimated loss on disposal of the
assets of Tube-Fab Ltd., and Health-Mor Personal Care Corp. of $1,937,200 during
fiscal 1997. In August 1997, the Company sold the assets of Bliss Tubular to H-P
Products and recorded a pretax loss on the sale of those assets of $1,524,000.
As of September 30, 1997, the Company reported Bliss Manufacturing, its metal
fabrication and stamping business, as a discontinued operation. Accordingly, the
consolidated financial statements of the Company have been reclassified to
report separately the net assets and net
13
<PAGE> 134
operating results of these discontinued operations. Income Statements for
periods prior to the dates of discontinuance have been restated to reflect
continuing operations. The Company's steam cleaning business, Household Rental
Systems, reported as a discontinued operation in fiscal 1996, recorded an
additional loss on disposal of $2,651,000 in fiscal 1997. At the time of the
filing of the Fiscal Year 1996 10-K, the Company had a letter of intent to
purchase Household Rental Systems for $3.2 million. Subsequently, the deal could
not be completed as the acquiring company could not complete its financing and
has since filed for bankruptcy. When the Company went back into the market to
sell Household Rental Systems, there was a significant diminution in the market
price, despite positive results in the operations. In November 1997, the Company
received two signed letters of intent regarding the planned sale of this
business. The current offers, as described in the letters of intent, are
substantially lower. As a result, the assets were further written down to
recognize this impairment. Management anticipates that the sale of this business
will be completed in early 1998. Sales applicable to the discontinued operations
as of September 30, 1997 and September 30, 1996 were $75,151,642 and
$65,771,728, respectively.
Bliss Manufacturing, the major entity of the Manufactured Products Segment, had
sales of $61,813,000 for the fiscal year ended September 30, 1997, an increase
of $14,654,000 or 31.1% for the comparable period. Gross profit was 13.2% for
the fiscal year 1997 compared to 16.5% for the fiscal year ended September 30,
1996. Gross profit was lower due to a change in product mix and incurrence of
higher material and conversion costs that could not be passed through to
customers. Selling, General, and Administrative expense was $3,959,900 for the
year ended September 30, 1997, a decrease of $580,900 from the year ended
September 30, 1996.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
NET PRODUCT SALES - Net product sales for the year ending September 30, 1996
decreased by $3,408,000 or 5.5% as compared to fiscal 1995. Sales declines in
the North American and Asian markets were offset by growth in the European
market. Decreases in the North American market were attributable to, among other
things, a tightening of consumer credit. Distribution difficulties and required
product changes in Asia hampered sales in fiscal 1996.
FINANCING REVENUES - Financing revenues represent the interest and fees
generated on the contracts financed by the Company's Australian, Canadian, and
United States Subsidiaries.
GROSS PROFIT - Gross profit, exclusive of financing revenues, for fiscal 1996
was $20,574,000 or 35.0% as compared to 1995 gross profit of $23,119,000 or
37.1%. Total gross profit was lower due to the decline in sales volume. The
Consumer Goods operations moved into a new facility in March 1996, thus
eliminating the cost of duplicate facilities incurred during the first six
months of the year. Additionally, scheduling and process changes were made,
within the operations, in an effort to reduce production inefficiencies.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative costs
increased by $4,236,000 from fiscal 1995 to fiscal 1996. Included in the
increase is $2,200,000 of product development and introduction costs for the
Consumer Goods business with corresponding increases in sales from these
products. The Company also experienced increased legal and professional fees,
increased compensation costs and increased reserves for uncollectable accounts.
14
<PAGE> 135
INCOME TAXES - The effective rate for fiscal 1996 was 33.0% compared to 69.1% in
1995.
DISCONTINUED OPERATIONS - The Company adopted a plan to exit its direct sales
business in Mexico and to sell the Canadian Household Rental Systems operation.
Accordingly, the results of these operations were reported as discontinued
operations. The Company recorded a loss on the disposal of Mexico of $1,481,000
primarily comprised of the currency devaluation which was previously reflected
as a component of equity offset by a U.S. tax benefit of the loss on the
Company's investment in the Mexican operation. An $800,000 charge was recorded
in fiscal 1996 on the disposal of the steam cleaning business in order to record
the assets of this operation at their estimated net realizable value.
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at September 30, 1997 was $3,793,500 compared to the
September 30, 1996 balance of $24,982,000, principally as a result of the
Company's long-term debt being classified as current on the September 30, 1997
consolidated balance sheet. On December 18, 1997, the Company entered into a
definitive agreement to sell 100% of the stock of Bliss Manufacturing, a wholly
owned subsidiary for $31,500,000, subject to certain adjustments. The Company
expects the entire proceeds from the sale of Bliss Manufacturing to be applied
to the retirement of substantially all of its debt, certain vendor obligations,
transaction costs and related expenses, certain employee benefit payments, and
amounts necessary to fund future tax obligations arising from the gain on the
sale of Bliss Manufacturing. It is anticipated that this transaction will close
by the end of the second fiscal quarter of 1998. Accordingly, debt to be retired
from the proceeds of the sale has been classified as current.
The Company's cash decreased $233,000 during the year ended September 30, 1997.
The decrease in receivables of $3,241,000 was due primarily to lower sales,
tighter credit terms, and an increase in the allowance for doubtful accounts.
Inventories decreased by $4,362,000 due to tighter inventory controls in the
Consumer Goods Division and at Bliss Manufacturing. Accounts payable decreased
by $3,214,000 as a result of lower inventory levels. Accrued liabilities
increased $4,208,000 due primarily to severance charges taken as a result of the
termination of Kirk W. Foley.(See Note 14 to the Consolidated Financial
Statements). The aforementioned variances relate to information in the
Consolidated Statement of Cash Flow in which items relating to discontinued
operations have not been disaggregated as they have in the Consolidated Balance
Sheet.
In November 1996, the Company increased the line of credit facility from
$17,500,000 to $19,500,000 with a principal payment of $2,000,000 due by
February 28, 1997. Under this line of credit agreement, a principal amount of
$2,500,000 was due no later than January 2, 1997. In December 1996, the proceeds
from the sale of the Bedford Heights, Ohio tubular facility were utilized to pay
down the $2,500,000 principal amount to $1,379,100. In January 1997, proceeds
from a federal income tax refund were used to pay the remaining principal amount
due. Effective February 28, 1997, the Credit Facility Agreement was amended to
increase the line of credit from $17,000,000 to $20,000,000 with $5,000,000 of
the commitment due March 31, 1997. Subsequently, the availability of the
$20,000,000 facility was extended through May 31, 1997.
15
<PAGE> 136
Effective June 1997, the Company entered into a $20 million credit facility with
its lender which replaced the February 1997 amended and restated credit facility
agreement. The new credit agreement expires on October 1, 1998 and requires an
unused facility fee, computed at 0.25% per annum on the Unused Revolving
Facility amount, payable monthly. The secured facility consists of a $13 million
revolving credit facility and $7 million in term loans. The term loans require
monthly principal payments of $98,501. Interest rates accrue at prime on the
revolving credit facility and up to prime plus 2.25% on the term loans. As of
September 30, 1997, the outstanding balance on the Company's credit facility was
$15,824,397.
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally , the
Company expects to receive additional financing of $1,200,000 upon the filing of
its fiscal 1997 tax return, which is expected to be filed in early January 1998.
The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of September 30, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
The Australian Unsecured Demand Authorization, payable on demand or February 28,
1997, was extended until the earlier of March 31, 1998 or upon the receipt of
proceeds from the sale of Bliss Manufacturing. An extension was also obtained in
April 1997 for the bank credit facility utilized by the Netherlands operation.
The facility ($480,822), originally payable in March 1997, is now available
through December 1997. The Company is presently negotiating, with its lender, an
extension on this debt until the earlier of March 31, 1998 or upon receipt of
proceeds from the sale of Bliss Manufacturing.
Interest expense for 1997 was primarily related to borrowing on the line of
credit, term loans, and the Private Placement unsecured term notes. Other
interest relates to the Industrial Revenue Bonds on the Lombard property,
interest on capital leases and interest paid on Distributors' deposits.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
16
<PAGE> 137
The sale of Bliss Manufacturing is contingent upon shareholder approval,
regulatory approval and a variety of other customary closing conditions. The
Company expects all these conditions to be met and the sale of Bliss
Manufacturing to be consummated by March 31, 1998. However, if the sale of Bliss
Manufacturing is not achieved by such date, the Company would have liquidity
needs that could only be satisfied by further amendment to the credit facility
to allow for additional time to close the sale transaction or obtaining
additional financing sources.
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. As of
September 30, 1997, the Company was not in compliance with certain of these
covenants contained in its credit agreements; however, the Company obtained a
waiver on these covenants through September 30, 1997. Additionally, the credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to certain uncertainties
including the successful completion of the sale of Bliss Manufacturing, and
retention and rebuilding of the Consumer Products Division distribution network.
Such uncertainties are difficult to predict and could cause actual results of
the Company to differ materially from those matters expressed or implied by such
forward-looking statements.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Reference is made to the Index to Financial Statements included on page 32 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III.
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
(A) DIRECTORS
The following information is presented regarding the name, age, business
experience, term of office, positions with HMI Industries Inc. ("the Company")
and legal proceedings for each of the directors of the Company.
17
<PAGE> 138
CLASS C DIRECTORS: NOMINEE FOR ELECTION AT THE 1998 ANNUAL SHAREHOLDERS' MEETING
TO SERVE FOR A THREE-YEAR TERM EXPIRING IN THE YEAR 2001
Mark A. Kirk, age 40, became a Director of the Company in May 1997. He was
elected President and Chief Operating Officer of the Company in May 1997. He was
elected Chief Financial Officer of the Company in February 1997. From 1993 to
1997 he served as Senior Vice President and Chief Financial Officer of Anchor
Glass Container Corporation, a manufacturer of glass bottles and other
containers. From 1990 to 1993 he was Senior Vice President and Chief Financial
Officer of Grimes Aerospace Company, a manufacturer of components for the
aircraft industry, including interior and exterior lighting, engine valves,
electronic systems and avionics. In September 1996, a petition was filed in the
United States Bankruptcy Court in Delaware by Anchor Glass under Chapter 11 of
the Bankruptcy Code in order to restructure the debt of Anchor Glass. Mr. Kirk
was an executive officer of that company at that time.
John S. Meany, Jr., age 52, became a Director of the Company in 1986. Mr. Meany
is an attorney in private practice and has served as Secretary of the Company
since 1995. Mr. Meany previously served as Secretary of the Company from 1986 to
1991, as Vice President-Legal of the Company from 1983 to 1990 and as Vice
President and General Counsel from 1990 to 1991.
Barry L. Needler, age 49, became a Director of the Company in 1989. Mr. Needler
is a private investor. Since 1991 he has been President and Chief Executive
Officer of Steeplechase Corp. and Reldeen Ltd., investment holding companies,
and since 1990 he has been President and Chief Executive Officer of Fairway,
Inc., a personal holding company for business investments.
CLASS A DIRECTORS: (CONTINUING) TERM EXPIRING IN 1999
Moffat Dunlap, age 56, became a Director of the Company in 1993. Mr. Dunlap has
held a license in the real estate industry since 1962 and has been President of
Moffat Dunlap Real Estate Limited (real-estate broker for residential estates)
since 1972.
Grace McCarthy, age 70, became a Director of the Company in 1993. Mrs. McCarthy
is a former Deputy Premier of the Province of British Columbia. She served as
the leader of the B.C. Social Credit Party in 1993 and 1994. She served as a
Member of the Legislature for British Columbia for 26 years, retiring in 1991.
She has served as a Cabinet Minister holding various portfolios including
Economic Development, Tourism, Human Resources, Fish and Wildlife and Provincial
Secretary. Mrs. McCarthy has submitted a letter of resignation to the Board, to
be effective as of the Annual Meeting.
Ivan Winfield, age 63, became a Director of the Company in 1995. He is an
independent business and financial consultant. Mr. Winfield was a partner of
Coopers & Lybrand (the Company's auditors) from 1970 to 1994. Mr. Winfield is a
trustee of the Fairport Group of Mutual Funds. He is also a director of Boykin
Lodging Company and International Total Service, Inc.
18
<PAGE> 139
CLASS B DIRECTORS: (CONTINUING) TERM EXPIRING IN THE YEAR 2000
Robert J. Abrahams, age 71, became a Director of the Company in 1984. Mr.
Abrahams has been President of Crestwood Consultants, a financial consulting
company, since 1988. Mr. Abrahams is also the President of Health-Mor Acceptance
Corporation and HMI Acceptance Corporation, wholly-owned subsidiaries of the
Company.
Donald L. Baker, age 68, became a Director of the Company in 1986. Mr. Baker has
been President of Complete Industrial Enterprises, Inc., a distributor of
electrical and industrial equipment, since 1985. Mr. Baker has also served as
Mayor of Peru, Illinois since 1965.
James R. Malone, age 55, became a Director of the Company in 1996. Mr. Malone
was elected Chairman of the Board in December 1996, and was elected as Chief
Executive Officer in May 1997. He is also Chairman and Chief Executive Officer
of Intek Capital Corp., a private investment firm. From 1993 to 1997 he was
Chairman, President and Chief Executive Officer of Anchor Glass Container
Corporation, a manufacturer of glass bottles and other containers. From 1990 to
1993 he was Chairman and Chief Executive Officer of Grimes Aerospace Company, a
manufacturer of components for the aircraft industry, including interior and
exterior lighting, engine valves, electronic systems and avionics. He is a
member of the Board of Directors of AmSouth Bancorporation, a regional bank
holding company in the Southeast, and Ametek Inc., a manufacturer of measuring
and controlling devices, including motors, blowers, sensors, filters and
housings. In September 1996, a petition was filed in the United States
Bankruptcy Court in Delaware by Anchor Glass under Chapter 11 of the Bankruptcy
Code in order to restructure the debt of Anchor Glass. Mr. Malone was an
executive officer of that company at that time.
Frank M. Rasmussen, age 63, became a Director of the Company in 1994. Mr.
Rasmussen was a Partner of Squire, Sanders & Dempsey L.L.P., the Company's
principal law firm, from 1970 until his retirement in 1996.
(B) EXECUTIVE OFFICERS
For information regarding the Executive Officers of the registrant, please see
the list of Executive Officers following Part I of this Report on Form 10-K.
(C) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
the Company's officers, directors and owners of more than 10% of the Company's
common stock file reports of ownership and changes in ownership of the Company's
securities with the Securities and Exchange Commission and the Nasdaq Stock
Market and to furnish the Company with a copy of all such reports they file
Based solely on a review of the copies of such forms the Company has received,
the Company believes that all of its executive officers and directors complied
with all filing requirements applicable to them with respect to transactions
during the fiscal year ended September 30, 1997, except for the following: Kirk
Foley, an executive officer and director, failed to file a Form 4 for January
1997 reporting the vesting of 24,390 shares of phantom stock and the grant of an
employee stock option to purchase 20,000 shares of
19
<PAGE> 140
Common Stock; and Michael Harper and Robert M. Benedict, Jr., each an executive
officer of the Company, were each late in filing Form 5 relating to the grant of
employee stock options to purchase 15,000 shares of Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
(A) COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the respective amounts of compensation for the
individuals who served as the Chief Executive Officer in 1997, and the four most
highly compensated executive officers of the Company other than the Chief
Executive Officer for each of the years 1995, 1996 and 1997 (all such officers,
the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
All Other
Annual Compensation Long Term Compensation (5) Compensation (8)
-------------------------------- ------------------------------- ----------------
Awards
Other Annual Restricted Stock Phantom
Name and Compensation Stock ($) Options(#) Stock ($)
Principal Position Year Salary(1) Bonus (2) ($)(3) (4) (6) (7)
- ---------------------------- ---- --------- --------- ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Malone (9) 1997 $277,642 $0 $75,000 76,500 $0 $0
Chairman and Chief Executive 1996 - - - - - - -
Officer since May 1997 1995 - - - - - - -
Kirk W. Foley (10) 1997 $451,667 $0 $127,200 $0 20,000 $0 $3,956 (11)
President & Chief 1996 $449,802 $0 $182,613 $0 20,000 $0 $5,549 (11)
Executive Officer to May 1997 1995 $368,316 $382,121 $96,155 $0 40,000 $1,734,375 $4,790 (11)
Chuck Ellens (12) 1997 $324,066 $0 - $0 0 $0 $0
Vice President, Sales and 1996 $344,878 $0 - $0 0 $0 $685
Marketing 1995 $499,305 $0 - $0 0 $0 $775
Mark A. Kirk (13) 1997 $204,333 $0 - $200,000 75,000 $0 $108,040 (14)
President, Chief Operating 1996 - - - - - - -
Officer & Chief Financial 1995 - - - - - - -
Officer
Carl H. Young, III (15) 1997 $204,333 $0 - $200,000 75,000 $0 $0
Executive Vice President and 1996 - - - - - - -
General Counsel 1995 - - - - - - -
Kevin Dow 1997 $130,400 $0 - $0 0 $0 $0
Vice President, Corporate 1996 $130,400 $0 - $0 0 $0 $685
Services & Assistant 1995 $126,300 $71,875 - $0 0 $0 $775
Treasurer
</TABLE>
(1) Salary amounts include automobile allowance and automobile insurance.
Amount for Kirk Foley also includes $38,317 paid in 1997, $27,250 paid in
1996 and $10,500 paid in 1995 as an allowance for living expenses pursuant
to his employment agreement with the Company. Amounts for Mark Kirk and
Carl Young include an employment bonus of $65,000 each.
(2) Amounts paid in the fiscal year pursuant to the Company's Incentive Bonus
Plans. Incentive bonuses are calculated on a calendar year basis.
20
<PAGE> 141
(3) Kirk Foley is the only named executive officer who received perquisites or
other benefits required to be disclosed under applicable regulations. The
amounts identified consist of repayments of interest and principal made by
the Company on behalf of Mr. Foley in accordance with his employment
agreement for loans taken out by Mr. Foley. See "Compensation of the Chief
Executive Officer" elsewhere in this amendment for more information.
(4) Reflects the fair market value of grants of restricted stock on the dates
of grant. Mr. Kirk and Mr. Young each received an award of 20,000 shares
of restricted stock which vested on February 1, 1998. Messrs. Malone, Kirk
and Young each received an award of 25,000 shares of restricted stock
which vested in equal amounts of 12,500 shares on October 1, 1997 and
January 1, 1998. Subsequently, Messrs. Malone, Kirk and Young each
surrendered to the Company the 12,500 shares of stock vesting on October
1, 1997. The value of these shares was not included in the value of the
restricted stock awards in the table above. The value of the shares, which
were still restricted at September 30, 1997, including the shares
subsequently surrendered, was $603,750. No dividends have been paid on the
shares awarded in the above table because no dividends have been declared
by the Company since those shares were awarded.
(5) Reflects the number of shares of Common Stock of the Company covered by
stock options granted during the year, and the fair market value on the
date of grant of phantom stock and restricted stock. No stock appreciation
rights ("SAR"), either in conjunction with or separate from stock options,
were granted to the named executives during the years shown.
(6) The Company maintains plans under which stock options may be awarded. The
Company does not, however, make "long term compensation awards" as that
term is used in applicable Commission rules, because the amount of Company
incentive awards is not measured by performance of the Company over longer
than a one-year period.
(7) Phantom shares were deemed issued October 4, 1994 when Mr. Foley signed his
employment agreement with the Company. This agreement provides that the
shares vest in installments in 1995, 1996 and 1997, with the final
installment vesting on January 1, 1999. See "Compensation of the Chief
Executive Officer" regarding the surrender of a portion of the phantom
shares vesting in 1996.
(8) Except as otherwise noted, reflects contributions made by the Company or a
subsidiary under defined contribution plans maintained by the Company and a
subsidiary.
(9) Mr. Malone was elected as Chairman of the Company in December 1996 and
Chief Executive Officer in May 1997.
(10) The amount shown as salary for 1995 and 1996 represents compensation paid
to Mr. Foley as President of the Company and as Chairman and Chief
Executive Officer of the Company. The amount shown as salary for 1997
includes amounts paid through September 30, 1997.
(11) Premiums on life insurance paid pursuant to Mr. Foley's employment
agreement. For a description of additional compensation received by Mr.
Foley in connection with his termination of employment, see also "Certain
Relationships and Related Transactions" in this amendment.
(12) Mr. Ellens was elected an executive officer of the Company in 1996.
(13) Mr. Kirk was elected Vice President-Finance and Chief Financial Officer in
February 1997 and President and Chief Operating Officer in May 1997.
(14) Represents an allowance for Mr. Kirk's relocation to Cleveland, Ohio.
(15) Mr. Young was elected Executive Vice President and General Counsel in May
1997 and previously served as Vice President- Administration and General
Counsel from February 1997 to May 1997.
(B) 1992 OMNIBUS LONG-TERM COMPENSATION PLAN
In 1992, the stockholders of the Company adopted the Omnibus Long-Term
Compensation Plan (the "Plan"). The purpose of the Plan is to advance the
long-term interests of the Company by motivating executive personnel by means of
long-term stock based or derivative compensation, to align the interests of
participants with those of the stockholders, and to permit the Company to
attract and retain directors and executive personnel.
The Plan provides for the grant of the following types of awards: stock options,
including incentive stock options; stock appreciation rights, in tandem with
stock options or freestanding; common stock awards; phantom stock; restricted
stock; and performance shares. Awards are determined by the Compensation
Committee.
21
<PAGE> 142
The following table sets forth certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table during
fiscal 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES PERCENT ASSUMED ANNUAL RATES OF
UNDERLYING OF TOTAL OPTIONS STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE EXPIRATION FOR OPTION TERM
NAME GRANTED EMPLOYEES PRICE (1) DATE 5%($) 10%($)
---- ------- --------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James R. Malone 6,000 2% $5.50 January 2, 2002 $9,117 $20,147
James R. Malone 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
Kirk W. Foley 20,000 6% $6.05 January 2, 2007 $58,178 $164,312
Mark A. Kirk 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
Carl H. Young, III 75,000 24% $5.68 July 2, 2002 $148,327 $298,730
</TABLE>
- --------------------------------------------------------------------------------
(1) Stock options issued to Mr. Foley were granted pursuant to his Employment
Agreement with the Company and have an exercise price equal to 110% of fair
market value on the date of grant, which is the first business day of the
year. The closing price on the Nasdaq Stock Market on January 2, 1997 was
$5.50. The stock options issued to Mr. Malone, on January 2, 1997, were
valued at the closing price on the date of grant. The stock options issued
to Messrs. Malone, Kirk and Young on July 2, 1997, were valued at the
average between the high and the low sale price for the ten trading days
preceding the date of grant. The closing price on the Nasdaq Stock Market
on July 2, 1997, the date of grant, was $6.00.
The following table sets forth information regarding stock options held at the
end of the fiscal year by the named executive officers. There were no stock
option exercises in 1997 by any named executive officer.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 30, 1997 (1) SEPTEMBER 30, 1997 (2)
---------------------- ----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Malone 57,395 23,605 $0 $0
Kirk W. Foley 80,000 0 $0 $0
Kevin Dow 0 0 $0 $0
Chuck Ellens 0 0 $0 $0
Mark A. Kirk 57,395 17,605 $0 $0
Carl H. Young, III 57,395 17,605 $0 $0
</TABLE>
- --------------------------------------------------------------------------------
(1) There were no SARs outstanding at September 30, 1997 and none granted
during the fiscal year.
(2) The "value of unexercised in-the-money options at September 30, 1997" was
calculated by determining the difference between the fair market value of
the underlying shares of Common Stock at September 30, 1997 ($5.25 per
share) and the exercise price of the option. An option is "in-the-money"
when the fair market value of the underlying shares of Common Stock exceeds
the exercise price of the option. None of the options held by the named
executive officers was "in the money" on September 30, 1997.
22
<PAGE> 143
(C) DIRECTORS' COMPENSATION
A director who is an employee of the Company or a subsidiary is not separately
compensated for service as a director. Other directors receive a retainer of
$10,000 per year, payable quarterly, and $600 per meeting for each committee
meeting attended which is held on a day other than a day on which there is a
Board of Directors meeting.
Pursuant to the Company's Omnibus Plan, on the first business day of each
calendar year each non-employee director automatically receives an option to
purchase 6,000 shares of Common Stock of the Company (as adjusted for stock
splits).
(D) DIRECTORS' CONSULTING AGREEMENTS
Several members of the Board have entered into consulting contracts with the
Company relating to various matters within their fields of expertise.
Information regarding these contracts follows.
In 1990, the Company entered into a consulting agreement with Robert J.
Abrahams, a director of the Company, for consulting services relating to retail
financing programs for distributors of the Company's Consumer Goods Division. In
1991, this agreement was amended to include services to Health-Mor Acceptance
Corporation and HMI Acceptance Corporation, subsidiaries of the Company. Mr.
Abrahams is paid a total of $50,000 per year, plus expenses, for such services.
The consulting agreements with Mr. Abrahams are for one year periods and are
anticipated to be renewed. A total of $50,000 was paid in fiscal 1997 under this
agreement.
The Company pays a management fee in the amount of $25,000 per quarter to
Fairway Inc. for the consulting services of Mr. Needler relating to various
matters requested by the Company. Barry L. Needler, a director of the Company,
owns a majority of the outstanding shares of Fairway Inc. and is President of
that company. A total of $50,000 was paid to Fairway Inc. in 1997.
In 1996, the Company entered into a consulting agreement with Ivan Winfield, a
director of the Company, for services relating to issues involving the capital
structure of the Company, proposed acquisitions and divestitures, oversight of
the Company's capital structure, cash flow, debt management, long term corporate
planning and such other matters as may be required by the Chief Executive
Officer. Mr. Winfield was paid $12,500 per month for his services from October
1996 through March 1997, and $6,250 per month from April through September 1997.
A total of $112,500 was paid to Mr. Winfield in 1997 under this consulting
agreement. This agreement was terminated at the end of November 1997.
In 1995, the Company entered into an agreement with John Meany, a director of
the Company, to act as Administrator of the Company's Profit Sharing Plan. Also
in 1995, the Company entered into an agreement with Mr. Meany to act as
corporate Secretary of the Company and to oversee the functions of the corporate
Secretary's office. Mr. Meany received $2,700 per month under these agreements
from October 1996 through June 1997. Effective July 1997, the amount was raised
to $4,167 per month. In 1997, the Company paid Mr. Meany a total of $38,300
under these agreements.
23
<PAGE> 144
(E) EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-OF-CONTROL
ARRANGEMENTS
Messrs. Malone, Kirk and Young each have employment agreements which state that
they are to receive one year's salary in the event of termination of employment
without cause. Certain executives of the Company, including Messrs. Malone, Kirk
and Young, also have agreements which provide that in the event of termination
of employment without cause (other than for death or disability, or voluntary
termination by the employee) in the twelve months following a change in control
(as defined in the agreement), the executives are to receive compensation equal
to a certain number of months of salary. In the case of Messrs. Malone, Kirk and
Young, this compensation is equal to two years' base salary.
(F) COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board is responsible for recommending to the
Board the compensation of executive officers and key employees of the Company
and its subsidiaries. The Compensation Committee consists of Robert J. Abrahams,
Donald L. Baker and Barry L. Needler.
The Compensation Committee annually reviews compensation of the Chief Executive
Officer, other executive officers and key employees of the Company and its
subsidiaries. The Compensation Committee meets periodically during the year to
monitor performance and fix awards based on performance standards and to review
compensation decisions. The Committee's policy in evaluating and compensating
executive officers and key employees is to consider the performance of the
Company as a whole, the performance of the business unit for which the
individual has responsibility and the individual's contribution toward the
Company's attainment of established Company and individual goals. Factors
considered in evaluating performance are both subjective (such as the
individual's performance and development) and objective (such as the attainment
of specified financial goals).
The composition of compensation varies broadly among executive officers and key
employees of the Company based on their responsibilities and the business unit
to which they are assigned. Generally, base salary is targeted at competitive
rates believed by the Committee members to be necessary in their experience to
retain qualified personnel. The Company maintains an Incentive Bonus Plan under
which participating employees may be eligible for a bonus if the pretax profits
of the Company for the year exceed a specified target which is established
annually by the Compensation Committee. Beginning in 1995, the target was
changed from an after-tax to a pretax amount in order to put more emphasis on
meeting operating goals, and to remove from consideration those factors over
which the Company has no control, such as tax rates. The maximum bonus payable
to an individual is a percentage of base salary ranging from 25% to 150% of base
salary. Bonuses are based on varying performance criteria, including the
Company's pretax profits, return on assets, divisional net contribution, cost
containment programs and departmental gross margins. Specific incentive
performance criteria for each participating individual are determined by the
Committee at the beginning of the year based upon the individual's duties. The
targets for 1995, 1996 and 1997 were not met, and no bonuses were awarded for
those years under this Plan. Key employees of subsidiaries who do not
participate in the Incentive Bonus Plan have bonus or incentive arrangements
based on criteria deemed by the Compensation Committee to be effective in
aligning the financial interest of the employee with those of Company's
stockholders. Among the criteria that are utilized in incentive compensation of
key employees of subsidiaries include percentage of profits or net
24
<PAGE> 145
income, commissions based on sales, net profit contribution, and balance sheet
measures such as inventory and accounts receivable turnover and working capital
improvements. From time to time, the Company engages outside compensation
consultants to provide information and advice about competitive levels of
compensation and particular compensation techniques.
Compensation of the Chief Executive Officer
Mr. Foley's compensation was paid pursuant to his employment agreement with the
Company, which was approved by the Company's stockholders at the 1995 annual
meeting. In fiscal year 1997, Mr. Foley was paid total salary of $396,850. No
bonus relating to calendar year 1997 was earned.
Mr. Foley's employment agreement also provided that he receive options to
purchase 20,000 shares of Common Stock on the first business day of each year
through 1998. The option price is equal to 110% of the fair market value on the
date of grant, and the options are immediately exercisable. The period of
exercisability will be determined by the Compensation Committee and may last for
up to ten years. Mr. Foley's contract also provided that he receive 125,000
shares of phantom stock. The phantom stock was to vest in increments of 21,857
shares on each of June 30, 1995, January 1 and June 30, 1996, and January 1 and
June 30, 1997, with the final 37,571 shares vesting on January 1, 1999.
Dividends that would have been paid had the phantom shares been issued could
have been used to "purchase" additional phantom shares, which would have vested
on the same schedule as the other phantom shares. Mr. Foley deferred the vesting
of one half of the phantom shares and accrued dividends scheduled to vest on
January 1, 1996 for three years. In 1996, his employment agreement was amended
so that the phantom shares that were scheduled to vest on January 1, 1996 and
were deferred and the phantom shares scheduled to vest on June 30, 1996 were
surrendered in exchange for cash payments of $150,000 on June 30, 1997 and June
30, 1998. In addition, Mr. Foley would have been entitled to receive an award of
shares in the Company in the event of an increase in the price of the Common
Stock between June 30, 1996 and June 30, 1998. The increase in share price would
have been multiplied by the number of phantom shares surrendered, and the result
would have been divided by the share price on June 30, 1998 to determine the
number of shares to be awarded.
Mr. Foley's employment agreement also provided that the Company would guarantee
a loan to him and to pay interest on the loan. The unpaid principal on the loan
at September 30, 1997 was $486,750.
Mr. Foley's employment with the Company was terminated by the Board on May 13,
1997. See "Certain Relationships and Related Transactions" elsewhere in this
report for information regarding the settlement entered into by the Company with
Mr. Foley in connection with the termination of his employment.
Mr. Malone, who became Chief Executive Officer on May 13, 1997, is paid a base
salary of $325,000 per year and participates in the incentive bonus plan. Mr.
Malone also receives other benefits available generally to all executives.
For the Compensation Committee
Robert J. Abrahams
Donald L. Baker
Barry L. Needler
25
<PAGE> 146
(G) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert J. Abrahams, Chairman of the Compensation Committee, provides consulting
services to the Company and its finance company subsidiaries (Health-Mor
Acceptance Corporation, HMI Acceptance Corporation and Health-Mor Acceptance PTY
Ltd.) and serves as President of these subsidiaries. He received $50,000 for
these services in fiscal 1997. Fairway Inc., a company controlled by Barry L.
Needler, provides management consulting services to the Company and received
$50,000 from the Company for services rendered in 1997. Mr. Needler is Vice
Chairman of the Company and is a member of the Compensation Committee.
(H) PERFORMANCE COMPARISONS
The following chart compares the cumulative shareholder return of the Company
for the five years ended September 30, 1997 to the Nasdaq National Market
Composite Index and a Company-determined peer group. The Company's Common Stock
trades on the Nasdaq National Market System. The chart assumes the investment of
$100 on September 30, 1992 and the immediate reinvestment of all dividends. The
ten companies making up the peer group are in industries believed to be
comparable to the Company's lines of business in 1997 and the peer group, in the
aggregate, is believed to approximate the Company's mix of consumer and
industrial business in 1997.
COMPARISON OF 5-YEAR CUMULATIVE RETURN AMONG THE
COMPANY, PEER GROUP INDEX AND NASDAQ MARKET INDEX
[GRAPHIC]
<TABLE>
<CAPTION>
- ----------------------- --------- --------- --------- -------- --------- -------
1992 1993 1994 1995 1996 1997
- ----------------------- --------- --------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
HMI INDUSTRIES INC. $100 $227 $236 $253 $125 $97
- ----------------------- --------- --------- --------- -------- --------- -------
NASDAQ MARKET INDEX $100 $130 $138 $167 $195 $265
- ----------------------- --------- --------- --------- -------- --------- -------
PEER GROUP INDEX $100 $143 $160 $160 $197 $236
- ----------------------- --------- --------- --------- -------- --------- -------
</TABLE>
ASSUMES $100 INVESTED ON OCT. 1, 1992
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEP. 30, 1997
26
<PAGE> 147
The Company business in 1997 consisted of two segments: a Consumer Goods segment
and a Manufactured Products segment. The peer companies include companies
believed to be in similar lines of business as the Company. The companies in the
peer group are: Amcast Industrial Corporation, Black and Decker Corporation,
Material Sciences Corporation, National Presto Industries Inc., Rival Co., SPS
Technologies Inc., Steel Technologies Inc., Sunbeam Corporation, Toastmaster
Inc. and Worthington Industries Inc. Some of the Company's direct competitors
are divisions of larger corporations, privately held corporations or foreign
corporations and are not included in the peer comparisons since the pertinent
information is not available to the public.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the names and share ownership as of March 2, 1998
of those persons who, to the knowledge of the Company, are the beneficial owners
of more than 5% of the Company's outstanding Common Stock based upon information
furnished to the Company by such person. Each beneficial owner has sole power to
vote and dispose of the shares indicated, except as otherwise stated.
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of
Beneficial Owners Beneficial Percent of
as of January 16, 1998 Ownership Common Stock
- --------------------------------------------------------------------------------
<S> <C> <C>
Steeplechase Corp. (1) 1,704,750 33.86%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Barry L. Needler 1,869,000 (2) 37.06%
P.O. Box 2463, Station B
Richmond Hill, Ontario L4E 1A5
Kirk W. Foley 635,016 (3) 12.42%
12700 Lake Avenue, #2006
Lakewood, OH 44107
Amherst Tanti U.S. Inc. (4) 520,148 10.33%
12700 Lake Avenue, #2006
Lakewood, Ohio 44107
John S. Meany, Jr. 376,354 (5) 7.45%
9200 S. Winchester Ave.
Chicago, Illinois 60620
Dimensional Fund Advisors 325,925 6.47%
1299 Ocean Drive
Santa Monica, CA 90401
</TABLE>
27
<PAGE> 148
(1) Mr. Needler is the President and Chief Executive Officer of Steeplechase
Corp.
(2) Includes shares owned of record and beneficially by Fairway Inc. (150,750
shares) and Steeplechase Corp. (1,704,750 shares), and beneficially by
Reldeen Ltd. (4,500 shares). Includes 9,000 shares subject to issuance upon
the exercise of stock options exercisable within 60 days of the date
hereof. Mr. Needler controls these corporations and serves as a Director
and Chief Executive Officer of these corporations.
(3) Includes 520,148 shares owned of record by Amherst Tanti U.S. Inc.; 10,300
shares in a retirement fund; and 80,000 shares subject to issuance upon the
exercise of stock options exercisable within 60 days of the date hereof.
(4) Amherst Tanti U.S. Inc. is owned by Kirk W. Foley and his wife. Mr. Foley
serves as President of this corporation.
(5) Includes 20,250 shares subject to issuance upon the exercise of stock
options exercisable within 60 days hereof. Also includes 9,000 shares owned
by members of Mr. Meany's immediate family, beneficial ownership of which
is disclaimed.
(B) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 2, 1998, information concerning the
number of shares of Common Stock beneficially owned by each nominee
individually, each named executive officer, and by all executive officers and
directors as a group. The totals shown below for each person and for the group
include shares held personally, shares held by immediate family members, and
shares acquirable within sixty days of the date hereof by the exercise of stock
options.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Direct Exercisable
Name of Beneficial Owner Ownership Options (2) Total Percent (3)
- ------------------------ --------- ------- ----- -------
<S> <C> <C> <C> <C>
Robert J. Abrahams 28,175 20,250 48,425 *
Donald L. Baker 143,536 (4) 20,250 163,786 3.24%
Kevin Dow (5) 17,075 0 17,075 *
Moffat Dunlap 0 20,250 20,250 *
Chuck Ellens 16,350 (6) 0 16,350 *
Kirk W. Foley 555,016 (7) 80,000 635,016 12.42%
Mark A. Kirk 32,500 75,000 107,500 2.10%
James R. Malone 12,500 76,500 89,000 1.74%
Grace McCarthy 1,100 (8) 20,250 21,350 *
John S. Meany, Jr. 356,104 (9) 20,250 376,354 7.45%
Barry L. Needler (5) 1,860,000 (10) 9,000 1,869,000 37.06%
Frank M. Rasmussen 0 11,250 11,250 *
Ivan Winfield 2,800 104,500 107,300 2.09%
Carl H. Young, III 32,500 75,000 107,500 2.10%
All Executive Officers and
Directors as a Group 3,057,656 532,500 3,590,156 64.50%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each person has sole voting and investment power with respect to all shares
shown except as indicated below.
(2) Represents shares subject to stock options that are currently exercisable
or become exercisable within 60 days hereof.
(3) Unless otherwise indicated, the percentage of Common Stock owned is less
than one percent of the Common Stock outstanding.
(4) Includes 138,136 shares owned by Mr. Baker's wife, beneficial ownership of
which is disclaimed. Mr. Baker owns 2,700 shares jointly with his wife.
28
<PAGE> 149
(5) Mr. Dow and Mr. Needler are first cousins.
(6) Includes 10,350 shares owned jointly with his spouse.
(7) Includes 520,148 shares owned by Amherst Tanti U.S. Inc. and 10,300 shares
in a retirement fund.
(8) These shares are owned by her spouse. Mrs. McCarthy disclaims beneficial
ownership of these shares.
(9) Includes 9,000 shares owned by members of his immediate family, beneficial
ownership of which is disclaimed.
(10) Shares are owned of record and beneficially by Fairway Inc. (150,750
shares) and Steeplechase Corp. (1,704,750 shares), and beneficially by
Reldeen Ltd. (4,500 shares). These corporations are controlled by Mr.
Needler.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its Chief Executive
Officer, that it was terminating his employment which triggered certain
obligations as per Mr. Foley's employment contract, including an $800,000
severance payment, an assumption of a $518,000 personal bank loan made to Mr.
Foley, other compensation obligations of approximately $79,000 and an obligation
to purchase Mr. Foley's Company Common Stock at current market value
(approximately $325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube Fab Ltd, a Canadian
subsidiary of the Company ("Tube Fab Ltd.") headquartered in Mississauga,
Ontario, Canada, that an independent appraiser valued at $1,512,000. The
Tube-Fab Ltd. stock had been carried on the Company's books at a value of
$2,157,500 and was accordingly written down to its appraised value.
The settlement transaction with Mr. Foley closed on January 8, 1998. It entailed
a transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr. Foley's payment of
$303,000 to the Company; cancellation of the Company's $800,000 severance
obligation; an assumption of the $486,750 ($518,000 less a $31,250 principal
payment made in June 1997) bank loan; cancellation of Mr. Foley's put right with
respect to his Company Common Stock; and assumption by Mr. Foley of an operating
lease of Canadian facilities currently leased by the Company, which had a
remaining lease obligation of approximately $1,050,000 over 8 1/2 years.
Mr. Foley's employment contract also required the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award was reduced to a $150,000 payment in the settlement
transaction. The settlement also required the Company to continue Mr. Foley's
salary and benefits from the time of the termination advisement through December
15, 1997 (approximately $320,000).
As part of the negotiations to settle the obligations under Mr. Kirk Foley's
employment agreement and to avoid litigation regarding disputes as to the amount
of these obligations, certain related party receivables aggregating $743,000
were forgiven and accordingly written off in the third and fourth quarters of
fiscal 1997. These receivables consisted of $292,200 advanced by the Company in
1989 to three companies which were controlled by two directors of the Company
(Mr. Foley and Mr. Larry Needler), $334,100 loaned by the Company in 1997 to
Amherst Tanti U.S. Inc., a corporation owned by an officer of the Company (Mr.
Foley), and $116,700 relating to other employee receivables.
29
<PAGE> 150
As an inducement to retain the continued services, following the sale of Bliss
Manufacturing (as discussed in Note 1 of the Notes to the Consolidated Financial
Statements), of certain key executives and individuals employed by the Company,
the Company entered into separate agreements in October 1997 with such
executives and individuals to provide for the payment of bonuses upon the
consummation of the sale and severance allowances in the event of a termination
of employment as a result of a change of control of the Company (as defined in
such agreements). The amount of the bonuses to be awarded varies by individual
and is dependent on the amount of the purchase price ultimately received in the
sale of Bliss Manufacturing by the Company. The current executive officers of
the Company, Messrs. Malone, Kirk and Young will each receive stay bonuses in
the amount of $300,000 (less applicable withholding taxes) upon the consummation
of the sale pursuant to the terms of such agreements.
Refer to Item 11 in this Report on Form 10-K for additional transactions.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
1. FINANCIAL STATEMENTS - Reference is made to the Index To Financial
Statements, included as page 32 of this report.
2. FINANCIAL STATEMENT SCHEDULES - Reference is made to the Index To
Financial Statements, included as page 32 of this report.
3. EXHIBITS - Reference is made to the Index To Exhibits, included as
page 60 of this report.
(b) Reports on Form 8-K. No report on Form 8-K was filed during the last
quarter of 1997.
(c) Exhibits Reference is made to the Index To Exhibits, included as page 60 of
this report.
(d) Financial Statement Schedules - Reference is made to the Index To Financial
Statements, included as page 32 of this report.
30
<PAGE> 151
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
HMI INDUSTRIES INC.
(Registrant)
by /s/ Michael Harper
-----------------------------------
Michael Harper
Vice President, Corporate Controller and
Chief Accounting Officer
March 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Mark A. Kirk
- ----------------------------------------- --------------------------------------- ---------------------------------------
James R. Malone Mark A. Kirk Frank Rasmussen
Chairman of the Board, Chief Executive President, Chief Operating Officer, Director
Officer and Director Chief Financial Officer and Director March 9, 1998
March 9, 1998 March 9, 1998
/s/ Grace McCarthy
- ----------------------------------------- --------------------------------------- ---------------------------------------
Robert J. Abrahams Grace McCarthy Ivan Winfield
Director Director Director
March 9, 1998 March 9, 1998 March 9, 1998
/s/ Donald L. Baker /s/ John S. Meany, Jr.
- ----------------------------------------- ---------------------------------------
Donald L. Baker John S. Meany, Jr.
Director Director
March 9, 1998 March 9, 1998
/s/ Moffat Dunlap /s/ Barry L. Needler
- ----------------------------------------- ---------------------------------------
Moffat Dunlap Barry L. Needler
Director Director
March 9, 1998 March 9, 1998
</TABLE>
31
<PAGE> 152
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management 33
Report of Independent Accountants
- ---------------------------------
For the years ended September 30, 1997, 1996 and 1995 ........................... 34
Financial Statements
- --------------------
Consolidated Balance Sheets for the years ended September 30, 1997
and 1996 ...................................................................... 35
Consolidated Statements of Income for the years ended September 30,
1997, 1996 and 1995 ........................................................... 36
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995 ............................................. 37
Consolidated Statements of Cash Flows for the years ended September
30, 1997, 1996 and 1995 ....................................................... 38
Notes to Consolidated Financial Statements ...................................... 39-58
FINANCIAL STATEMENT SCHEDULE: II - Valuation and Qualifying Accounts and Reserves 59
</TABLE>
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements, the notes thereto or in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
32
<PAGE> 153
REPORT OF MANAGEMENT
To the Board of Directors and Stockholders of HMI Industries Inc.
The management of HMI Industries Inc. (HMI) is responsible for the preparation,
integrity and objectivity of the financial statements and all other financial
information included in this report. Management believes that the financial
statements have been prepared in accordance with generally accepted accounting
principles and that any amounts included herein which are based on estimates of
the expected effects of events and transactions have been made with sound
judgment and approved by qualified personnel.
HMI maintains an internal control structure to provide reasonable assurance that
assets are safeguarded and that transactions and events are recorded properly.
The internal control structure is regularly reviewed, evaluated and revised as
necessary by management. Additionally, HMI requires every Company employee to
maintain the highest level of ethical standards in the conduct of all aspects of
the Company's business, and their compliance is regularly monitored.
The financial statements in this report have been audited by the independent
accounting firm of Coopers & Lybrand L.L.P. Their audits were conducted in
accordance with generally accepted auditing standards and included a study and
evaluation of our internal control structure as they considered necessary to
determine the extend of tests and audit procedures required for expressing an
opinion on the company's financial statements.
The Audit Committee of the Board of Directors, of which outside directors are
members, meets periodically with the independent auditors and management to
review accounting, auditing, internal control and financial reporting matters.
The external auditors have full and free access to the Audit committee and its
individual members at any time.
/s/ Mark A. Kirk
--------------------------------------------
President, Chief Operating Officer and Chief
Financial Officer
/s/ Michael Harper
--------------------------------------------
Vice President, Corporate Controller and
Chief Accounting Officer
33
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders, HMI Industries Inc.
We have audited the consolidated financial statements and the financial
statement schedule of HMI Industries Inc. and its subsidiaries listed in the
index on page 32 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HMI Industries
Inc. and its subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
restated its prior year consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company
intends to retire substantially all of its outstanding debt with the expected
proceeds from the sale of its subsidiary Bliss Manufacturing Company.
/s/ Coopers & Lybrand, L.L.P.
Cleveland, Ohio
December 29, 1997
34
<PAGE> 155
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1997 1996
-------------- -------------
ASSETS (Restated)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 239,797 $ 472,408
Trade accounts receivable (net of allowance of $5,512,063 and $2,439,406) 10,357,999 26,252,884
Finance contracts receivable 496,044 2,224,480
Notes receivable 228,414 560,884
Inventories:
Finished goods 2,438,282 6,943,970
Work-in-progress, raw material and supplies 1,714,576 11,420,627
Income tax receivable 3,373,898 1,463,000
Deferred income taxes 8,239,080 1,772,129
Prepaid expenses 123,099 1,985,276
Other current assets 83,307 -
Net assets held for sale at realizable value 14,658,322 4,228,059
------------ ------------
Total current assets 41,952,818 57,323,717
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 6,194,868 15,717,653
------------ ------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one year) - 334,123
Cost in excess of net assets of acquired businesses
(net of amortization of $3,534,511 and $3,092,432) 5,777,440 12,636,147
Deferred income taxes - 1,499,600
Unamortized trademarks 339,823 312,775
Finance contracts receivable (less amounts due within one year) 992,090 4,449,628
Other 133,094 237,481
------------ ------------
Total other assets 7,242,447 19,469,754
------------ ------------
Total assets $ 55,390,133 $ 92,511,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 480,822 $ 3,132,975
Trade accounts payable 6,939,040 17,785,859
Income taxes payable 2,149,163 734,605
Accrued expenses and other liabilities 8,125,620 7,202,990
Long-term debt due within one year 20,464,632 3,485,641
------------ ------------
Total current liabilities 38,159,277 32,342,070
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 762,777 22,334,613
Postretirement benefits other than pensions - 3,749,000
Deferred income taxes 573,613 192,372
Other 1,342,961 3,010,109
------------ ------------
Total long-term liabilities 2,679,351 29,286,094
------------ ------------
Commitments and contingencies (Note 11)
- -
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none - -
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,295,556 shares 5,295,556 5,295,556
Capital in excess of par value 8,050,212 7,686,944
Unearned compensation, net (191,500) -
Retained earnings 4,077,771 20,740,344
Cumulative translation adjustment (1,418,762) (1,077,325)
------------ ------------
15,813,277 32,645,519
Less treasury stock 269,296 shares, at cost 1,261,772 1,762,559
------------ ------------
Total stockholders' equity 14,551,505 30,882,960
============ ============
Total liabilities and stockholders' equity $ 55,390,133 $ 92,511,124
============ ============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 156
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
------------------------------------------------------
REVENUES: (Restated) (Restated)
<S> <C> <C> <C>
Net product sales $ 49,878,534 $ 58,820,833 $ 62,228,698
Financing revenue and other 611,716 728,075 556,604
------------ ------------ ------------
50,490,250 59,548,908 62,785,302
OPERATING COSTS AND EXPENSES:
Cost of products sold 36,009,821 38,247,052 39,110,004
Selling, general and administrative expenses 32,593,485 25,635,132 21,399,040
Interest expense 2,217,781 1,686,254 1,409,291
Loss on investment in Holland-Electro
- 2,012,356 -
Other expenses 432,532 573,818 (126,800)
------------ ------------ ------------
Total expenses 71,253,619 68,154,612 61,791,535
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (20,763,369) (8,605,704) 993,767
Benefit for income taxes (7,285,949) (2,838,259) (614,791)
------------ ------------ ------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (13,477,420) (5,767,445) 1,608,558
------------ ------------ ------------
Income (loss) from discontinued operations -
Mexico (net of taxes of $-0-, $-0- and $496,000)
- (1,428,183) (235,838)
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-)
498,131 (1,082,502) (388,233)
Bliss Manufacturing (net of taxes of $1,323,395, $1,103,664
and $3,075,442) 2,159,224 1,655,497 4,613,163
Bliss Tubular (net of taxes of $87,090, $119,901, and $20,746) (142,094) (179,851) 31,120
Tube Fab Ltd (net of taxes of $-0-, $-0- and $-0-) 386,095 32,042 (132,796)
Health-Mor Personal Care Corp. (net of taxes of $339,742,
$641,878 and $36,066) (554,317) (962,818) (54,099)
------------ ------------ ------------
2,347,039 (1,965,815) 3,833,317
------------ ------------ ------------
Loss on disposals-
Mexico - Currency loss previously reflected as component of
equity (net of taxes of $1,000,000) - (1,396,509) -
Mexico - (84,335) -
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) (2,651,209) (800,000) -
Bliss Tubular (net of taxes of $244,351, $-0-, and $-0-) (1,279,799) - -
Tube Fab Ltd (net of taxes of $-0-, $-0- and $-0-) (1,020,065) - -
Health-Mor Personal Care Corp. provision for operating losses
during phase-out period (net of taxes of $348,503, $-0- and $-0-) (568,611) - -
------------ ------------ ------------
(5,519,684) (2,280,844) -
============ ============ ============
NET INCOME (LOSS) $(16,650,065) $(10,014,104) $ 5,441,875
============ ============ ============
Weighted average number of shares outstanding 4,956,276 4,912,135 4,876,599
============ ============ ============
PER SHARE OF COMMON STOCK:
Income (loss) before discontinued operations $ (2.72) $ (1.18) $ 0.33
Income (loss) from discontinued operations $ 0.47 $ (0.40) $ 0.79
Loss on disposals $ (1.11) $ (0.46) $ -
============ ============ ============
Net income (loss) $ (3.36) $ (2.04) $ 1.12
============ ============ ============
Cash dividends per common share $ - $ 0.263 $ 0.346
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 157
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Capital Cumulative Treasury stock Total
Common in Excess Unearned Retained Translation -------------------- Stockholders'
Stock of Par Value Compensation Earnings Adjustment Shares Amount Equity
---------- ------------ ------------ ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994,
as reported $5,295,556 $7,223,367 --- $30,111,101 ($869,016) 436,133 ($2,043,426) $39,717,582
Adjustment for postretirement
benefits (See Note 1) (1,815,600) (1,815,600)
---------- ----------- ----------- ------------ ----------- --------- ----------- ------------
Balance at September 30, 1994,
as restated 5,295,556 7,223,367 --- 28,295,501 (869,016) 436,133 (2,043,426) 37,901,982
Net income, as reported
5,614,675 5,614,675
Adjustment for postretirement
benefits (See Note 1) (172,800) (172,800)
Cash dividends - $.345 per
share (1,691,482) (1,691,482)
Treasury shares issued
298,484 (41,607) 194,942 493,426
Foreign currency translation
adjustment (1,794,888) (1,794,888)
---------- ----------- ----------- ------------ ----------- --------- ----------- ------------
September 30, 1995, as restated 5,295,556 7,521,851 --- 32,045,894 (2,663,904) 394,526 (1,848,484) 40,350,913
Net loss, as reported (9,334,042) (9,334,042)
Adjustment for postretirement
benefits (See Note 1) (261,000) (261,000)
Adjustment for certain
deferred costs (See Note 1) (419,062) (419,062)
Cash dividends - $.2625 per
share (1,291,446) (1,291,446)
Treasury shares issued 165,093 (18,340) 85,925 251,018
Foreign currency translation
adjustment 1,586,579 1,586,579
---------- ----------- ----------- ------------ ----------- --------- ----------- ------------
SEPTEMBER 30, 1996, AS RESTATED 5,295,556 7,686,944 --- 20,740,344 (1,077,325) 376,186 (1,762,559) 30,882,960
NET LOSS
(16,650,065) (16,650,065)
TREASURY SHARES ISSUED 363,268 (13,288) (106,890) 500,787 850,767
UNEARNED COMPENSATION (273,500) (273,500)
EMPLOYEE BENEFIT STOCK 82,000 82,000
UNCLAIMED DIVIDENDS 780 780
Foreign currency translation
adjustment (341,437) (341,437)
========== =========== =========== ============ =========== ========= =========== ============
BALANCE AT SEPTEMBER 30, 1997 $5,295,556 $ 8,050,212 $ (191,500) 4,077,771 $ (1,418,762) 269,296 $(1,261,772)$ 14,551,505
========== =========== =========== ============ =========== ========= =========== ============
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 158
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) (Restated)
Net income (loss) $(16,650,065) $(10,014,104) $ 5,441,875
Adjustments to reconcile net income (loss) to net cash provided by (used)
in operating activities:
Depreciation and amortization 2,744,553 3,564,595 3,768,822
Loss on disposal of discontinued operations 5,519,684 2,280,844 -
Provision for loss on asset write down 451,297 -
Provision for losses on receivables 6,069,937 1,069,509 641,562
Amortization of stock awards, net 385,766 - -
Amortization of deferred non-compete agreement - - 380,576
Net increase in postretirement liability 488,000 435,000 288,000
Deferred income taxes (4,683,948) (701,049) (169,123)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 3,241,172 (2,668,671) (5,916,069)
Decrease (increase) in inventories 4,362,110 (2,139,794) (2,191,579)
Decrease (increase) in prepaid expenses 1,716,065 (20,741) (429,965)
Increase in other current assets (131,180) - -
Increase (decrease) in accounts payable (3,213,858) 7,016,530 3,301,638
Increase (decrease) in accrued expenses and other liabilities 4,208,023 1,015,940 (1,545,968)
Decrease in income taxes payable (774,447) (2,465,824) (245,319)
Other, net 74,895 (258,612) (186,780)
------------ ------------ ------------
Net cash provided by (used) in operating activities 3,808,004 (2,886,377) 3,137,670
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 2,720,916 523,783 -
Capital expenditures (1,463,320) (6,484,846) (3,805,326)
Collection of notes receivable - - -
------------ ------------ ------------
Net cash provided by (used) in investing activities 1,257,596 (5,961,063) (3,805,326)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 38,491,000 7,795,616 4,117,324
Payments of credit facility (40,166,603) - -
Proceeds from mortgage 55,077 2,214,923 -
Payment of long term debt (3,690,397) (2,807,706) (2,012,371)
Proceeds from long term debt 12,712 3,022,807 -
Dividends paid - (1,721,162) (1,669,565)
Proceeds from exercise of stock options - - 112,850
------------ ------------ ------------
Net cash provided by (used) in financing activities (5,298,211) 8,504,478 548,238
------------ ------------ ------------
Effect of exchange rate changes on cash - 244,611 -
------------ ------------ ------------
Net decrease in cash and cash equivalents (232,611) (98,351) (119,418)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 472,408 570,759 690,177
============ ============ ============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 239,797 $ 472,408 $ 570,759
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
----------------------
The consolidated financial statements include all significant controlled
subsidiaries both continuing and discontinued operations. Continuing operations
include the accounts of HMI Industries Inc (the "Company") and the following
wholly-owned subsidiaries: Health-Mor B.V., Health-Mor International Inc., HMI
Incorporated, Health-Mor Acceptance Corporation, HMI Acceptance Corporation,
Health-Mor Acceptance Pty. Ltd., and Home Impressions Inc. Operations reported
as discontinued are Household Rental Systems, Tube-Fab Ltd., Health-Mor Personal
Care Corp., Bliss Tubular, and Bliss Manufacturing Company. All significant
inter-company accounts and transactions have been eliminated.
Reclassification
----------------
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
Restatement
-----------
During the fourth quarter of fiscal 1997, new management personnel discovered
the fact that the basic labor agreement between Bliss Manufacturing and its
employees provides hospitalization and life insurance benefits for eligible
employees upon retirement. Upon discovery, an actuarial valuation was
immediately performed which reflected an APBO of $4.1 million at September 30,
1997. Under the immediate recognition rules of FASB No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions" (FAS 106),
management has recorded the actuarially determined liability of $4.2 million at
September 30, 1997 and has restated its opening fiscal year 1995 retained
earnings ($3.0 million accrued cost less $1.2 million tax impact) and its 1995
and 1996 results of operations for the respective years' FAS 106 expense of
$385,000 and $541,000, respectively (net of "pay as you go" amounts previously
included in the respective year's income statements of $97,000 and $106,000,
respectively and net of taxes of $115,200 and $174,000, respectively). These
adjustments reduced the Company's net income per share of common stock by $.03
and $.05 for 1995 and 1996, respectively.
In addition, certain other costs associated with the Company's Health-Mor
Personal Care Corporation totaling approximately $698,000 ($419,000 net of taxes
or $.09 per share of common stock), which were capitalized and deferred in
fiscal 1996, to match such expenses with associated revenues to be generated in
connection with the sale of the AdvantaJet needle-fee insulin injector, have
been restated in the Company's financial statements to reflect the expensing of
these costs in fiscal year 1996 rather than in fiscal year 1997 as previously
reported.
39
<PAGE> 160
Foreign Currency Translation
----------------------------
All consolidated foreign operations use the local currency of the country of
operation as the functional currency and translate the local currency asset and
liability accounts at year-end exchange rates while income and expense accounts
are translated at weighted average exchange rates. The resulting translation
adjustments are accumulated as a separate component of Shareholders' Equity
titled "Cumulative foreign currency translation adjustment". Such adjustments
will affect net income only upon sale or liquidation of the underlying foreign
investments. During the fourth quarter of 1997, the Company recorded $719,900 to
loss on disposal for cumulative translation adjustments associated with
discontinued foreign operations.
Exchange gains and losses from transactions in a currency other than the local
currency of the entity involved are included in income. Net transaction and
translation adjustments are not significant.
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 any
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash Equivalents
----------------
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
Allowance for Doubtful Accounts
-------------------------------
On a periodic basis, the Company's management performs a review of potentially
uncollectable trade accounts receivable to provide its best estimate of the net
realizable value of the receivables. This review consists of a detailed specific
customer analysis and a focus on aging categorization, days sales outstanding
and other related analytical procedures.
Cost in Excess of Net Assets of Acquired Businesses
---------------------------------------------------
Intangibles resulting from business acquisitions, comprising cost in excess of
net assets of businesses acquired, are being amortized on a straight-line basis
over 40 years. Cost in excess of net assets acquired of $881,121 which related
to the acquisition of Tube Form in 1970 are included in the loss on disposal for
the Tubular business, which was recorded in June 1997.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and market and economic conditions. If there is
an impairment in value, recorded balances will be adjusted.
40
<PAGE> 161
Inventories
-----------
Inventories are stated at the lower of cost or market and are valued using the
last-in, first-out (LIFO) and the first-in, first out (FIFO) cost methods.
Inventories from continuing operations on the LIFO method were 90.9% and 86.3%
of inventories in 1997 and 1996, respectively. If the FIFO method had been used
for these inventories, their value would have been approximately $4,768,400 and
$8,174,100 at September 30, 1997 and 1996, respectively.
All discontinued operations are on the FIFO cost method. The value of these
inventories approximate $7,859,200 and $11,229,200 at September 30, 1997 and
1996.
Assets Held for Sale
--------------------
In 1997, assets held for sale include the assets of Health-Mor Personal Care
Corporation, Tube-Fab Ltd., Bliss Manufacturing and Household Rental Systems. In
1996, assets held for sale included the assets of Household Rental Systems and
the former Bedford Heights, Ohio facility for the Tubular operation. The assets
and liabilities of these businesses at September 30, 1997 and 1996, have been
reclassified to net assets held for sale and are stated at their estimated net
realizable value.
In December 1997, the Company signed a letter of intent with respect to the sale
of Household Rental Systems. Management anticipates that the sale of this
business will be completed in early 1998.
On December 18, 1997, the Company signed a definitive agreement to sell the
stock of its Bliss Manufacturing Company to an investor group led by Mervin Dunn
and Rhone Capital, LLC. The purchase price is $31,500,000, subject to certain
adjustments, including a $1,500,000 distribution for certain payments to vendors
and employee obligations. The sale is expected to close in March 1998, subject
to regulatory and HMI shareholder approval. Holders of over 50% of the
outstanding shares of HMI common stock have granted to representatives of the
buyer group irrevocable proxies to vote their HMI shares in favor of the
transaction. The Company expects the entire proceeds from the sale of Bliss
Manufacturing to be applied to the retirement of substantially all of its debt,
certain vendor obligations, transaction costs and related expenses, certain
employee benefit payments, and amounts necessary to fund future tax obligations
arising from the gain on the sale of Bliss Manufacturing.
In January 1998, the Company expects to sell Tube-Fab Ltd. to its former CEO,
Mr. Kirk Foley, as part of the Company's negotiated settlement of obligations
under Mr. Foley's employment contract (See Note 14). The assets of Health-Mor
Personal Care Corp. are expected to be sold in early 1998.
The former Bedford Heights, Ohio facility for the Tubular operation was sold in
December 1996 resulting in an insignificant gain on disposal.
41
<PAGE> 162
Assets held for sale at September 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ --------------
<S> <C> <C>
Accounts receivable, net $ 9,524,069 $ 823,393
Inventories 7,859,180 331,992
Property, plant and equipment, net 9,240,582 3,122,164
Other assets 8,260,924 1,113,601
----------- -----------
Total assets $34,884,755 $ 5,391,150
----------- -----------
Accounts payable 7,801,520 168,559
Accrued expenses 7,079,624 994,532
Other liabilities 5,345,289 ---
----------- -----------
Total liabilities $20,226,433 $ 363,091
=========== ===========
Net assets held for sale at realizable value $14,658,322 $ 4,228,059
=========== ===========
</TABLE>
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at cost. Depreciation is provided on
the straight-line and declining balance methods over estimated useful lives of
10 to 40 years for buildings and improvements and 3 to 10 years for machinery
and equipment. Improvements which extend the useful life of property, plant and
equipment are capitalized, and maintenance and repairs are expensed. When
property, plant and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the appropriate accounts and any gain
or loss is included in current income.
Fair Value of Financial Instruments
-----------------------------------
It is not practical to determine the fair value of finance contract receivables
due to the unavailability of quoted market prices and the significant volume of
outstanding contracts with varying maturity dates. The Company's finance
contract receivables generally mature three years after issuance and generate
interest at rates ranging from 18% to 23%.
The Company's remaining financial instruments consist principally of cash and
cash equivalents, accounts and notes receivable, accounts payable, accrued
expenses and other liabilities, line of credit, and short and long-term debt in
which the fair value of these financial instruments approximates the carrying
value.
Income Taxes
------------
The Company accounts for income taxes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the tax consequences in the future years for differences
between the financial and tax basis of assets and liabilities at year end are
reflected as deferred income taxes.
42
<PAGE> 163
Revenue Recognition
-------------------
Product revenues are recognized upon the shipment of product. Prior to January
1, 1998, the Company provided extended credit terms to its distribution network
in the Consumer Goods Division. On January 1, 1998, the Company revised this
policy to cash only sales terms for its North American distributors.
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash paid for interest was $2,171,658, $1,509,627 and $1,477,552 for the years
ended September 30, 1997, 1996 and 1995, respectively. During the year, the
tenant of the Company's Lombard, Illinois building, exercised his right to
purchase the property at a price equal to the remaining principal debt service
of approximately $800,000. The amount of the debt service equaled the net book
value of the asset recorded on the Company's books. In addition, $5,286,277 of
goodwill related to the discontinued Bliss Manufacturing operation was
reclassified to net assets held for sale. During fiscal 1996, the Company
assumed a mortgage of $323,000 and relieved a note receivable for $302,000 in
exchange for $625,000 of fixed assets. During 1995, the Company acquired
approximately $470,000 of fixed assets which were not paid for as of September
30, 1995.
Items relating to discontinued operations included in the Consolidated
Statements of Cash Flow have not been disaggregated as they have in the
Consolidated Balance Sheets under the heading net assets held for sale at
realizable value.
Income Per Share
----------------
Income per share of common stock is based upon the weighted-average number of
common shares and common share equivalents outstanding. The weighted-average
number of common shares and common share equivalents outstanding during 1997,
1996 and 1995 was 4,956,276, 4,912,135 and 4,876,599, respectively.
2. DISCONTINUED OPERATIONS
In the third quarter of fiscal 1997, the Company reported its Health-Mor
Personal Care Corporation, Bliss Tubular and Tube-Fab Ltd. as discontinued
operations. Bliss Tubular, Tube-Fab Ltd and Bliss Manufacturing comprise the
Company's reported Manufactured Products segment. The Bliss Tubular and Tube-Fab
Ltd. operations represent the Company's only tube fabrication and tube forming
businesses (primarily for the consumer goods marketplace) and have been
accounted for and operated separately from the Bliss Manufacturing business. The
Company recorded a pre-tax estimated loss on disposal of the assets of Tube-Fab
Ltd., and Health-Mor Personal Care Corp. of $1,937,179 during fiscal 1997. In
August 1997, the Company sold the assets of Bliss Tubular to H-P Products and
recorded a pre-tax loss on the sale of those assets of $1,524,150.
In the fourth quarter of fiscal 1997, the Company received Board approval for
the proposed sale of the Bliss Manufacturing Company, a business which
represents a heavy-duty metal stamping operation and supplier to the automobile
and heavy-duty truck industry. As a result, the entire Manufactured Products
Division, which was previously reported as a separate segment in the Company's
financial statements, is reflected as a discontinued operation for the year
ended September 30, 1997.
43
<PAGE> 164
Sales applicable to the discontinued operations were $69,902,015, $58,358,230
and $68,964,988 for the years ended September 30, 1997, 1996 and 1995,
respectively.
During the fourth quarter of fiscal 1996, the Company adopted a plan to exit its
direct sales operation in Mexico. Revenues and expenses related to this business
have been classified as discontinued operations for the years ended September
30, 1996 and 1995. The Company recorded a loss on disposal of $1,480,844 in
fiscal 1996 primarily comprised of the currency devaluation which was previously
reported as a component of equity, net of the U.S. tax benefit of the loss on
the Company's investment in the Mexican operation. Revenues of the Mexican
operations were $1,876,516, and $2,873,044 for the years ended September 30,
1996, and 1995, respectively.
In March 1996, the Company adopted a plan to sell its steam cleaning rental
leasing operations distributed through grocery chains and supermarkets in
Canada. Revenues and expenses related to this business have been classified as
discontinued operations for the years ended September 30, 1997, 1996 and 1995.
Revenues of this operation for the years ended September 30, 1997, 1996 and 1995
were $5,249,627, $5,536,983 and $6,592,853, respectively. The Company recorded
an estimated loss on the disposal of the operation of $800,000 during 1996. An
additional charge of $2,651,209 on the disposal of this asset was recorded in
the third and fourth quarters of fiscal 1997 to reflect its current realizable
value. This charge also includes an estimated write-off of the entity's currency
translation adjustment (reported as a component of equity) which will occur upon
the sale of the operation. Net assets of Household Rental Systems are included
in assets held for sale.
3. NOTES RECEIVABLE
Long-term notes receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes receivable - See Note 14 $ 228,414 $ 895,007
Less amounts due within one year 228,414 560,884
=========== ===========
$ --- $ 334,123
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
1997 1996
----------- -----------
Land $ 7,083 $ 576,109
Buildings and improvements 3,867,012 9,712,417
Machinery and equipment 7,552,322 20,553,692
----------- -----------
11,426,417 30,842,218
Accumulated depreciation 5,231,549 15,124,565
=========== ===========
Net property, plant and equipment $ 6,194,868 $15,717,653
=========== ===========
</TABLE>
Gross property, plant and equipment related to discontinued operations amounted
to $23,485,754, with associated accumulated depreciation of $14,245,172, at
September 30, 1997.
44
<PAGE> 165
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued compensation $4,049,464 $3,127,615
Distributor funds payable 1,171,998 292,198
Pension and profit sharing 362,560 852,413
Accrued interest 332,364 259,657
Accrued taxes --- 110,810
Other 2,209,234 2,560,297
========== ==========
$8,125,620 $7,202,990
========== ==========
</TABLE>
6. CREDIT FACILITY AND LONG-TERM DEBT
In November 1996, the Company increased the line of credit facility from
$17,500,000 to $19,500,000 with a principal payment of $2,000,000 due by
February 28, 1997. Under this line of credit agreement, a principal amount of
$2,500,000 was due no later than January 2, 1997. In December 1996, the proceeds
from the sale of the Bedford Heights, Ohio tubular facility were utilized to pay
down the $2,500,000 principal amount to $1,379,100. In January 1997, proceeds
from a federal income tax refund were used to pay the remaining principal amount
due. Effective February 28, 1997, the Credit Facility Agreement was amended to
increase the line of credit from $17,000,000 to $20,000,000 with $5,000,000 of
the commitment due March 31, 1997. Subsequently, the availability of the
$20,000,000 facility was extended through May 31, 1997.
Effective June 1997, the Company entered into a $20 million credit facility with
its lender which replaced the February 1997 amended and restated credit facility
agreement. The new credit agreement expires on October 1, 1998 and requires an
unused facility fee, computed at 0.25% per annum on the Unused Revolving
Facility amount, payable monthly. The secured facility consists of a $13 million
revolving credit facility and $7 million in term loans. The term loans require
monthly principal payments of $98,501. Interest rates accrue at prime on the
revolving credit facility and up to prime plus 2.25% on the term loans. As of
September 30, 1997, the outstanding balance on the Company's credit facility was
$15,824,397 (including $10.1 million of the line of credit, the special term
loan, the equipment term loan and the real estate term loan disclosed below).
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally , the
Company expects to receive additional financing of $1,200,000 upon the filing of
its fiscal 1997 tax return, which is expected to be filed in early January 1998.
The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
45
<PAGE> 166
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of September 30, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
In March 1996, the Company entered into a bank credit facility, utilized by the
Netherlands operations, for a maximum amount of NLG 1,000,000 or approximately
$600,000. Interest is incurred at the promissory note discount rate as
determined by the Dutch central bank. At September 30, 1997 the promissory note
discount rate was 6.00%. This commitment is available through December 31, 1997
and the $481,000 outstanding balance at September 30, 1997 is classified as
short term debt in the consolidated balance sheet. The Company is presently
negotiating, with its lender, an extension on this debt until the earlier of
March 31, 1998 or upon receipt of proceeds from the sale of Bliss Manufacturing.
The Australian Unsecured Demand Authorization, payable on demand or February 28,
1997, was extended until the earlier of March 31, 1998 or upon the receipt of
proceeds from the sale of Bliss Manufacturing.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
BANK LINES OF CREDIT - see above $ 10,579,822 $ 18,132,975
SPECIAL TERM LOAN, bearing interest at Prime 1,580,052 ---
plus 2 1/4% (10.75% at September 30, 1997), due
in monthly installments of $50,000 through
October 1, 1998
EQUIPMENT TERM LOAN, bearing interest at Prime 1,951,595 ---
plus 1/2% (9.00% at September 30, 1997), due in
monthly installments of $29,751 through October
1, 1998
REAL ESTATE TERM LOAN, bearing interest at Prime 2,193,750 ---
plus 1/2% (9.00% at September 30, 1997), due in
monthly installments of $18,750 through October
1, 1998
SEVEN YEAR, 9.86% PROMISSORY 1,666,667 3,333,333
NOTES, interest payable semi-
annually and principal
payments of $1,666,666,
commencing November, 1992
through March 31, 1998
</TABLE>
46
<PAGE> 167
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
CONSTRUCTION LOAN/MORTGAGE bearing $ 2,252,156 $ 2,214,923
interest at 9.00% at September
30, 1997, collateralized by buildings,
contents and inventory, principal and
interest payments due in monthly
installments of $23,193 commencing
June 1997 through October 1, 1998
CAPITALIZED LEASE OBLIGATIONS 478,760 1,745,303
bearing interest at 6.48% to
8.04% due in monthly
installments of $21,496
(including interest)
through January 2000
DISTRIBUTOR DEPOSITS bearing 599,429 1,144,492
interest up to 6% at September 30, 1997 payable
180 days after termination of
distributor agreement
UNSECURED DEMAND AUTHORIZATION 406,000 1,007,745
bearing interest at Australian prime less
1/2% (5.4%), due in monthly
installments of $25,375 payable on
March 31, 1998
INDUSTRIAL REVENUE DEVELOPMENT --- 956,849
BONDS- See Note 11
MORTGAGE LOAN, variable interest (9.25% --- 316,537
at September 30, 1996) payable
monthly with principal payments of
$1,226, through May 2008
INTEREST FREE GRANT with varied principal --- 101,072
installments due annually through June
1999
----------------- ------------------
21,708,231 28,953,229
Less amounts due within one year 20,945,454 6,618,616
================= ==================
$ 762,777 $ 22,334,613
================= ==================
</TABLE>
47
<PAGE> 168
Long-term debt relating to discontinued operations has been reclassified to net
assets held for sale. Total debt ($481,897 long-term and $508,046 short-term for
the year ended September 30, 1997) associated with these operations amounted to
$989,940 at September 30, 1997. Interest rates relating to debt for discontinued
operations range from 3.74% to 9.5%.
The principal amount of long-term debt payable in the five years ending
September 30, 1998 through 2002, relating to continuing operations, is
$20,945,454, $121,418, $41,929, $599,430 and $-0-, and for discontinued
operations is $508,046, $194,757, $14,700, $14,700 and $257,737. The weighted
average interest rate on short term borrowings at September 30, 1997 and 1996
was 8.75% and 8.10%, respectively.
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. As of
September 30, 1997, the Company was not in compliance with certain of these
covenants contained in its credit agreements; however, the Company obtained a
waiver on these covenants through September 30, 1997. Additionally, the credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
7. LONG-TERM COMPENSATION PLAN
The Company adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan
("Plan") in 1992. The Plan provides for the granting of stock options, stock
appreciation rights, restricted stock awards, phantom stock and/or performance
shares ("Awards") to key employees of the Company and its Subsidiaries and stock
options for the non employee directors of the Company. Options granted under the
Plan expire up to ten years after the date of grant if not exercised and may be
exercisable in whole or in part at the discretion of the Committee established
by the Board of Directors. Share awards available for issuance under the Plan
may be authorized and unissued shares or treasury shares. The maximum number of
shares of Common Stock available for grant of Awards under the Plan are limited
on an annual and cumulative basis as further defined in the Plan.
Stock options under the Plan generally have exercise prices equal to the fair
market values at dates of grant, otherwise, if the option price is less than the
fair market value at the date of the grant, compensation expense is recorded for
the difference. For restricted or phantom stock, the Company records
compensation expense as the excess of the quoted market price of a similar but
unrestricted share of stock at the award date over the purchase price, if any.
In May 1997, the Board of Directors approved a stock option grant to two
executives of 20,000 shares each, of common stock subject to certain
restrictions. The shares will vest over a maximum period of eight months and are
subject to each executive's continued employment and other various restrictions.
48
<PAGE> 169
In July 1997, the Board of Directors granted stock and stock options under the
Plan to three of its executives. Each executive was awarded 25,000 shares of
restricted stock, with 12,500 vesting on October 1, 1997 (subsequently, the
executives forfeited the 12,500 shares vesting on October 1, 1997) and the
balance on January 2, 1998. An additional 75,000 shares of restricted common
stock will be issued in 1998 contingent upon certain conditions and continued
employment. In addition, they each received options to purchase 75,000 shares of
common stock at $5.68 per share, of which 35,210 options are incentive stock
options, half exercisable on July 2, 1997 and the remaining on January 2, 1998.
The remaining 39,790 options are non-qualified stock options that became
exercisable on July 2, 1997. All options expire July 2, 2002, to the extent not
exercised.
There were 77,500 shares issued pursuant to 1997 executive grants during the
current fiscal year. Unamortized deferred compensation amounted to $273,500 at
September 30, 1997. Total compensation expense, in conjunction with the Plan was
$659,266, $251,000 and $380,600 in 1997, 1996 and 1995, respectively.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Accordingly, the adoption of this statement did not affect the
Company's results of operations, financial position or liquidity. Had
compensation cost for the stock granted in 1997 and 1996 been determined
consistent with FAS 123, pro forma net income and earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Net loss, as reported $16,650,065 $10,014,104
Net loss, pro forma $17,482,065 $10,515,359
Loss per Common share:
As reported $3.36 $2.04
Pro forma $3.53 $2.14
</TABLE>
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to 1996, the above pro forma disclosures are not necessarily
indicative of future amounts.
The fair value for all options granted in 1997 and 1996 were estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 JUNE 1996 JANUARY 1996
OPTIONS OPTIONS OPTIONS
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Risk free interest rate 6.2% 6.5% 5.3%
Expected life of option 3 yrs. 3 yrs. 3 yrs.
Expected dividend yield of stock 0.0% 0.0% 0.0%
Expected volatility of stock 51.5% 41.8% 41.8%
</TABLE>
49
<PAGE> 170
A summary of the Company's stock option activity, and related information for
the years ended September 30, 1997, 1996, and 1995, is shown in the following
table.
<TABLE>
<CAPTION>
Shares subject Average option
to option price per share
------------------------- -------------------
<S> <C> <C>
September 30, 1994, Outstanding 314,300 $ 8.49
Granted 94,000 16.18
Exercised (13,594) 7.35
Canceled (13,031) 7.54
-------------------------
September 30, 1995 381,675 10.46
Granted 162,000 9.08
Canceled (12,750) 7.55
-------------------------
September 30, 1996 530,925 10.18
Granted 356,000 5.52
Canceled (163,300) 7.49
=========================
September 30, 1997, Outstanding 723,625 $ 8.47
=========================
</TABLE>
Options exercisable and shares available for future grant on September 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Options exercisable 487,810 403,893 197,737
Weighted- average option price per share of options exercisable $8.90 $8.58 $10.28
Weighted-average fair value of options granted during the year $2.34 $3.09 ---
</TABLE>
The ranges of exercise prices and the remaining contractual life of options as
of September 30, 1997 were:
<TABLE>
<S> <C> <C>
Range of exercise prices $4-$10 $11-$18
Options outstanding:
Outstanding as of September 30, 1997 504,625 219,000
Weighted-average remaining contractual life 5.41 4.32
Weighted-average exercise price $6.06 $13.98
Options exercisable:
Outstanding as of September 30, 1997 340,810 147,000
Weighted-average remaining contractual life 5.60 4.85
Weighted-average exercise price $6.43 $14.20
</TABLE>
50
<PAGE> 171
8. INCOME TAXES
The (benefit) provision for income taxes relating to continuing operations
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ (6,205,078) $ (2,678,363) $ (1,177,783)
Foreign 25,000 25,000 25,000
------------------ ---------------- ----------------
(6,180,078) (2,653,363) (1,152,783)
Deferred (benefit) expense (1,105,871) (184,896) 537,992
================== ================ ================
$ (7,285,949) $ (2,838,259) $ (614,791)
================== ================ ================
</TABLE>
A reconciliation of the provision for income taxes at the Federal statutory rate
to that included in the Consolidated Statements of Income related to earnings
from continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- ---------------
<S> <C> <C> <C>
Tax at Federal statutory rate of 34% $ (7,059,545) $ (2,925,939) $ 337,881
Increases (reductions) in taxes
resulting from:
Valuation allowance reserves on
foreign net operating losses --- --- (325,085)
Foreign Sales Corporation earnings (231,455) (269,595) (548,500)
Amortization of cost in excess of 79,152
net assets of acquired businesses 79,152 79,152
Foreign income taxes, net 25,000 25,000 25,000
Other - net (99,101) 253,123 (183,239)
================= =============== ===============
$ (7,285,949) $ (2,838,259) $ (614,791)
================= =============== ===============
</TABLE>
51
<PAGE> 172
The components of deferred tax assets and liabilities are comprised of the
following at September 30,
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Gross deferred tax assets:
Postretirement benefits $ 1,631,245 $ 1,499,600
Operating loss carryforwards 3,222,314 871,000
Receivable and inventory reserves 857,822 853,556
Accrued compensation 1,816,797 684,871
Benefits insurance reserves 181,335 117,425
Impairment reserves 1,999,901 308,000
Warranty reserves 90,475 90,475
Other 241,373 171,674
--------------- ---------------
10,041,262 4,596,601
--------------- ---------------
Gross deferred tax liabilities:
Deferred DISC income 31,219 62,438
Depreciation 668,445 583,806
--------------- ---------------
699,664 646,244
Valuation allowances on foreign
net deferred tax assets 1,676,131 871,000
--------------- ---------------
Net deferred tax asset $ 7,665,467 $ 3,079,357
=============== ===============
</TABLE>
The Company has determined that it should fully reserve against this net
potential tax asset to the extent it represents excess available net deferred
tax assets for all foreign subsidiaries and divisions as it is more likely than
not that these tax assets will not be realized. Accordingly, such benefits will
be realized only as, and if, they are used to reduce future tax expense, subject
to evaluation of the continuing need for such valuation allowance, or until
fully realized. The Mexican NOL which was recognized as an asset in fiscal year
1995, amounting to $496,537, was written off in fiscal year 1996 in connection
with the decision to discontinue the Company's Mexican operations. Income taxes
paid during the years ended September 30, 1997, 1996 and 1995 were $277,559,
$1,082,229 and $1,622,986, respectively.
Net operating loss carryforwards of approximately $3,222,314 for tax are
available to offset future taxable income. The carryforwards will expire in 2002
through 2012. Undistributed earnings of foreign subsidiaries are reinvested in
their operations and therefore, no provision is made for additional income taxes
that might be payable on such earnings.
9. PROFIT SHARING AND PENSION PLANS
Bliss Manufacturing has a defined contribution plan which covers substantially
all employees. The Bliss plan contribution is at management's discretion and is
allocated based on a percentage of each employee's wages. In addition, Tube Form
had a defined contribution plan which covered substantially all employees. This
plan required an annual contribution of a specified percentage of each
employee's wage, with a minimum contribution of $660 per employee. This plan was
terminated in April 1996. All funds relating to the plan were distributed in
fiscal year 1997.
52
<PAGE> 173
The Company and Tube-Fab have qualified profit sharing plans which cover
substantially all employees. The overall contribution to the Company's plan and
the allocation method is at the discretion of the Board of Directors. The
allocation to the participants is based on either a fixed amount per
participant, a percentage of eligible wages, or a combination of a fixed amount
and a percentage of eligible wages. The required annual contribution to the
Tube-Fab plan is based upon a percentage of net income after certain
adjustments. The allocation to the participants is based upon a formula
established in the Plan. Profit sharing and pension plan expense for all plans
for the years ended September 30, 1997, 1996 and 1995 was $600,804, $1,978,647
and $1,042,741, respectively. For the years ended September 30,1997, 1996 and
1995, continuing operations represented $112,560, $-0- and $112,515 of the total
expense.
Tube-Fab Ltd., and Bliss Manufacturing have been reported as discontinued
operations, and accordingly, pension and profit sharing expense for these
entities have been reflected in results of discontinued operations.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance benefits to
certain employees and retirees of Bliss Manufacturing, a wholly owned
subsidiary. As the Bliss Manufacturing business qualified for discontinued
operations treatment for the fiscal year ended September 30, 1997, the
postretirement benefit costs are reflected in the "Income from discontinued
operations - Bliss Manufacturing" line of the Consolidated Statement of Income
and the accrued postretirement benefit costs are grouped in the "net assets held
for sale at realizable value" line in the Consolidated Balance Sheet.
The components of the postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Service costs $ 339,000 $ 309,000 $ 213,000
Interest costs 265,000 232,000 192,000
Net amortization and deferral --- --- (20,000)
------------- ------------- -------------
$ 604,000 $ 541,000 $ 385,000
============= ============= =============
</TABLE>
53
<PAGE> 174
The status of the plans was as follows at September 30,
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ (1,642,000) $ (1,639,000)
Actives fully eligible (195,000) (181,000)
Actives not yet fully eligible (2,242,000) (1,769,000)
------------------- --------------------
Total APBO (4,079,000) (3,589,000)
Fair value of plan assets --- ---
------------------- --------------------
Funded status $ (4,079,000) $ (3,589,000)
Unrecognized (gain)/loss (158,000) (160,000)
------------------- --------------------
Accrued postretirement benefit costs $ (4,237,000) $ (3,749,000)
=================== ====================
Assumed weighted average discount rate 7.5% 7.5%
</TABLE>
The assumed health care cost trend rate used in measuring the health care
portion of the postretirement benefit cost for 1997 is 10.5%, gradually
declining to 5.5% by the year 2007 and remaining at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1 percentage point in each year would increase the APBO as of September 30, 1997
by $849,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $165,000.
11. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES
The Company has guaranteed certain surety bonds totaling $90,512 executed by
distributors. The Company is obligated under certain operating leases for
facilities which expire on various dates through 2003. The minimum annual lease
payments, for continuing operations, under these agreements including renewal
options, if exercised, are $193,242, $185,062, $167,161, $152,520 and $147,518
for the years ending September 30, 1998, 1999, 2000, 2001 and 2002,
respectively. Minimum annual lease payments for discontinued operations are
$195,272, $94,248, $56,958, $40,853 and $20,058 for the years ending September
30, 1998, 1999, 2000, 2001 and 2002, respectively. Rental expense for all leases
and other short-term needs was $858,589, $917,600 and $756,000 for the years
ended September 30, 1997, 1996 and 1995, respectively. Of the total rent expense
for the year ended September 30, 1997, $359,520 related to discontinued
operations.
During the fiscal year 1994 and continuing throughout 1996, the property owned
by the Company in Lombard, Illinois that housed the office facilities for the
discontinued operations of HMI Credit Inc. was leased to a third party. The
lease included an option to purchase the property at any time during the ten
year lease term. The tenant was responsible for all operating expenses related
to the property and the lease payments equal the debt service for the variable
rate industrial revenue development bonds originally issued to finance the
property.
On July 7,1997, the tenant exercised his right to purchase the property at a
price equal to the remaining principal debt service for the variable rate
industrial revenue development bonds of approximately $800,000.
54
<PAGE> 175
Litigation
----------
The Receiver of the Health Mor B.V. bankruptcy estate commenced litigation
against HMI Industries Inc and one of Health Mor B.V.'s Managing Directors,
Kevin Dow, on or about December 3, 1997, in bankruptcy case asserting that HMI
Industries Inc and Dow are liable, under the law of the Netherlands, for a
616,000 NLG ($308,000) deficit in the Health Mor B.V. estate and approximately
85,000 NLG ($42,500) in costs of administration. HMI Industries Inc believes the
Receiver's claims against HMI are without merit and will vigorously oppose the
Receiver.
Various other claims arising in the ordinary course of business are pending
against the Company. In the opinion of management none of these matters will
have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
Executive Compensation Agreement
--------------------------------
During 1994, the Company negotiated a five year Compensation Agreement with the
Chief Executive Officer, Kirk W. Foley, which was ratified at the 1995 Annual
Shareholders' Meeting. The Agreement combines salary, incentive compensation,
loans, stock options and Phantom Stock to employ Mr. Foley. On May 14, 1997 Mr.
Foley's employment with the Company was terminated triggering certain
obligations under this employment agreement (See Note 14).
Also in May 1997, the Company announced and completed a reduction of personnel
which affected approximately forty people (hourly and salaried) at its
Cleveland, Ohio Consumer Goods facility. The Canadian corporate office was also
scaled down, with all accounting functions being brought into the Cleveland,
Ohio office, reducing staff by approximately eleven people in the Canadian
office.
Total charges of $3,049,754 relating to the layoffs announced in May and Mr.
Foley's termination benefit package were recorded in the third and fourth
quarter of 1997. The balance in the related reserve at September 30, 1997 was
$2,058,492, of which $300,000 was previously recorded as compensation expense in
fiscal year 1996 in accordance with Mr. Foley's employment agreement.
12. BUSINESS SEGMENTS
As of September 30, 1997, the Company's continuing operations consist of a
single operating segment: the Consumer Goods Division. Previously, the Company
was segmented into three operating divisions: Consumer Goods, Health-Mor
Personal Care and Manufactured Products. During 1997, the Company sharpened its
focus on its core business in the Consumer Goods Division and operations that
were outside of the core business were identified in the third and fourth
quarters and classified as discontinued operations. The identified operations
consist of all of the Manufactured Products Division entities as well as the
Health-Mor Personal Care segment.
Canadian sales are not considered export sales. One of the Company's major
foreign operations is located in Canada. The Company primarily conducts business
in local currency. Identifiable assets of the Canadian operations, excluding the
assets of Household Rental Systems and Tube-Fab Ltd., which are classified as
net assets held for sale, were $2,318,521 and $3,790,067 at September 30, 1997
and 1996, respectively. Identifiable
55
<PAGE> 176
revenues of Canadian operations for the years ended September 30, 1997, 1996 and
1995 were $4,981,069, $4,387,750 and $5,841,140, respectively. Three customers
in the Consumer Goods segment, each with individual sales greater than 10% of
total product sales, represented 44.9% and 23.4% of the Company's total net
sales in 1997 and 1996, respectively.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
-------------------- --- ----------------- ---- ----------------- --- ---------------------
December 31, March 31, June 30, September 30,
-------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 14,620,888 $ 13,725,320 $ 11,120,603 $ 11,023,439
Gross profit (exclusive of
financing revenues) $ 5,073,398 $ 3,456,337 $ 2,433,425 $ 2,905,553
Loss before discontinued
operations $ (657,479) $ (3,158,796) $ (4,945,981) $ (4,715,164)
Loss on disposals $ --- $ --- $ (3,439,298) $ (2,080,386)
Income from discontinued
operations $ 534,487 $ 141,795 $ 1,111,073 $ 559,684
Net loss $ (122,992) $ (3,017,001) $ (7,274,206) $ (6,235,866)
Per share of common stock:
Loss before discontinued
operations $ (0.13) $ (0.64) $ (1.00) $ (0.95)
Loss on disposals $ --- $ --- $ (0.69) $ (0.42)
Income from discontinued
operations $ 0.11 $ 0.03 $ 0.22 $ 0.11
Net loss $ (0.02) $ (0.61) $ (1.47) $ (1.26)
</TABLE>
56
<PAGE> 177
<TABLE>
<CAPTION>
1996
-------------------- -- ------------------ --- ------------------ -- ---------------------
December 31, March 31, June 30, September 30,
-------------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C>
Net revenues $ 13,432,049 $ 16,789,086 $ 13,291,222 $ 16,036,551
Gross profit (exclusive of
financing revenues) $ 4,874,589 $ 5,073,776 $ 4,712,003 $ 5,913,410
Loss before discontinued
operations $ (446,993) $ (1,284,982) $ (1,411,563) $ (2,623,907)
Loss on disposals $ --- $ --- $ (800,000) $ (1,480,844)
Income (loss) from
discontinued operations $ (48,119) $ (1,577,795) $ (748,562) $ 408,661
Net loss $ (495,112) $ (2,862,777) $ (2,960,125) $ (3,696,090)
Per share of common stock:
Loss before discontinued
operations $ (0.09) $ (0.26) $ (0.29) $ (0.53)
Loss on disposals $ --- $ --- $ (0.16) $ (0.30)
Income (loss) from
discontinued operations $ (0.01) $ (0.32) $ (0.15) $ 0.08
Net loss $ (0.10) $ (0.58) $ (0.60) $ (0.75)
</TABLE>
The first two quarters of 1997 have been restated as shown above. Inventory
analysis performed in conjunction with the third quarter physical inventory
revealed $1.1 million of raw material procurements from a supplier which were
recognized in the third quarter that related to the two previous quarters and
additionally, inventory adjustments of $582,800 were required to reflect product
costs not properly recognized in the first two quarters.
14. RELATED PARTY TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its CEO, that it was
terminating his employment which triggered certain obligations as per Mr.
Foley's employment contract, including an $800,000 severance payment, an
assumption of a $518,000 personal bank loan made to Mr. Foley, other
compensation obligations of approximately $79,000 and an obligation to purchase
Mr. Foley's Company stock at current market value (approximately $325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube-Fab Ltd, a Canadian
subsidiary headquartered on Prince Edward Island, Canada, which an independent
appraiser valued at $1,512,000. The Tube-Fab Ltd. stock had been carried on the
Company's books at a value of $2,157,500 and was accordingly written down to its
appraised value.
57
<PAGE> 178
The settlement transaction with Mr. Foley is expected to be closed in January
1998. It entails a transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr.
Foley's payment of $303,000 to the Company; cancellation of the Company's
$800,000 severance obligation; an assumption of the $486,750 ($518,000 less a
$31,250 principal payment made in June 1997) bank loan; cancellation of Mr.
Foley's put right with respect to his Company stock; and assumption by Mr. Foley
of an operating lease of Canadian facilities currently leased by the Company,
which has a remaining lease obligation of approximately $1,050,000 over 8 1/2
years.
Mr. Foley's employment contract also requires the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award has been reduced to a $150,000 payment in the
settlement transaction. The settlement also requires the Company to continue Mr.
Foley's salary and benefits from the time of termination advice through December
15, 1997 (approximately $320,000).
Mr. Foley's departure caused the Company to examine the collectability of
certain other related party receivables aggregating $743,000 which were forgiven
and accordingly written off in the third and fourth quarters of fiscal 1997.
In 1995, the Company converted $750,000 of accounts receivable from a former
Filter Queen distributor to notes receivable. This distributor is an officer of
a majority owned subsidiary of the Company. In 1996, the officer contributed
various assets and liabilities to the subsidiary in exchange for a reduction in
the note receivable. The note receivable of $228,414 is reflected in current
assets as a note receivable at September 30, 1997.
15. MAJOR VENDOR
In 1991, the Company entered into an agreement that provided for the potential
acquisition of Holland Electro B.V. of Rotterdam, the Netherlands, contingent
upon attaining certain earnings targets in the two year period ended September
30, 1992. When Holland Electro B.V. failed to achieve the agreed targets, HMI
walked away from the proposed purchase but continued to buy products and other
services from Holland-Electro.
In January 1996, Holland Electro B.V. filed for bankruptcy, triggering a
Conditional Purchase Agreement the Company had with Kredietbank N.V. in the
amount of $1,104,000. As a result, the Company was required to take possession
of finished goods and work in progress inventories. Upon acquisition of these
inventories, the Company began production of the ElektraPure and other floorcare
products for distribution in North America and Europe. The Company had paid in
advance for certain services and inventory to be acquired from Holland Electro
B.V. The advances, royalties and other receivables totaled $2,012,000. During
fiscal 1996, as a result of the bankruptcy and subsequent resolution of pending
claims, the Company determined that recovery of these advances was not likely.
Accordingly, the Company recorded a charge for the write-off of these advances.
58
<PAGE> 179
HMI INDUSTRIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning of Charged to End of
Description Period Costs and Expense Deductions Period
--------------- --------------- -------------------- -------------- --------------
<S> <C> <C> <C> <C>
Valuation account for accounts receivable:
Year ended September 30, 1997 $ 2,439,000 $ 4,820,000 $ 1,747,000 $ 5,512,000
Year ended September 30, 1996 $ 1,550,000 $ 889,000 --- $ 2,439,000
Year ended September 30, 1995 $ 1,121,000 $ 429,000 --- $ 1,550,000
Valuation account for inventory:
Year ended September 30, 1997 $ 1,234,000 $ 754,000 $ 357,000 $ 1,631,000
Year ended September 30, 1996 $ 305,000 $ 929,000 --- $ 1,234,000
Year ended September 30, 1995 $ 120,000 $ 185,000 --- $ 305,000
Reserve for loss on disposal:
Year ended September 30, 1997 $ 800,000 $ 6,112,000 $ 1,524,000 $ 5,388,000
Year ended September 30, 1996 --- $ 800,000 --- $ 800,000
Year ended September 30, 1995 --- --- --- ---
Valuation for deferred tax asset:
Year ended September 30, 1997 $ 871,000 $ 1,151,000 $ 346,000 $ 1,676,000
Year ended September 30, 1996 $ 517,000 $ 354,000 --- $ 871,000
Year ended September 30, 1995 $ 193,000 $ 324,000 $ 517,000
</TABLE>
59
<PAGE> 180
INDEX TO EXHIBITS
- -----------------
<TABLE>
<S> <C> <C>
3.1 Certificate of Incorporation Incorporated by reference from, Annual Report on form
10-K for the year ended September 30, 1995
3.2 Bylaws Incorporated by reference from, Annual Report on form
10-K for the year ended September 30, 1995
10.00 Material Contracts Incorporated by reference from, Proxy Statement for the
Annual Meeting of Stockholders January 19, 1995 -
Exhibit B
10.01 Material Contracts Change of Control Agreements, attached
10.02 Material Contracts Non-statutory Stock Option Agreements, attached
10.03 Material Contracts Incentive Stock Option Agreements, attached
10.04 Material Contracts Deferred Bonus Agreements, attached
10.05 Material Contracts Employment Agreement - Malone, attached
10.06 Material Contracts Employment Agreement - Kirk, attached
10.07 Material Contracts Employment Agreement - Young, attached
10.08 Material Contracts Restricted Stock Agreements, attached
10.09 Material Contracts Amended and Restated Credit Agreement, attached
10.10a Material Contracts Amendment No. 1 to Amended and Restated Credit
Agreement, attached
10.10b Material Contracts Amendment No. 2 to Amended and Restated Credit
Agreement, attached
10.11 Material Contracts Bliss Stock Purchase Agreement, attached
11 Statement re: Computation of per Note 1 on Page 43 of the Financial Statements
share earnings
21 Subsidiaries of Registrant Page 3 of this report
27 Financial Data Schedule
</TABLE>
60
<PAGE> 181
ANNEX E
FORM 10-Q
E-1
<PAGE> 182
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A1
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 2-30905
HMI INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1202810
- ---------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3631 Perkins Ave, Cleveland, Ohio 44114
- ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 432-1990
--------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No ____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 6, 1998
----------------------------------- ----------------------------
Common stock, $1 par value per share 5,033,996
================================================================================
<PAGE> 183
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(Unaudited)
December 31, September 30,
1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 819,321 $ 239,797
Trade accounts receivable (net of allowance of $5,281,495 and $5,512,063) 7,989,924 10,357,999
Finance contracts receivable 458,867 496,044
Notes receivable 250,525 228,414
Inventories 4,261,655 4,152,858
Income tax receivable 3,372,644 3,373,898
Deferred income taxes 8,349,167 8,239,080
Prepaid expenses 64,986 123,099
Other current assets 130,268 83,307
Net assets held for sale at realizable value 15,317,503 12,900,184
---------------- ----------------
Total current assets 41,014,860 40,194,680
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 5,734,508 6,194,868
---------------- ----------------
OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of amortization of $2,572,516 and $2,576,373) 6,659,047 6,735,578
Unamortized trademarks 359,456 339,823
Finance contracts receivable (less amounts due within one year) 917,733 992,090
Other 262,439 133,094
---------------- ----------------
Total other assets 8,198,675 8,200,585
---------------- ----------------
Total assets $54,948,043 $54,590,133
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 465,870 $ 480,822
Trade accounts payable 7,585,880 6,939,040
Dividends payable - -
Income taxes payable 674,870 1,349,163
Accrued expenses and other liabilities 7,186,265 8,125,620
Long-term debt due within one year 23,369,038 20,464,632
---------------- ----------------
Total current liabilities 39,281,923 37,359,277
---------------- ----------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 552,860 762,777
Deferred income taxes 668,445 573,613
Other 1,248,378 1,342,961
---------------- ----------------
Total long-term liabilities 2,469,683 2,679,351
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none - -
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,295,556 shares 5,295,556 5,295,556
Capital in excess of par value 8,094,719 8,050,212
Unearned compensation, net - (191,500)
Retained earnings 2,917,367 4,077,771
Cumulative translation adjustment (1,885,676) (1,418,762)
---------------- ----------------
14,421,966 15,813,277
Less treasury stock 261,560 shares, at cost 1,225,529 1,261,772
---------------- ----------------
Total stockholders' equity 13,196,437 14,551,505
---------------- ----------------
Total liabilities and stockholders' equity $54,948,043 $54,590,133
================ ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 184
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C>
Net product sales $ 8,911,190 $ 14,450,743
Financing revenue and other 100,325 170,145
----------------- -----------------
9,011,515 14,620,888
OPERATING COSTS AND EXPENSES:
Cost of products sold 6,130,494 9,377,345
Selling, general and administrative expenses 5,352,758 5,552,346
Interest expense 532,675 545,085
Other expenses 15,857 114,659
----------------- -----------------
Total expenses 12,031,784 15,589,435
----------------- -----------------
Loss before income taxes (3,020,269) (968,547)
Benefit for income taxes (915,442) (311,068)
----------------- -----------------
LOSS BEFORE DISCONTINUED OPERATIONS (2,104,827) (657,479)
----------------- -----------------
Income (loss) from discontinued operations -
Household Rental Systems (net of taxes of $-0-, and $-0-) 262,218 119,844
Bliss Manufacturing (net of taxes of $289,393, and $335,301) 472,167 547,071
Bliss Tubular (net of taxes of $-0-, and $2,371) - (3,869)
Tube Fab Ltd (net of taxes of $128,733, and $-0-) 210,038 47,102
Health-Mor Personal Care Corp. (net of taxes of $-0-, and $107,663) - (175,661)
----------------- -----------------
944,423 534,487
NET LOSS $ (1,160,404) $ (122,992)
================= =================
Weighted average number of shares outstanding 5,032,105 4,919,408
================= =================
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
Loss before discontinued operations $ (0.42) $ (0.13)
Income from discontinued operations $ 0.19 0.11
----------------- -----------------
Net loss $ (0.23) $ (0.02)
================= =================
Cash dividends per common share $ - $ -
================= =================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 185
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,160,404) $ (122,992)
Adjustments to reconcile net income (loss) to net cash provided by (used)
by operating activities:
Depreciation and amortization 695,536 614,330
Amortization of stock awards, net 272,250 -
Provision for losses on receivables - 213,534
Deferred income taxes (124,563) 104,092
Changes in operating assets and liabilities:
Decrease in receivables 2,380,455 533,460
Decrease (increase) in inventories (1,151,381) 695,057
Decrease in prepaid expenses 101,592 297,134
Decrease in other current assets 28,844 -
Decrease in accounts payable (1,001,531) (1,492,422)
Increase (decrease) in accrued expenses and other liabilities (1,117,985) 666,899
Decrease in income taxes payable (393,708) (190,062)
Other, net (411,835) (72,312)
-----------------------------------
Net cash provided by (used in) operating activities (1,882,730) 1,246,718
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets - 1,120,916
Capital expenditures (90,881) (324,703)
-----------------------------------
Net cash provided by (used in) investing activities (90,881) 796,213
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 12,454,000 206,084
Payment of credit facility (9,246,455) -
Payment of long term debt (654,410) (2,245,213)
-----------------------------------
Net cash (used in) provided by financing activities 2,553,135 (2,039,129)
-----------------------------------
Effect on exchange rate changes on cash - -
-----------------------------------
Net increase in cash and cash equivalents 579,524 3,802
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 239,797 472,408
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 819,321 $ 476,210
===================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 186
PART I - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of HMI Industries Inc. ("the Company"), these consolidated
condensed financial statements contain all of the adjustments necessary to
present fairly the financial position as of December 31, 1997, and the results
of operations for the three months ended December 31, 1997 and 1996, and cash
flows for the three months then ended.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Preparation of the Consolidated Condensed Financial Statements
------------------------------------------------------------------------
The consolidated condensed financial statements included in this report have
been prepared, without audit, by the Company from the consolidated statements of
the Company and its subsidiaries, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in annual financial statements have been condensed
or omitted pursuant to such rules and regulations.
It is suggested that these consolidated condensed financial statements, which
are subject to year-end audit adjustments, be read in conjunction with the
Company's latest Annual Report on Form 10-K, as amended.
Assets Held for Sale
--------------------
On December 23, 1997, the Company signed a Letter of Intent proposing to sell
certain assets of the Household Rental Systems business ("HRS") to Integrated
Capital Management Group for $1,050,000. Assets to be acquired by Integrated
Capital Management Group primarily consist of inventory, fixed assets and other
intangible assets relating to the carpet and upholstery cleaning business. The
proposed sale is expected to close in March 1998.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to the fiscal 1998
presentation.
2. EARNINGS PER SHARE
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS 128 replaced the
previously reported "primary earnings per share" with "basic earnings per share"
and replaced "fully diluted earnings per share" with "diluted earnings per
share". This statement had no effect on the resulting earnings per share for the
Company. In addition, because all the common stock equivalents are
4
<PAGE> 187
anti-dilutive as of December 31, 1997 and 1996, the denominators for calculating
the Company's basic and diluted earnings per share are identical.
3. DISCONTINUED OPERATIONS
Sales applicable to the discontinued operations were $17,509,500 and $17,492,300
for the three months ended December 31, 1997 and 1996, respectively.
4. INVENTORIES
Inventories at December 31, 1997 and September 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------- ---------------------
<S> <C> <C>
Finished goods $ 3,170,372 $ 2,438,282
Work-in-progress, raw materials
and supplies 1,091,283 1,714,576
---------------------- ---------------------
$ 4,261,655 $ 4,152,858
====================== =====================
</TABLE>
5. DEBT
The Company received additional financing, from its lender, of $1,200,000 upon
the filing of its fiscal 1997 federal tax return, which was filed in January
1998. The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
In January 1998, the Company negotiated, with its lender, an extension on the
credit facility, utilized by the Netherlands operations, until the earlier of
March 31, 1998 or upon receipt of proceeds from the sale of Bliss Manufacturing.
6. RELATED PARTY TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its CEO, that it was
terminating his employment which triggered certain obligations as per Mr.
Foley's employment contract, including an $800,000 severance payment, an
assumption of a $518,000 personal bank loan made to Mr. Foley, other
compensation obligations of approximately $79,000 and an obligation to purchase
Mr. Foley's Company stock at current market value (approximately $325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube-Fab Ltd, a Canadian
subsidiary headquartered on Prince Edward Island, Canada, which an independent
appraiser valued at $1,512,000. The Tube-Fab Ltd. stock had been carried on the
Company's books at a value of $2,157,500 and was accordingly written down to its
appraised value.
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<PAGE> 188
The settlement transaction with Mr. Foley closed in January 1998. It entailed a
transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr. Foley's payment of
$303,000 to the Company; cancellation of the Company's $800,000 severance
obligation; an assumption of the $486,750 ($518,000 less a $31,250 principal
payment made in June 1997) bank loan; cancellation of Mr. Foley's put right with
respect to his Company stock; and assumption by Mr. Foley of an operating lease
of Canadian facilities currently leased by the Company, which has a remaining
lease obligation of approximately $1,050,000 over 8 1/2 years.
Mr. Foley's employment contract also required the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award was reduced to a $150,000 payment in the settlement
transaction. The settlement also required the Company to continue Mr. Foley's
salary and benefits from the time of termination advice through December 15,
1997 (approximately $320,000).
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS
NET PRODUCT SALES - Net product sales for the quarter ended December 31, 1997
decreased by $5,539,600 or 38.3% in the comparable quarter. The decrease in
sales is due primarily to declines in North America and Asia. Weak sales in
North America were attributable to a correction of high inventory levels in the
distribution network, lower sales to end consumers and a reduction in the
distributor base. Additionally, excess credit granted in prior years to the
Company's distributors resulted in an overall deterioration of liquidity in the
distribution network. Sales in Asia were adversely affected by economic
conditions in that region and the devaluation of certain currencies, especially
in Korea.
FINANCING REVENUE AND OTHER INCOME - Financing revenues represent the interest
and fees generated on the contracts financed by the Company's Australian,
Canadian, and United States Subsidiaries. The decline in these revenues is
consistent with the sales decrease experienced mainly in North America.
GROSS PROFIT - Gross profit for the quarter ended December 31, 1997 was
$2,780,700 or 31.2 % as compared to $5,073,400 or 35.1% in the quarter ended
December 31, 1996. Gross profit was adversely affected by the decline in volume
and continued operational inefficiencies from the prior year. However,
initiatives begun in the fourth quarter of 1997 to strengthen business
processes, reduce costs, and improve quality yielded positive results in the
first quarter 1998 as gross profit increased as a percent of sales from 26.6% in
the fourth quarter of fiscal 1997.
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<PAGE> 189
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative costs
decreased by $199,600 for the quarter ended December 31, 1997 versus the
comparable quarter. Included in these costs is a severance charge of $200,000
related to the termination of the Company's branch in Holland. SG&A was higher
as a percent of sales due to depressed volume in the first quarter of 1998. The
Company's cost reduction measures initiated in 1997 should continue to reduce
selling, general and administrative costs in 1998. These include implementation
of a cash basis policy for North American distributors effective January 1,
1998. While this policy may depress sales temporarily, over time it should
improve the Company's liquidity and strengthen the fiscal health of its
distribution network. The subsequent reduction in credit resulting from this
policy should significantly reduce bad debt expense in 1998.
INTEREST EXPENSE - Interest expense for the quarter ended December 31, 1997 did
not change significantly versus the quarter ended December 31, 1996.
DISCONTINUED OPERATIONS - As of June 30, 1997, the Company reported Bliss
Tubular and Tube-Fab Ltd., its tubular and aerospace businesses, as well as
Health-Mor Personal Care Corp., its personal care business, as discontinued
operations. The Company recorded pre-tax combined income from Tube-Fab Ltd., and
Health-Mor Personal Care Corp. of $338,000 for the quarter ended December 31,
1997. As of September 30, 1997, the Company reported Bliss Manufacturing, its
metal fabrication and stamping business, as a discontinued operation. For the
quarter ended December 31, 1997, the Company recorded pre-tax income from Bliss
Manufacturing of $761,600. The Company's steam cleaning business, Household
Rental Systems, reported as a discontinued operation in fiscal 1996, recorded
pre-tax income of $262,200 in the first quarter ended December 31, 1997. On
December 23, 1997, the Company signed a Letter of Intent proposing to sell
certain assets of the Household Rental Systems business ("HRS") to Integrated
Capital Management Group for $1,050,000. Assets to be acquired by Integrated
Capital Management Group primarily consist of inventory, fixed assets and other
intangible assets relating to the carpet and upholstery cleaning business. The
proposed sale is expected to close in March 1998.
Sales applicable to the discontinued operations for the quarters ended December
31, 1997 and December 31, 1996 were $17,509,500 and $17,492,300, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at December 31, 1997 was $1,732,900, a decrease of
$1,102,500 from the September 30, 1997 balance of $2,835,400. The Company's cash
increased $579,500 during the quarter ended December 31, 1997 from September 30,
1997. The decrease in receivables of $2,380,500 was due primarily to lower sales
and tighter credit terms. Inventories increased by $1,151,400 due to higher
inventory at Bliss Manufacturing as a result of higher conversion costs.
Accounts payable decreased by $1,001,500 primarily at Bliss Manufacturing.
Accrued liabilities decreased $1,118,000 due primarily to deferred compensation
and profit sharing payments made at Bliss. The aforementioned variances relate
to information in the Consolidated Statement of Cash Flow in which items
relating to discontinued operations have not been disaggregated as they have in
the Consolidated Balance Sheet.
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<PAGE> 190
On December 18, 1997, the Company entered into a definitive agreement to sell
100% of the stock of Bliss Manufacturing, a wholly owned subsidiary for
$31,250,000, subject to certain adjustments. The Company expects the entire
proceeds from the sale of Bliss Manufacturing to be applied to the retirement of
substantially all of its debt, certain vendor obligations, transaction costs and
related expenses, certain employee benefit payments, and amounts necessary to
fund future tax obligations arising from the gain on the sale of Bliss
Manufacturing. It is anticipated that this transaction will close by the end of
the second fiscal quarter of 1998. Accordingly, debt to be retired from the
proceeds of the sale has been classified as current.
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally , the
Company received additional financing of $1,200,000 upon the filing of its
fiscal 1997 tax return, which was filed in January 1998. The proceeds of the
anticipated tax refund will be first used to repay the $1,200,000 to the bank
and any excess will be used for working capital.
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of December 31, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
The Australian Unsecured Demand Authorization, payable on demand or February 28,
1997, was extended until the earlier of March 31, 1998 or upon the receipt of
proceeds from the sale of Bliss Manufacturing. An extension was also obtained in
April 1997 for the bank credit facility utilized by the Netherlands operation.
The facility, originally payable in March 1997, is now available until the
earlier of March 31, 1998 or upon receipt of proceeds from the sale of Bliss
Manufacturing.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
The sale of Bliss Manufacturing is contingent upon shareholder approval,
regulatory approval and a variety of other customary closing conditions. The
Company expects all these conditions to be met and the sale of Bliss
Manufacturing to be consummated by March 31, 1998. However, if the sale of Bliss
Manufacturing is not achieved by such date, the Company would have
8
<PAGE> 191
liquidity needs that could only be satisfied by further amendment to the credit
facility to allow for additional time to close the sale transaction or obtaining
additional financing sources.
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. The credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to certain uncertainties
including the successful completion of the sale of Bliss Manufacturing, and
retention and rebuilding of the Consumer Products Division distribution network.
Such uncertainties are difficult to predict and could cause actual results of
the company to differ materially from those matters expressed or implied by such
forward-looking statements.
PART II - OTHER INFORMATION
Item 5. Other Information - None
Item 6. Index to Exhibits
10.00 Material Contracts Household Rental System Letter of
Intent, attached
27.00 Financial Data Schedule
9
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMI Industries Inc.
------------------
(Registrant)
Date: March 10, 1998 \s\ Michael Harper
-------------- ---------------------------
Vice President, Corporate
Controller and Chief
Accounting Officer
10
<PAGE> 193
HMI INDUSTRIES INC.
3631 PERKINS AVENUE, CLEVELAND, OHIO 44114
ANNUAL MEETING OF STOCKHOLDERS, MARCH 25, 1998
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mark A. Kirk, James R. Malone and John S.
Meany, Jr., or any one of them, each with power of substitution, attorneys and
proxies for and in the name and place of the undersigned, to vote, as designated
below, all of the shares of Common Stock, par value $1.00 per share, of the
Company that the undersigned would be entitled to vote if then personally
present at the Annual Meeting of Stockholders of HMI Industries Inc., a Delaware
corporation (the "Company"), to be held at the Ritz-Carlton Cleveland, 1515 West
3 Street, Cleveland, OH 44113 on March 25, 1998, at 10:00 A.M. Eastern Standard
time, and any adjournments or postponements thereof upon the matters set forth
in the Notice of Annual Meeting and Proxy Statement, receipt of which is hereby
acknowledged, as follows:
<TABLE>
<S> <C> <C>
1. Election of Directors [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as noted to the contrary below) to vote for all nominees listed below
</TABLE>
NOMINEES: Mark A. Kirk, John S. Meany, Jr., Barry L. Needler
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME ON THE FOLLOWING LINE:
- --------------------------------------------------------------------------------
2. Ratification of the selection of Coopers & Lybrand L.L.P. as auditors of the
Company for the fiscal year 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval and adoption of the Stock Purchase Agreement, dated as of December
17, 1997, as amended as of February 11, 1998, by and between the Company and
Rhone Capital LLC ("Buyer"), providing for the sale by the Company of Bliss
Manufacturing Company, a subsidiary, to Buyer, and the related transactions
contemplated therein.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon all other
matters properly brought before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED IN THE SPACE
PROVIDED. TO THE EXTENT NO DIRECTIONS ARE GIVEN, THEY WILL BE VOTED FOR THE
ELECTION OF ANY OR ALL OF THE NOMINEES FOR DIRECTORS AND "FOR" PROPOSALS 2 AND
3, AND IN THE DISCRETION OF THE PROXIES ON ALL OTHER MATTERS PROPERLY BROUGHT
BEFORE THE MEETING AND ANY ADJOURNMENT THEREOF. THIS PROXY MAY BE REVOKED AT ANY
TIME PRIOR TO ITS EXERCISE.
Dated , 1998
-----------------------
-----------------------------------
Signature
-----------------------------------
Signature (if jointly held)
Where stock is registered jointly
in names of two or more persons,
all should sign. Signature should
correspond exactly with the name on
the stock certificate. Persons
signing in a representative
capacity should indicate that
capacity.
I DO [ ] DO NOT [ ]
PLAN TO ATTEND THE
ANNUAL MEETING IN PERSON.
Proxy Card
